MSP Recovery(LIFW) - 2025 Q2 - Quarterly Report

Definitions This section defines key terms, financial reporting standards, business-specific terminology, and crucial financial instruments used in the report - The section provides definitions for key terms used throughout the Quarterly Report on Form 10-Q, including company references ('we,' 'us,' 'our,' 'Company,' 'MSP Recovery'), financial reporting standards (ASC, GAAP), and business-specific terminology such as 'Algorithm,' 'Assignor,' 'Claim,' 'Billed Amount,' 'Paid Amount,' and 'PVPRC' (Paid Value of Potentially Recoverable Claims)[7][8][10] - Key financial instruments and agreements are also defined, including 'CPIA Warrant,' 'Yorkville Convertible Notes,' 'Yorkville SEPA,' 'VRM Full Return,' and 'Working Capital Credit Facility,' which are crucial for understanding the company's financial structure and obligations[8][10][13] PART I. FINANCIAL INFORMATION This section presents the company's unaudited condensed consolidated financial statements, including balance sheets, statements of operations, equity, and cash flows, along with detailed explanatory notes Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements, including the balance sheets, statements of operations, changes in equity, and cash flows, along with comprehensive notes detailing the company's business, accounting policies, material agreements, and financial position as of and for the periods ended June 30, 2025 Condensed Consolidated Balance Sheets The company's balance sheet shows a significant decrease in total assets and a shift in liabilities from current to long-term guaranty obligations as of June 30, 2025, compared to December 31, 2024, resulting in a negative total equity Condensed Consolidated Balance Sheet Highlights (In thousands) | Metric | June 30, 2025 | December 31, 2024 | | :----------------------------------- | :------------ | :------------------ | | Cash | $3,990 | $12,328 | | Total current assets | $7,728 | $15,474 | | Intangible assets, net | $1,660,938 | $1,898,223 | | Total assets | $1,673,936 | $1,919,083 | | Total current liabilities | $562,944 | $1,265,314 | | Guaranty obligation (current) | $— | $1,126,490 | | Claims financing obligation and notes payable (current) | $483,877 | $31,200 | | Guaranty obligation (non-current) | $1,234,454 | $— | | Claims financing obligation and notes payable (non-current) | $246,977 | $633,026 | | Total liabilities | $2,277,964 | $2,047,492 | | Total equity | $(604,028) | $(128,409) | Condensed Consolidated Statements of Operations The company reported increased net losses for both the three and six months ended June 30, 2025, compared to the prior year, primarily due to higher interest expenses and a significant decrease in the gain from changes in fair value of warrant and derivative liabilities, despite a slight increase in claims recovery income for the quarter Condensed Consolidated Statements of Operations Highlights (In thousands, except per share data) | Metric | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :------------------------------------------ | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Claims recovery income | $536 | $301 | $1,366 | $6,302 | | Total Revenues | $536 | $337 | $1,373 | $6,338 | | Total operating expenses | $125,291 | $135,261 | $253,133 | $271,468 | | Operating Loss | $(124,755) | $(134,924) | $(251,760) | $(265,130) | | Interest expense | $(124,747) | $(101,990) | $(243,532) | $(199,943) | | Change in fair value of warrant and derivative liabilities | $7,527 | $24,977 | $17,463 | $76,284 | | Net loss | $(241,780) | $(211,848) | $(477,809) | $(388,448) | | Net loss attributable to MSP Recovery, Inc. | $(143,176) | $(25,136) | $(264,777) | $(44,018) | | Basic and diluted net loss per share, Class A Common Stock | $(29.15) | $(37.13) | $(62.10) | $(68.91) | Condensed Consolidated Statements of Changes in Equity The company's total equity significantly declined from a negative $128.4 million at December 31, 2024, to a negative $604.0 million at June 30, 2025, primarily due to a substantial net loss and an increase in non-controlling interest's share of net loss Condensed Consolidated Statements of Changes in Equity Highlights (In thousands) | Metric | Balance at Dec 31, 2024 | Net Loss (6 months) | Class A Issuances (6 months) | Balance at June 30, 2025 | | :-------------------------- | :---------------------- | :------------------ | :--------------------------- | :----------------------- | | Additional paid-in capital | $546,635 | — | $(42,971) | $503,664 | | Accumulated deficit | $(446,050) | $(264,777) | — | $(710,827) | | Non-controlling interest | $(228,994) | $(213,032) | $45,161 | $(396,865) | | Total equity | $(128,409) | $(477,809) | $2,190 | $(604,028) | Condensed Consolidated Statements of Cash Flows The company experienced an increased net decrease in cash for the six months ended June 30, 2025, primarily driven by higher cash used in operating activities, despite an increase in cash provided by financing activities Condensed Consolidated Statements of Cash Flows Highlights (In thousands) | Metric | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :-------------------------------- | :--------------------------- | :--------------------------- | | Net cash used in operating activities | $(15,654) | $(11,164) | | Net cash used in investing activities | $(163) | $(343) | | Net cash provided by financing activities | $7,479 | $6,987 | | Net decrease in cash | $(8,338) | $(4,520) | | Cash at beginning of year | $12,328 | $11,633 | | Cash at end of period | $3,990 | $7,113 | Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures for the unaudited condensed consolidated financial statements, covering the company's business, significant accounting policies, material agreements, and specific financial line items Note 1. DESCRIPTION OF THE BUSINESS MSP Recovery, Inc. operates as an 'Up-C' structure, specializing in healthcare claims recovery using proprietary data analytics. The company faces substantial doubt about its ability to continue as a going concern due to recurring losses and reliance on the Yorkville SEPA for liquidity, with recent corporate restructuring efforts terminated - MSP Recovery operates in an 'Up-C' structure, with its business held directly or indirectly by the Company, which is the managing member and consolidates Legacy MSP. The company utilizes a proprietary internal data analytics platform to identify claims cost recovery rights from secondary payers[33][34][35] - The company has incurred substantial net losses since inception, with an accumulated deficit of $710.8 million as of June 30, 2025, and used approximately $15.7 million of cash in operations for the six months ended June 30, 2025, leading to substantial doubt about its ability to continue as a going concern[39] - Primary liquidity for 2025 is anticipated from the Yorkville SEPA, which is currently the company's sole source of liquidity for short-term obligations, and revenue from Claims recovery income. The Working Capital Credit Facility is fully utilized[36][200] - The company received a Nasdaq notice on April 24, 2025, for non-compliance with the minimum stockholders' equity requirement (deficit of $128.4 million vs. $2.5 million minimum) and submitted a plan to regain compliance[49][50] Note 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial statements are unaudited and prepared in accordance with GAAP, consolidating entities where the company has a controlling interest or is the primary beneficiary of a VIE. The company operates as a single segment and has identified new accounting pronouncements for future evaluation - The condensed consolidated financial statements are unaudited and prepared in accordance with GAAP, reflecting all necessary normal recurring adjustments[52] - The company consolidates all entities it controls through a majority voting interest or as the primary beneficiary of a Variable Interest Entity (VIE), such as MSP Recovery[55][56] - The company manages its operations as a single operating and reportable segment, with the Chief Executive Officer serving as the chief operating decision maker[58][191] - The FASB has issued new accounting pronouncements (ASU 2023-09, 2024-03, 2025-03, 2025-05) regarding income tax disclosures, expense disaggregation, accounting acquirer in VIEs, and credit losses, which the company is currently evaluating[63][64][65][66] Note 3. MATERIAL AGREEMENTS This section details key financial agreements, including the VRM Full Return obligation of $1,234.5 million, the fully utilized Hazel Working Capital Credit Facility, and the terminated corporate restructuring term sheets with Hazel and Virage - The company has a VRM Full Return obligation of $1,234.5 million as of June 30, 2025, payable by November 30, 2026, and secured by a first priority lien on certain revenues[70][72] - The company issued 12 Monthly Virage Warrants, entitling Virage to purchase 19,361,939 shares of Class A Common Stock, with varying exercise prices and expiration dates[76][238] - The Hazel Working Capital Credit Facility, providing up to $80 million (with a 40% original issue discount), is fully utilized, with no remaining funding capacity under the facility or Operational Collection Floor as of the filing date[84][85][113] - Term sheets for a corporate restructuring with Hazel and Virage were terminated in May and June 2025, respectively, due to the failure to execute definitive agreements and satisfy related conditions precedent[88][229] Note 4. INVESTMENT IN EQUITY METHOD INVESTEES The company holds equity method investments in Series PMPI, MAO-MSO entities, and VRM MSP, where it exercises significant influence but not control. The value of these investments is currently $0 due to preferred returns exceeding equity or the allocation of costs to other investors - The company accounts for its investments in Series PMPI, MAO-MSO Recovery II LLC, MAO-MSO Recovery LLC, and VRM MSP using the equity method[89][91][92] - The value of the equity method investment in Series PMPI and MAO-MSO entities is $0 as of June 30, 2025, and December 31, 2024, because the preferred return exceeds total members' equity or the entities have recorded losses[90][91] - The investment in VRM MSP includes only administrative activities not otherwise consolidated, resulting in no significant equity earnings or exposure to losses or obligations for the company[92] Note 5. INTANGIBLE ASSETS, NET The company's net intangible assets, primarily CCRAs, decreased to $1,660.9 million as of June 30, 2025, from $1,898.2 million at December 31, 2024, due to claims amortization expense of $237.3 million for the six months ended June 30, 2025 Intangible Assets, Net (In thousands) | Metric | June 30, 2025 | December 31, 2024 | | :---------------------- | :------------ | :------------------ | | Intangible assets, gross | $3,121,859 | $3,121,859 | | Accumulated amortization | $(1,460,921) | $(1,223,636) | | Net | $1,660,938 | $1,898,223 | - Claims amortization expense was $237.3 million for the six months ended June 30, 2025, contributing to the decrease in net intangible assets[93][96] Future CCRAs Amortization (In thousands) | Year | CCRAs Amortization | | :--- | :------------------- | | 2025 | $237,276 | | 2026 | $474,554 | | 2027 | $474,554 | | 2028 | $474,554 | | Total | $1,660,938 | - The company monitors intangible assets for impairment indicators, and based on its analysis, the carrying value of CCRA intangible assets was deemed recoverable as of June 30, 2025[94][95] Note 6. VARIABLE INTEREST ENTITIES The company consolidates VIEs where it is the primary beneficiary, with total assets of $1.2 billion and liabilities of $3.4 million as of June 30, 2025. It also has unconsolidated VIEs with equity investments of $0, limiting its exposure to these entities Consolidated VIEs Assets and Liabilities (In thousands) | Metric | June 30, 2025 | December 31, 2024 | | :---------------- | :------------ | :------------------ | | Total assets | $1,200,000 | $1,400,000 | | Total liabilities | $3,400 | $400 | Unconsolidated VIEs Assets and Liabilities (In thousands) | Metric | June 30, 2025 | December 31, 2024 | | :---------------- | :------------ | :------------------ | | Total assets | $800 | $900 | | Total liabilities | $1,000 | $800 | - The assets of consolidated VIEs may only be used to settle obligations of these VIEs and are not available to the company's creditors, limiting recourse to the company for these liabilities[99] - The company's exposure to unconsolidated VIEs is generally limited to its investment, which is reflected at $0 on the balance sheet[101][103] Note 7. CLAIMS FINANCING OBLIGATIONS AND NOTES PAYABLE The company's claims financing obligations and notes payable increased to $736.3 million as of June 30, 2025, with minimum required payments of $875.3 million. Key obligations include those to Brickell Key Investments, Hazel (Working Capital Credit Facility and Purchase Money Loan), Nomura, and Yorkville (SEPA and Convertible Notes), with various terms, interest rates, and collateral arrangements Claims Financing Obligations and Notes Payable (In thousands) | Metric | June 30, 2025 | December 31, 2024 | | :------------------------------------------------ | :------------ | :------------------ | | Present value of amounts owed | $736,300 | $673,600 | | Advances from Yorkville | $12,300 | $12,200 | | Minimum required payments | $875,300 | N/A | | Weighted average interest rate | 15.4% | N/A | | Interest rate range | 0% to 20% | N/A | - The company owes Brickell Key Investments $80 million as of June 30, 2025, with no further interest accrual, secured by a CPIA Warrant and Founders' pledged shares[110][111] - The Hazel Working Capital Credit Facility, providing up to $80 million (with a 40% original issue discount), is fully utilized. Loans accrue interest at Term SOFR + 10% per annum, payable in kind, and mature on March 31, 2026[114][121][317] - The Nomura Note has a principal amount of approximately $33.7 million, accrues interest at 16% per annum, and matures on November 30, 2026. 50% of Yorkville SEPA proceeds are allocated for its repayment[127][128] - The Yorkville SEPA allows Yorkville to purchase up to $250 million in Class A Common Stock. Yorkville also advanced $15 million through Convertible Notes, with a conversion price based on VWAP and a floor price reduced to $0.50 as of August 5, 2025[129][132][133][146] - The Yorkville SEPA is currently the company's sole source of liquidity to meet short-term obligations; inability to secure funding could lead to insolvency proceedings[148] Note 8. WARRANT LIABILITY The company recognized a warrant liability of $27.1 million as of June 30, 2025, for various outstanding warrants, including Public Warrants, CPIA Warrant, VRM Warrants, and VRP warrants, with a total of 19.6 million underlying shares Warrant Liability Roll-Forward (In thousands) | Metric | Amount | | :-------------------------------- | :------- | | Balance at December 31, 2024 | $(22,373) | | Issuance of warrants | $(22,033) | | Change in fair value of outstanding warrants | $17,347 | | Balance at June 30, 2025 | $(27,059) | Shares Underlying Warrants Activity | Metric | of Shares | Weighted Average Exercise Price | | :-------------------------- | :---------- | :------------------------------ | | Balance at December 31, 2024 | 9,962,727 | $0.0032 | | Issued | 9,610,600 | $0.0001 | | Balance at June 30, 2025 | 19,573,327 | $0.0017 | - As of June 30, 2025, the warrant liability includes Public Warrants (2.95 million shares), CPIA Warrant (106,667 shares), VRM Warrants (19.36 million shares), and VRP warrants (100,000 shares)[152] Note 9. NON-CONTROLLING INTEREST Non-controlling interest primarily represents the 40.3% ownership of Class V Common Stock by Members in the Up-C structure, along with interests in certain Series and FHCP, which are classified as permanent equity Ownership of Units in the Company as of June 30, 2025 | Common Stock | Percentage | | :------------- | :--------- | | Class A Common Stock | 59.7% | | Class V Common Stock | 40.3% | | Total | 100.0% | - The non-controlling interest balance primarily represents the Up-C Units of the Company held by the Members, which are convertible into Class A Common Stock[155] - Non-controlling interest also includes $4.4 million related to FHCP, where the noncontrolling member is entitled to a 20% preferred return and 80% of claims recoveries after the preferred return is met[156] Note 10. COMMITMENTS AND CONTINGENCIES The company is involved in ongoing SEC and USAO investigations, a re-commenced litigation with Cano Health, and a shareholder class action lawsuit, with outcomes uncertain and potential material impacts on financial results - The company is subject to an ongoing SEC investigation, initiated in August 2022, with multiple subpoenas received, relating to the Business Combination, financial results, investor agreements, and data analytic platforms[160][350] - An ongoing grand jury investigation by the U.S. Attorney's Office (USAO), initiated in March 2023, requests documents concerning proprietary algorithms, the drop in stock price, and marketing materials[161][351] - Litigation with Cano Health, involving claims of declaratory relief, breach of contract, and fraud, has re-commenced after Cano's bankruptcy plan confirmation. The company has a $5.0 million receivable from Cano, for which a reserve was established[164][353] - A putative class action lawsuit was filed on May 7, 2025, alleging fiduciary-duty breaches and unjust enrichment against the company's sponsor and certain current/former directors and officers[167][356] Note 11. FAIR VALUE MEASUREMENTS The company's liabilities measured at fair value on a recurring basis totaled $27.2 million as of June 30, 2025, primarily comprising warrant liability ($27.1 million) and derivative liability ($0.1 million), with the embedded derivative valued using market-based inputs Liabilities Measured at Fair Value (In thousands) | Metric | June 30, 2025 | December 31, 2024 | | :---------------- | :------------ | :------------------ | | Derivative liability | $104 | $211 | | Warrant liability | $27,059 | $22,373 | | Total | $27,163 | $22,584 | Embedded Derivative Valuation Inputs (June 30, 2025) | Input | Value | | :---------------- | :---- | | Price of Common Stock | $1.39 | | Volatility | 75% | | Market Risk Spread | 10.29% | | Expected Term (in years) | 1.42 - 1.67 | - The beneficial conversion feature within the Yorkville SEPA is treated as an embedded derivative liability, with changes in fair value recognized in the condensed consolidated statements of operations[149][168] Note 12. RELATED PARTY TRANSACTIONS The company has significant related party transactions, including $112.8 million in promissory notes to MSP Principals, a $4.95 million loan from the Law Firm, and various payables/receivables with affiliates, impacting interest expense and operational funding - The company has an unsecured promissory note of $112.8 million to MSP Principals (John H. Ruiz and Frank C. Quesada), bearing 4% annual interest, maturing June 16, 2026[169][324] - A $4.95 million unsecured promissory note from the Law Firm provides general operational funding, due September 3, 2026, without interest[178][325] - The company previously advanced $36.5 million to the Law Firm for operating expenses, but an amendment on April 14, 2025, terminated this obligation and prioritizes repayment of past advances from Law Firm compensation[172][174][180] Related Party Balances (In thousands) | Metric | June 30, 2025 | December 31, 2024 | | :-------------------- | :------------ | :------------------ | | Affiliate receivable | $1,263 | $1,204 | | Affiliate payable | $21,076 | $21,664 | | Loan from related parties | $130,328 | $130,328 | | Interest payable | $1,689 | $33,298 | - Interest expense related to the VRM Full Return and Virage MTA Amendment from VRM MSP was $179.1 million for the six months ended June 30, 2025[184] Note 13. SEGMENT INFORMATION The company operates as a single reportable segment, with the CEO serving as the chief operating decision maker, reviewing consolidated financial information for performance evaluation and resource allocation - The company manages its operations as a single operating and reportable segment[190][191] - The Chief Executive Officer is the chief operating decision maker (CODM), reviewing consolidated financial information for operating decisions, resource allocation, and performance evaluation[58][191] - Significant expenses regularly provided to the CODM include Claims Amortization Expense, Interest Expense, General & Administrative, and Professional Fees[192] Note 14. NET LOSS PER COMMON SHARE Basic and diluted net loss per share for Class A Common Stock was $(62.10) for the six months ended June 30, 2025, with potentially dilutive securities excluded due to their anti-dilutive effect Net Loss Per Common Share (Class A Common Stock) | Metric | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :------------------------------------------ | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net loss attributable to MSP Recovery, Inc. | $(143,176) | $(25,136) | $(264,777) | $(44,018) | | Weighted-average shares outstanding – basic | 4,912,238 | 676,969 | 4,263,859 | 638,762 | | Basic and diluted net loss per share | $(29.15) | $(37.13) | $(62.10) | $(68.91) | - Potentially dilutive securities, including Class V Common Stock, Public Warrants, CPIA Warrant, New Warrants, VRM Warrants, and VRP warrants, were excluded from the diluted EPS calculation because their effect would have been anti-dilutive[195][196] Note 15. SUBSEQUENT EVENTS The "One Big Beautiful Bill Act" (H.R.1) was signed into law on July 4, 2025, and the company is currently evaluating its impact on financial statements, particularly regarding tax reform provisions - On July 4, 2025, H.R.1, known as the "One Big Beautiful Bill Act" (OBBB), was signed into law, including broad tax reform provisions affecting businesses[197] - The company is currently evaluating the impact of the OBBB on its condensed consolidated financial statements, including the remeasurement of deferred tax assets and liabilities and changes to current and future tax expense[197] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition, results of operations, liquidity, and capital resources, highlighting key business aspects, recent updates, and factors affecting performance, including a detailed analysis of revenues and expenses Cautionary Note Regarding Forward-Looking Statements This section highlights that the report contains forward-looking statements subject to risks and uncertainties, and actual results may differ materially. The company does not intend to update these statements unless required by law - The Quarterly Report contains forward-looking statements that involve risks and uncertainties, and actual events may differ materially from those expressed or suggested[199] - The company has no obligation, and does not intend, to update any forward-looking statements after the report date, except as required by federal securities laws[199] Liquidity and Capital Resources The company faces substantial doubt about its ability to continue as a going concern due to recurring losses and negative cash flows. Its liquidity is heavily reliant on the Yorkville SEPA, which is currently its sole source for short-term obligations, and the Working Capital Credit Facility is fully utilized - The company has incurred recurring losses and negative operating cash flows since inception, with an accumulated deficit of $710.8 million as of June 30, 2025, leading to substantial doubt about its ability to continue as a going concern[203] - Unrestricted cash totaled $4.0 million as of June 30, 2025, and $2.1 million as of July 31, 2025[200] - The Yorkville SEPA is currently the company's sole source of liquidity to meet short-term obligations, as the Operational Collection Floor facility is fully utilized with no remaining capacity[200] - Yorkville agreed to increase advances by up to $3.0 million, extend the first Monthly Payment due date to November 30, 2026, and extend the maturity date of Convertible Notes to November 30, 2026[200] Our Business MSP Recovery is a healthcare reimbursement recovery and data analytics company, specializing in identifying and recovering improper payments for Medicare, Medicaid, and commercial health insurers through irrevocable claims assignments. The company's business model involves assuming risk and controlling litigation, with a significant portfolio of potentially recoverable claims - MSP Recovery is a leading healthcare reimbursement recovery and data analytics company, providing solutions for payers, providers, and patients by discovering losses and recovering improper payments for Medicare, Medicaid, and commercial health insurers[204] - The company's competitive advantage stems from receiving recovery rights through irrevocable assignments of claims, allowing it to assume risk, control litigation, and pursue additional recoveries under various legal theories[207] - As of June 30, 2025, the company is entitled to a portion of recovery rights associated with approximately $1,592 billion in Billed Amount and $87.8 billion in Paid Value of Potentially Recoverable Claims[209] - The estimated total potentially serviceable market is over $161.5 billion annually, with health spending projected to grow at an average rate of 5.6% a year between 2023 and 2032[210][211] - Approximately 95.9% of the company's expected recoveries arise from claims under the Medicare Secondary Payer Act, making the business sensitive to changes in these laws[212] Our Business Model The company's business model primarily involves discovering losses and recovering reimbursements through irrevocable assignments of health claims, utilizing proprietary data analytics and legal counsel. It aims to generate high-profit margins from these recoveries, with a secondary focus on claims recovery services - The company's primary income-producing activities involve pursuing and recovering proceeds from irrevocably assigned health claims recovery rights, utilizing proprietary data analytics and contracting with law firms for legal proceedings[213][214][259] - Generally, the company is entitled to 100% of recoveries, typically paying 50% of Net Proceeds to the Assignor and 20% to legal counsel[215] - The company has not yet generated substantial revenue from its recovery model, and future profitability is dependent on successfully recovering upfront purchase prices and investments[215][241] - Claims recovery service revenue, based on budgeted expenses, was not recognized during the six months ended June 30, 2025, or 2024[216][262] Industry Solutions MSP Recovery has developed an integrated ecosystem including the Chase to Pay platform for near real-time payment accuracy, a clearinghouse platform with Palantir for lien resolution using AI/ML, and an EHR platform for secure medical data management, though revenue from these platforms has not yet been significant - The MSP Ecosystem integrates advanced data analytics, Near Real-Time insights, and technological tools to enhance healthcare reimbursement processes and provide connectivity between various stakeholders[218] - The Chase to Pay platform is designed to improve payment accuracy by identifying the proper primary insurer at or near the point of care, aiming to prevent wrongful payments and reduce legal costs of recovery[219][220] - The MSP/Palantir Clearinghouse Platform, developed with Palantir, utilizes AI, NLP, and ML to identify, quantify, and resolve outstanding liens, addressing primary payers' failure to report obligations[222][224] - The Electronic Health Record (EHR) Platform, launched in Q2 2024, enables secure collection, distribution, and export of EHRs, but revenue generated from it has not been significant[227][263] Recent Updates Recent updates include the termination of corporate restructuring agreements with Hazel and Virage, amendments to the Yorkville SEPA extending payment dates and reducing the floor price, and the termination of the company's obligation to fund the Law Firm - Agreements for corporate restructuring with Hazel and Virage were terminated in May and June 2025, respectively, due to the failure to execute definitive agreements[229] - Yorkville agreed to extend the first Monthly Payment due date and the maturity date of the Convertible Notes to November 30, 2026, and waived Volume Threshold and Maximum Advance Amount limitations under the Yorkville SEPA. The Floor Price was reduced to $0.50[231][232] - Yorkville funded $2.1 million in principal amounts via additional Convertible Notes in June, July, and August 2025[233] - An amendment to the Legal Services Agreement on April 14, 2025, terminated the company's obligation to provide further advances to fund the Law Firm and prioritizes repayment of past advances from Law Firm compensation[235] - The company issued additional VRM Monthly Warrants for November and December 2024, and a term sheet with Virage proposes to terminate future monthly warrant issuances in favor of adding the 1% Fee to the VRM Full Return obligation[238][239] Key Factors Affecting Our Results The company's results are heavily influenced by its Claims portfolio, which relies on irrevocable assignments and the ability to recover double damages and statutory interest under MSP Laws. Key performance indicators (KPIs) like Total Paid Amount, PVPRC, BVPRC, Recovery Multiple, and Penetration Status of Portfolio are tracked to evaluate progress, though substantial revenue from the Claims portfolio has not yet been generated - The company's business model is dependent on achieving revenue from its Claims portfolio, which relies on irrevocable assignments and the ability to recover upfront purchase prices and investments[240][241] - The company pursues double damages and statutory interest under the Medicare Secondary Payer (MSP) Laws, which allow for an award of double the amount when a primary plan fails to provide primary payment or appropriate reimbursement[243][244] - Claims recovery revenue is typically recognized upon reaching a binding settlement or arbitration with a counterparty or when legal proceedings are resolved[245][259] Key Performance Indicators (KPIs) (in billions, except for Recovery Multiple and Penetration Status) | Metric | June 30, 2025 | 2024 | 2023 | | :-------------------------------------- | :------------ | :--- | :--- | | Paid Amount | $380.8 | $380.4 | $369.8 | | Paid Value of Potentially Recoverable Claims (PVPRC) | $87.8 | $87.7 | $88.9 | | Billed Value of Potentially Recoverable Claims (BVPRC) | $375.4 | $375.3 | $373.5 | | Recovery Multiple | 0.10 | 0.08 | N/A | | Penetration Status of Portfolio | 86.8% | 86.8% | 86.8% | - A four-year statute of limitations period for MSP Act claims in the Eleventh Circuit could reduce PVPRC by an estimated $10.8 billion, though the company is deploying legal strategies to mitigate this impact[257] Key Components of Sales and Expenses This section outlines the components of the company's revenue (Claims Recovery Income, Claims Recovery Service Income, Other Revenue) and operating expenses (Costs of Claim Recoveries, Claims Amortization Expense, General and Administrative, Professional Fees, Professional Fees – Legal, Depreciation and Amortization, Interest Expense, Other Income (Expense), Changes in Fair Value of Warrant and Derivative Liabilities, Net (Income) Loss Attributable to Non-Controlling Members, and Income Tax Benefit) - Primary income is Claims Recovery Income, generated from irrevocably assigned Claims recovery rights, recognized upon binding settlement or legal resolution[259] - Claims Amortization Expense consists of the amortization of CCRA intangible assets acquired through upfront payments or commitments[265] - Professional Fees – Legal include payments for the expenses of the Law Firm and other third-party legal services[268] - Interest expense includes interest paid on the Nomura Note, Hazel Working Capital Credit Facility and Purchase Money Loan, Virage transactions, Yorkville Advances, and Loans from related parties[270] - The company is subject to U.S. federal and certain state/local income taxes on its allocable share of MSP Recovery's income, but has recorded a full valuation allowance against deferred tax assets[275] Results of Operations For the three months ended June 30, 2025, net loss increased by 14% to $(241.8) million, and for the six months, it increased by 23% to $(477.8) million, primarily driven by higher interest expense and reduced gains from fair value changes, despite some operational expense reductions Net Loss Comparison (In thousands) | Period | 2025 Net Loss | 2024 Net Loss | $ Change | % Change | | :-------------------------- | :------------ | :------------ | :------- | :------- | | 3 Months Ended June 30 | $(241,780) | $(211,848) | $(29,932) | 14% | | 6 Months Ended June 30 | $(477,809) | $(388,448) | $(89,361) | 23% | Claims Recovery Income Comparison (In thousands) | Period | 2025 Income | 2024 Income | $ Change | % Change | | :-------------------------- | :---------- | :---------- | :------- | :------- | | 3 Months Ended June 30 | $536 | $301 | $235 | 78% | | 6 Months Ended June 30 | $1,366 | $6,302 | $(4,936) | (78)% | Interest Expense Comparison (In thousands) | Period | 2025 Expense | 2024 Expense | $ Change | % Change | | :-------------------------- | :------------- | :------------- | :-------- | :------- | | 3 Months Ended June 30 | $(124,747) | $(101,990) | $(22,757) | 22% | | 6 Months Ended June 30 | $(243,532) | $(199,943) | $(43,589) | 22% | - General and administrative expenses decreased by $1.9 million (3 months) and $2.1 million (6 months), primarily due to reductions in payroll and IT expenses. Professional fees decreased by $2.2 million (3 months) and $4.1 million (6 months) due to lower corporate legal, accounting, and consulting fees. Professional fees – legal decreased by $3.5 million (3 months) and $6.5 million (6 months) due to the completion of Law Firm advance amortization[280][281][282][290][291][292] Non-GAAP Financial Measures The company presents "adjusted net loss" and "adjusted operating loss" as non-GAAP measures, excluding certain non-cash and non-recurring expenses like professional fees payable in shares, claims amortization expense, and non-cash interest expense, to provide a clearer view of ongoing operating performance Adjusted Operating Loss (In thousands) | Period | 2025 Adjusted Operating Loss | 2024 Adjusted Operating Loss | | :-------------------------- | :--------------------------- | :--------------------------- | | 3 Months Ended June 30 | $(5,517) | $(13,319) | | 6 Months Ended June 30 | $(13,275) | $(22,042) | Adjusted Net Loss (In thousands) | Period | 2025 Adjusted Net Loss | 2024 Adjusted Net Loss | | :-------------------------- | :--------------------- | :--------------------- | | 3 Months Ended June 30 | $(6,067) | $(14,029) | | 6 Months Ended June 30 | $(14,125) | $(22,879) | - Non-GAAP adjustments include professional fees payable in shares, claims amortization expense, and non-cash interest expense, aiming to provide a more consistent view of ongoing operating performance[296][297] Reverse Split The company is seeking shareholder approval for a reverse stock split (1-for-2 to 1-for-7) to regain compliance with Nasdaq's minimum bid price requirement, with a special meeting scheduled for August 18, 2025 - The company filed a preliminary proxy statement to seek shareholder approval for an amendment to its Charter effecting a reverse stock split of its Common Stock at a ratio between 1-for-2 and 1-for-7[298] - The Reverse Stock Split is intended to enhance the company's ability to maintain compliance with Nasdaq's minimum bid price requirement of $1.00 per share[298] - A special meeting of shareholders is scheduled for August 18, 2025, to consider and vote on the Reverse Split Proposal[299] Sources of Liquidity The company's liquidity is critically dependent on the Yorkville SEPA, which is its sole source for short-term obligations, as other facilities like the Hazel Working Capital Credit Facility are fully utilized. The company also relies on MSP Principals Promissory Notes and Claims Financing Obligations, with significant debt and interest accruals - The Yorkville SEPA is currently the company's sole source of liquidity to meet short-term obligations[300] - Under the Yorkville SEPA, Yorkville committed to purchase up to $250.0 million in Class A Common Stock, with the company controlling the timing and amount of sales[301][309] - Yorkville advanced $15.0 million through Convertible Notes, convertible into Class A Common Stock at a variable price with a floor price reduced to $0.50[304][305] - The Hazel Working Capital Credit Facility, providing up to $80 million (with a 40% original issue discount), is fully utilized, with no remaining funding capacity[317][321] - The MSP Principals provided a $112.8 million promissory note to the company, bearing 4% annual interest, maturing on June 16, 2026[324] - The Nomura Note has a principal amount of approximately $33.7 million, accrues interest at 16% per annum, and matures on November 30, 2026[326] - Claims financing obligations and notes payable totaled $736.3 million as of June 30, 2025, with minimum required payments of $875.3 million, expected to be repaid from claims recovery income[338][339] - Guaranty obligations amounted to $1,234.5 million as of June 30, 2025, under the Virage MTA, maturing November 30, 2026, and secured by a first priority lien on certain revenues[340] Cash Flows Net cash used in operating activities increased to $15.7 million for the six months ended June 30, 2025, contributing to an overall net decrease in cash of $8.3 million, despite increased cash from financing activities Cash Flow Summary (In thousands) | Metric | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :-------------------------------- | :--------------------------- | :--------------------------- | | Net cash used in operating activities | $(15,654) | $(11,164) | | Net cash used in investing activities | $(163) | $(343) | | Net cash provided by financing activities | $7,479 | $6,987 | | Net decrease in cash | $(8,338) | $(4,520) | | Cash at beginning of year | $12,328 | $11,633 | | Cash at end of period | $3,990 | $7,113 | - The increase in net cash used in operating activities was primarily impacted by the net loss, claims amortization expense, paid-in-kind interest, and changes in working capital[335] - Net cash provided by financing activities increased due to proceeds from debt financing and issuance of common stock, partially offset by repayments of claims financing obligations[337] Contractual Obligations, Commitments, and Contingencies The company has significant contractual obligations, including $736.3 million in claims financing obligations and notes payable, and $1,234.5 million in guaranty obligations, with various maturity dates and repayment mechanisms, primarily from claims recovery income - Claims financing obligations and notes payable totaled $736.3 million as of June 30, 2025, with minimum required payments of $875.3 million[338][339] - Guaranty obligations amounted to $1,234.5 million as of June 30, 2025, under the Virage MTA, with a maturity date of November 30, 2026, subject to acceleration[340] - Repayment of these obligations is expected to come from cash flows generated by claims recovery income[338] Critical Accounting Estimates The company's financial statements rely on estimates and assumptions, particularly regarding the recoverability of long-lived assets, with no material changes to critical accounting policies during the six months ended June 30, 2025 - The preparation of condensed consolidated financial statements requires management to make significant estimates and assumptions, particularly concerning the recoverability of long-lived assets[341] - There have been no material changes to the company's Critical Accounting Policies and Estimates during the six months ended June 30, 2025[342] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, MSP Recovery, Inc. is not required to provide quantitative and qualitative disclosures about market risk - The company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is therefore not required to provide quantitative and qualitative disclosures about market risk[343] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2025, with no material changes in internal control over financial reporting during the quarter - Management, with the participation of the Chief Executive Officer and Chief Financial Officer, concluded that the company's disclosure controls and procedures were effective as of June 30, 2025[346] - There were no material changes in the company's internal control over financial reporting during the most recent fiscal quarter[347] PART II. OTHER INFORMATION This section provides additional information on legal proceedings, risk factors, equity sales, and other disclosures relevant to the company's operations and financial position Item 1. Legal Proceedings The company is subject to ongoing SEC and USAO investigations, re-commenced litigation with Cano Health, and a shareholder class action lawsuit, with uncertain outcomes that could materially affect the company - The Securities and Exchange Commission (SEC) initiated an investigation on August 11, 2022, requesting documents related to the Business Combination, financial results, investor agreements, and data analytic platforms, with recent subpoenas issued to officers in June and July 2025[350] - The U.S. Attorney's Office (USAO) initiated a grand jury investigation on March 10, 2023, requesting information concerning proprietary algorithms, the drop in stock price, and marketing materials, with an additional subpoena received in July 2024[351] - Litigation with Cano Health, involving claims of declaratory relief, anticipatory breach of contract, fraud, tortious interference, and unjust enrichment, has re-commenced after Cano's bankruptcy filing[353] - A putative class action lawsuit was filed on May 7, 2025, alleging fiduciary-duty breaches and unjust enrichment against Lionheart Equities, LLC and certain current/former directors and officers[356] Item 1A. Risk Factors A key risk factor is the company's non-compliance with Nasdaq's minimum stockholders' equity requirement, which could lead to delisting, limit liquidity, increase stock volatility, and hinder capital raising efforts - The company is not in compliance with Nasdaq Listing Rule 5550(b)(1) due to a stockholders' deficit of $128.4 million, which is below the required minimum of $2.5 million[359] - Failure to regain compliance by October 21, 2025, could result in delisting from Nasdaq, which would adversely affect the company's ability to raise additional financing, the liquidity and value of its common stock, and business development opportunities[360][361] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the quarter ended June 30, 2025, the company issued 188,406 unregistered shares of Class A Common Stock to Palantir in exchange for services - During the quarterly period ended June 30, 2025, the company issued 188,406 unregistered shares of Class A Common Stock to Palantir Technologies, Inc. in exchange for services provided[362] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities - The company reported no defaults upon senior securities[363] Item 4. Mine Safety Disclosures This item is not applicable to the company - Mine Safety Disclosures are not applicable to the company[364] Item 5. Other Information The company reported no other information for this item - The company reported no other information for this item[365] Item 6. Exhibits This section lists the exhibits filed as part of, or incorporated by reference into, the Quarterly Report on Form 10-Q, including various agreements and certifications - The exhibits include various agreements such as the Nomura Amended and Restated Promissory Note, Virage Letter Agreement, Yorkville Letter Agreement, and Yorkville Convertible Notes[367] - Certifications from the Principal Executive Officer and Principal Financial Officer, pursuant to the Sarbanes-Oxley Act of 2002, are also filed[367] Signatures This section contains the official signatures of the company's principal financial and accounting officers, certifying the accuracy and completeness of the report - The report is signed on behalf of MSP Recovery, Inc. by Francisco Rivas-Vásquez, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)[371][372] - The signing date of the report is August 14, 2025[372]