PART I Item 1. Financial Statements (Unaudited) Unaudited financial statements show a $609.2 million net loss, $1.64 billion in liabilities, and restated 2022 figures - The company identified material errors in its previously issued financial statements for the periods ended June 30, 2022, and September 30, 2022, leading to their restatement56768 Condensed Consolidated Balance Sheets Total assets decreased slightly to $3.28 billion, liabilities increased to $1.64 billion, decreasing total equity Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Assets | $3,282,035 | $3,417,945 | | Intangible assets, net | $3,253,707 | $3,363,156 | | Cash and cash equivalents | $6,659 | $3,661 | | Total Liabilities | $1,638,373 | $1,230,673 | | Guaranty obligation | $900,455 | $787,945 | | Claims financing obligation and notes payable | $513,450 | $198,489 | | Total Equity | $1,643,662 | $2,185,465 | | Accumulated deficit | ($62,094) | ($29,203) | Condensed Consolidated Statements of Operations Q3 2023 net loss $224.2 million, nine-month net loss $609.2 million, due to revenue drop and higher expenses Condensed Consolidated Statements of Operations (in thousands, except per share amounts) | Metric | Q3 2023 | Q3 2022 (Restated) | 9 Months 2023 | 9 Months 2022 (Restated) | | :--- | :--- | :--- | :--- | :--- | | Total Claims Recovery | $440 | $8,507 | $6,977 | $22,020 | | Claims amortization expense | $121,008 | $111,851 | $355,481 | $153,560 | | Operating Loss | ($136,694) | ($125,184) | ($417,849) | ($195,973) | | Interest expense | ($88,279) | ($46,180) | ($204,287) | ($80,947) | | Net loss | ($224,217) | ($105,556) | ($609,192) | ($225,428) | | Basic and diluted net loss per share | ($1.56) | ($0.75) | ($4.63) | ($1.86) | Condensed Consolidated Statements of Cash Flows Net cash used in operations improved to $31.5 million, financing decreased, resulting in $8.4 million cash decrease Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | Nine months ended Sep 30, 2023 | Nine months ended Sep 30, 2022 (Restated) | | :--- | :--- | :--- | | Net cash used in operating activities | ($31,533) | ($70,764) | | Net cash provided by (used in) investing activities | $7,759 | ($4,563) | | Net cash provided by financing activities | $15,352 | $99,351 | | (Decrease) increase in cash | ($8,422) | $24,024 | | Cash at end of period | $6,659 | $25,688 | Notes to Unaudited Condensed Consolidated Financial Statements Notes detail liquidity challenges, key transactions, 2022 financial restatement, and ongoing SEC/U.S. Attorney investigations - The company faces significant liquidity challenges, with an accumulated deficit of $62.1 million as of September 30, 2023, though management believes actions taken alleviate going concern doubt555657 - The company is subject to an ongoing investigation by the SEC and a grand jury investigation by the U.S. Attorney's Office, with the company intending to cooperate fully154155313 - On March 29, 2023, the company acquired CCRAs from Hazel Holdings funded by a $250 million Purchase Money Loan, resulting in a net gain of $4.6 million107108110 - The company has a significant guaranty obligation to Virage (VRM), amounting to $900.5 million as of September 30, 2023, with the payment date extended to December 31, 20249799104 - Subsequent to quarter end, the company replaced its Yorkville Purchase Agreement with a new Standby Equity Purchase Agreement (SEPA) for up to $250 million, including a pre-paid advance of $15.0 million in convertible promissory notes444547 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses healthcare payment recovery, noting decreased Q3 2023 revenue, increased net loss, $91.5 billion PVPRC, and liquidity challenges Key Performance Indicators (as of period end) | $ in billions | Sep 30, 2023 | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | :--- | | Paid Amount | $381.1 | $374.8 | $364.4 | | Paid Value of Potentially Recoverable Claims (PVPRC) | $91.5 | $89.6 | $86.6 | | Billed Value of Potentially Recoverable Claims (BVPRC) | $387.1 | $377.8 | $363.2 | | Penetration Status of Portfolio | 86.8% | 85.8% | 75.6% | - A U.S. Court of Appeals decision on a four-year statute of limitations could reduce the Paid Value of Potentially Recoverable Claims (PVPRC) by approximately $8.9 billion if applied broadly229 - The company has yet to generate substantial revenue from its primary recovery model and remains dependent on achieving future revenue from its claims portfolio192216238 Non-GAAP Reconciliation: Adjusted Net Loss (in thousands) | | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | GAAP Net Loss | ($609,192) | ($225,428) | | Share-based compensation | $1,875 | $20,055 | | Gain on debt extinguishment | $0 | ($63,367) | | Claims amortization expense | $355,481 | $153,560 | | Allowance for credit losses | $5,000 | $0 | | Paid-in-kind Interest | $204,287 | $80,947 | | Change in fair value of warrant and derivative liabilities | ($4,247) | $11,683 | | Adjusted net loss | ($46,796) | ($22,550) | Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, the company is not required to provide market risk disclosures - As a smaller reporting company defined by Rule 12b-2 of the Exchange Act, the company is not required to provide quantitative and qualitative disclosures about market risk304 Item 4. Controls and Procedures Management concluded disclosure controls were ineffective due to material weaknesses, with a remediation plan underway - The CEO and CFO concluded that the company's disclosure controls and procedures were not effective as of September 30, 2023, due to existing material weaknesses306 - Identified material weaknesses include insufficient controls for: accounting for complex transactions, human resources and payroll processes, segregation of duties over cash disbursements, personnel training, and monitoring activities307308 - A remediation plan is in process, including hiring a director of internal audit, implementing further controls over complex financial instruments, engaging third-party payroll providers, and enhancing internal communication and oversight308309 PART II. OTHER INFORMATION Item 1. Legal Proceedings The company faces significant legal matters, including ongoing SEC/U.S. Attorney investigations and litigation with Cano Health - The SEC initiated an investigation in August 2022, issuing multiple subpoenas related to the business combination, financial restatements, and pre-merger funding154313 - On March 10, 2023, the company received a subpoena from the U.S. Attorney's Office for the Southern District of Florida in connection with a grand jury investigation155314 - The company and Cano Health have filed lawsuits against each other in August 2023, with the company seeking declaratory relief and Cano alleging fraud and breach of contract156315 Item 1A. Risk Factors No material changes to principal risk factors from prior Annual Report on Form 10-K - There have been no material changes to the principal risks from those previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2022316 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During Q3 2023, the company issued unregistered Class A Common Stock to Palantir, Cano Health, and Virage, some purchased by executives - Issued 274,947 unregistered shares of Class A Common Stock to Palantir Technologies, Inc. in exchange for services317 - Issued 7,960,001 unregistered shares of Class A Common Stock to Cano Health, LLC as payment for deferred compensation related to claims assignment agreements54320 - Issued 742,016 unregistered shares of Class A Common Stock to Virage in satisfaction of obligations, subsequently purchased from Virage by CEO John H. Ruiz and CLO Frank C. Quesada318319 Item 3. Defaults Upon Senior Securities The company reported no defaults upon its senior securities during the period - None321 Item 4. Mine Safety Disclosures This item is not applicable to the company's business - Not applicable321 Item 5. Other Information The company did not report any other information for this item - None321 Item 6. Exhibits Key exhibits filed include amendments for the reverse stock split and significant financing agreements with Nomura, Virage, and Yorkville - Key exhibits filed include the Certificate of Amendment for the reverse stock split, the Amended and Restated Promissory Note with Nomura, MTA Amendment No. 2 with Virage, and the Standby Equity Purchase Agreement with Yorkville323
MSP Recovery(LIFW) - 2023 Q3 - Quarterly Report