MSP Recovery(LIFW) - 2023 Q4 - Annual Report

PART I Business MSP Recovery, Inc. is a healthcare data analytics and recovery company specializing in identifying and recovering improper payments made by Medicare, Medicaid, and commercial insurers - The company's primary focus is on the Medicare and Medicaid markets, with an estimated total potentially serviceable market of over $150 billion annually[29] - MSP Recovery differentiates itself by receiving irrevocable assignments of claims, allowing it to control litigation and pursue recoveries as the plaintiff, unlike competitors who typically act as third-party vendors[35] - The company is developing a 'Chase to Pay' model, a near real-time analytics platform intended to identify the correct primary insurer at the point of care, aiming to prevent wrongful payments and reduce legal recovery costs[46][48] - Approximately 93.1% of the company's expected recoveries are based on claims brought under the Medicare Secondary Payer (MSP) Act, which provides a private cause of action and the potential for double damages[32][55] Claims Portfolio Overview (as of Dec 31, 2023) | Metric | Value (Approximate) | | :--- | :--- | | Total Billed Amount | $1,544 billion | | Total Paid Amount | $370 billion | | Paid Value of Potentially Recoverable Claims (PVPRC) | $88.9 billion | Risk Factors The company faces significant risks, including a history of net losses, uncertain future revenue, litigation outcomes, potential legislative changes, cybersecurity threats, substantial indebtedness, and dependence on assigned claims - The company has a history of net losses and no substantial revenue, with a limited track record of generating meaningful recoveries from its assigned claims, making future profitability uncertain[129][130] - Litigation outcomes are inherently risky; an adverse ruling by the Eleventh Circuit on the statute of limitations could reduce PVPRC by an estimated $7.02 billion if applied to all claims[135][139] - Potential legislative changes, such as the proposed Repair Abuses of MSP Payments Act (RAMP Act), could limit the application of double damages to only group health plans, which would significantly reduce potential future recoveries if enacted[67][194][195] - The company has substantial indebtedness and payment obligations, and failure to generate significant revenue could impact its ability to service this debt, potentially restricting business operations and growth[225][226] - The company is controlled by its founding members, who hold approximately 89.44% of the combined voting power, allowing them to determine all corporate actions requiring stockholder approval[273] - The company is subject to ongoing investigations by the SEC and the U.S. Attorney's Office regarding the business combination, financial projections, and its data analytics platforms[326][327] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the Securities and Exchange Commission - Not applicable[357] Cybersecurity The company maintains a comprehensive cybersecurity program managed by an internal IT Security Team to protect sensitive healthcare data, complying with HIPAA and other regulations - The company has an IT Security Team responsible for managing cybersecurity risks and a DevOPS/Security Manager with 27 years of experience leading the program[360][361] - The company has achieved key industry certifications, including a SOC 2 Type II report and HITRUST CSF® v11.1.0 certification, demonstrating compliance with high standards for protecting healthcare information[371] - A Cybersecurity Subcommittee of the Audit Committee was established on February 7, 2024, to provide board-level oversight of cybersecurity risks[374] - In 2023, the company did not identify any cybersecurity threats that materially affected or are reasonably likely to materially affect its business strategy, results of operations, or financial condition[359] Properties The company leases its corporate headquarters in Coral Gables, Florida, and also leases office space in Puerto Rico, which management believes are adequate for current and planned operations - The company's principal executive offices are located at 2701 S. Le Jeune Road, 10th Floor, Coral Gables, Florida 33134[376] Legal Proceedings The company is involved in significant legal matters, including ongoing investigations by the SEC and the U.S. Attorney's Office for the Southern District of Florida, and litigation with Cano Health, LLC, which is currently stayed - The SEC initiated an investigation in August 2022 and has since issued multiple subpoenas concerning the business combination, financial projections, accounting, and data analytics platforms[378] - The U.S. Attorney's Office for the Southern District of Florida issued a subpoena in March 2023 in connection with a grand jury investigation into the company's algorithms, stock price drop, and marketing materials[379] - The company is in a legal dispute with Cano Health, LLC, with both parties suing each other over claims recovery agreements; due to Cano's bankruptcy filing in February 2024, these matters are currently stayed[384][385] Mine Safety Disclosures This item is not applicable to the company - Not applicable[386] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's Class A Common Stock and two classes of warrants trade on the Nasdaq Stock Market, while Class V Common Stock is not publicly traded, and the company has never paid cash dividends - Class A Common Stock trades under the symbol 'LIFW', Public Warrants under 'LIFWZ', and New Warrants under 'LIFWW' on the Nasdaq Stock Market[389] - The company has never declared or paid cash dividends and does not plan to in the foreseeable future[391] - During fiscal 2023, the company issued 452,598 unregistered shares to Palantir Technologies, Inc. in exchange for services[392] - On July 7, 2023, the company issued 7,960,001 unregistered shares of Class A Common Stock to Cano Health, LLC[395] Reserved This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations In fiscal year 2023, the company's total claims recovery revenue decreased, operating loss widened due to increased amortization, and management addressed going concern doubts through new financing and debt extensions Consolidated Results of Operations (in thousands) | Metric | 2023 (in thousands) | 2022 (in thousands) | | :--- | :--- | :--- | | Total Claims Recovery | $7,705 | $23,420 | | Total operating expenses | $567,575 | $354,898 | | Operating Loss | $(559,870) | $(331,478) | | Net loss | $(835,145) | $(401,905) | | Net loss attributable to MSP Recovery, Inc. | $(56,348) | $(7,417) | - Claims amortization expense increased by $209.6 million to $476.5 million in 2023, primarily due to amortization of newly acquired Claims Cost Recovery Agreements (CCRAs)[483] - Interest expense increased by 139% to $289.2 million in 2023, driven by new debt facilities (Hazel Working Credit Facility) and increased interest on claims financing obligations[488] - The company has taken several actions to address liquidity concerns and alleviate going concern doubts, including securing a Working Capital Credit Facility, entering into the Yorkville SEPA for up to $250 million in equity financing, and extending maturity dates on major debt obligations with Virage and Nomura[494][613] Key Performance Indicators ($ in billions) | KPI | 2023 ($ in billions) | 2022 ($ in billions) | | :--- | :--- | :--- | | Paid Amount | $369.8 | $374.8 | | Paid Value of Potentially Recoverable Claims (PVPRC) | $88.9 | $89.6 | | Billed Value of Potentially Recoverable Claims (BVPRC) | $373.5 | $377.8 | | Penetration Status of Portfolio | 86.8% | 85.8% | 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 and is not required to provide quantitative and qualitative disclosures about market risk[545] Financial Statements and Supplementary Data This section contains the company's consolidated financial statements for the years ended December 31, 2023, 2022, and 2021, along with accompanying notes and the independent auditor's report Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2023 (in thousands) | Dec 31, 2022 (in thousands) | | :--- | :--- | :--- | | Assets | | | | Cash | $11,633 | $3,661 | | Intangible assets, net | $3,132,796 | $3,363,156 | | Total Assets | $3,159,995 | $3,417,945 | | Liabilities & Equity | | | | Guaranty obligation | $941,301 | $787,945 | | Claims financing obligation and notes payable | $548,276 | $198,489 | | Total Liabilities | $1,740,866 | $1,230,673 | | Total Equity | $1,419,129 | $2,185,465 | Consolidated Statement of Operations Highlights (in thousands) | Account | 2023 (in thousands) | 2022 (in thousands) | 2021 (in thousands) | | :--- | :--- | :--- | | Total Claims Recovery | $7,705 | $23,420 | $14,626 | | Operating Loss | $(559,870) | $(331,478) | $(7,170) | | Net loss | $(835,145) | $(401,905) | $(33,077) | Consolidated Statement of Cash Flows Highlights (in thousands) | Account | 2023 (in thousands) | 2022 (in thousands) | | :--- | :--- | :--- | | Net cash used in operating activities | $(40,023) | $(80,634) | | Net cash provided by (used in) investing activities | $7,558 | $(5,684) | | Net cash provided by financing activities | $29,017 | $99,735 | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure This item is not applicable to the company - Not applicable[788] Controls and Procedures Management concluded that the company's disclosure controls and procedures were not effective as of December 31, 2023, due to identified material weaknesses in internal control over financial reporting, with a remediation plan initiated - Management concluded that disclosure controls and procedures were not effective as of December 31, 2023[790] - Material weaknesses were identified in two main areas: insufficient controls over human resources and payroll processes, and a lack of controls for the accounting of contract terminations[795] - A remediation plan is underway, which includes designing new controls, enhancing IT change management, providing additional training, and fully transitioning to a third-party payroll processor with SOC audit processes[797][801] Other Information On April 12, 2024, the company secured an agreement with Yorkville to fund an additional $13 million advance under the Standby Equity Purchase Agreement if ownership limitations prevent its utilization - Yorkville has committed to fund an additional $13 million advance under the SEPA if its share ownership prevents the company from otherwise accessing the facility[799] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[800] PART III Directors, Executive Officers and Corporate Governance The company's Board of Directors, including CEO John H. Ruiz and CLO Frank C. Quesada, comprises seven members with established Audit, Compensation, and Nominating committees, adhering to corporate governance guidelines - The Board of Directors is composed of seven members: John H. Ruiz, Frank C. Quesada, Ophir Sternberg, Beatriz Maria Assapimonwait, Michael Arrigo, Thomas Hawkins, and Roger Meltzer[804] - Key executive officers include John H. Ruiz (CEO), Frank C. Quesada (CLO), Ricardo Rivera (COO), and Francisco Rivas-Vásquez (CFO)[804] - The Board has three standing committees: Audit, Compensation, and Nominating and Corporate Governance[832] Executive Compensation Executive compensation for 2023 consisted primarily of base salaries and benefits, with CEO John H. Ruiz's salary voluntarily reduced, and non-employee directors receiving annual retainers in cash and equity 2023 Named Executive Officer Compensation | Name | Position | Salary ($) | Bonus ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | | John H. Ruiz | CEO | 917,500 | - | 1,007,332 | | Frank C. Quesada | CLO | 600,000 | - | 605,750 | | Ricardo Rivera | COO | 600,000 | 75,000 | 675,000 | - CEO John H. Ruiz voluntarily reduced his salary to $35,000 effective June 26, 2023; his salary was reinstated retroactively from January 1, 2024 by the Board on April 12, 2024[834][851] - Non-employee directors receive an annual retainer of $237,000, paid 30% in cash and 70% in equity, with additional cash retainers for committee chairs and members; several directors also received additional cash compensation for services on a Special Committee[845][843] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of April 5, 2024, executive officers and directors, particularly CEO John H. Ruiz and CLO Frank C. Quesada, hold highly concentrated ownership and voting control of the company's common stock - CEO John H. Ruiz is the beneficial owner of 86.55% of Class A Common Stock and 67.19% of Class V Common Stock[858] - CLO Frank C. Quesada is the beneficial owner of 70.30% of Class A Common Stock and 29.06% of Class V Common Stock[858] - All directors and executive officers as a group beneficially own 92.05% of Class A Common Stock and 96.26% of Class V Common Stock, indicating significant insider control[858] Certain Relationships and Related Transactions, and Director Independence The company engages in significant related-party transactions, including legal services and loans with entities controlled by its founders, while five of its seven directors are deemed independent - The company has a Legal Services Agreement with MSP Recovery Law Firm, an affiliate of the founders, to act as exclusive lead counsel for claims recovery, with the company advancing monthly expenses to the Law Firm[865][866] - The company has received significant loans from its principals, John H. Ruiz and Frank C. Quesada, and the Law Firm to fund transaction costs and operating expenses; a $112.8 million note from the principals bears 4% interest[863] - The company utilizes aviation services from MSP Recovery Aviation, LLC, an entity owned by CEO John H. Ruiz[867] - The Board has determined that five of its seven directors are independent: Michael F. Arrigo, Beatriz Assapimonwait, Thomas Hawkins, Ophir Sternberg, and Roger Meltzer[875] Principal Accounting Fees and Services Deloitte & Touche LLP served as the company's principal accountant, with total fees of approximately $1.7 million in 2023 and $2.3 million in 2022, primarily for audit and audit-related services Fees Billed by Deloitte & Touche LLP | Fee Category | 2023 ($) | 2022 ($) | | :--- | :--- | :--- | | Audit Fees | $1,475,236 | $1,444,002 | | Audit-Related Fees | $226,895 | $895,821 | | Tax Fees | — | — | | All Other Fees | — | — | | Total Fees | $1,702,131 | $2,339,823 | PART IV Exhibits, Financial Statement Schedules This section lists the consolidated financial statements of MSP Recovery, Inc. filed with the Annual Report, noting that all financial statement schedules are omitted as information is inapplicable or presented in notes - The consolidated financial statements of MSP Recovery, Inc. are included in the report[883] - All financial statement schedules are omitted as they are inapplicable or the information is included in the notes to the financial statements[884] Form 10-K Summary This item is not applicable to the company - Not applicable[889]