MSP Recovery(LIFW) - 2024 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for MSP Recovery, Inc. and its subsidiaries, including balance sheets, statements of operations, changes in equity, and cash flows Condensed Consolidated Balance Sheets The condensed consolidated balance sheets show the financial position of MSP Recovery, Inc. and its subsidiaries as of March 31, 2024, and December 31, 2023 | (In thousands) | March 31, 2024 | December 31, 2023 | | :-------------------------------- | :------------- | :---------------- | | ASSETS | | | | Cash | $11,973 | $11,633 | | Total current assets | $19,233 | $21,946 | | Intangible assets, net | $3,011,882 | $3,132,796 | | Total assets | $3,036,316 | $3,159,995 | | LIABILITIES AND EQUITY | | | | Warrant liability | $33,316 | $268 | | Total current liabilities | $82,767 | $46,506 | | Guaranty obligation | $984,450 | $941,301 | | Claims financing obligation and notes payable | $575,021 | $548,276 | | Total liabilities | $1,792,817 | $1,740,866 | | Total equity | $1,243,499 | $1,419,129 | - Intangible assets, net, decreased from $3.13 billion at December 31, 2023, to $3.01 billion at March 31, 2024, with $2.1 billion and $2.2 billion, respectively, related to a consolidated VIE[20] - Warrant liability significantly increased from $268 thousand at December 31, 2023, to $33.3 million at March 31, 2024[20] Condensed Consolidated Statements of Operations The condensed consolidated statements of operations show a net loss of $176.6 million for the three months ended March 31, 2024, similar to the $174.1 million loss in the prior year | (In thousands except per share amounts) | Three months ended March 31, 2024 | Three months ended March 31, 2023 | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | | Claims recovery income | $6,001 | $3,497 | | Total Claims Recovery | $6,001 | $3,995 | | Claims amortization expense | $121,014 | $113,469 | | Total operating expenses | $136,207 | $144,633 | | Operating Loss | $(130,206) | $(140,638) | | Interest expense | $(97,953) | $(42,390) | | Change in fair value of warrant and derivative liabilities | $51,307 | $2,255 | | Net loss | $(176,600) | $(174,146) | | Net loss attributable to MSP Recovery, Inc. | $(18,882) | $(4,916) | | Basic and diluted net income per share, Class A Common Stock | $(1.26) | $(1.39) | - Claims recovery income increased by 71.5% from $3.5 million in Q1 2023 to $6.0 million in Q1 2024[23] - Interest expense more than doubled, increasing by 131% from $42.4 million in Q1 2023 to $98.0 million in Q1 2024, primarily due to VRM-related interest[23][24] - Change in fair value of warrant and derivative liabilities showed a significant gain of $51.3 million in Q1 2024, compared to $2.3 million in Q1 2023[23] Condensed Consolidated Statements of Changes in Equity The condensed consolidated statements of changes in equity reflect a decrease in total equity from $1.42 billion at December 31, 2023, to $1.24 billion at March 31, 2024, primarily due to the net loss and a reduction in non-controlling interest | (In thousands) | Balance at Dec 31, 2023 | Class A Issuances | Net loss | Balance at Mar 31, 2024 | | :------------- | :---------------------- | :---------------- | :------- | :---------------------- | | Total Equity | $1,419,129 | $970 | $(176,600) | $1,243,499 | - Non-controlling interest decreased from $1.147 billion at December 31, 2023, to $980.8 million at March 31, 2024, reflecting the allocation of net loss and other equity changes[27] Condensed Consolidated Statements of Cash Flows The condensed consolidated statements of cash flows show a significant reduction in cash used in operating activities, from $10.0 million in Q1 2023 to $2.1 million in Q1 2024 | (In thousands) | Three months ended March 31, 2024 | Three months ended March 31, 2023 | | :------------- | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(2,145) | $(9,976) | | Net cash (used in) provided by investing activities | $(143) | $8,073 | | Net cash provided by financing activities | $2,628 | $8,405 | | Increase in cash | $340 | $6,502 | | Cash at end of period | $11,973 | $21,583 | - Net cash used in operating activities decreased by $7.8 million, from $10.0 million in Q1 2023 to $2.1 million in Q1 2024[32] - Investing activities shifted from providing $8.1 million in Q1 2023 to using $143 thousand in Q1 2024, primarily due to proceeds from the sale of intangible assets in the prior year not recurring[32] 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 description, accounting policies, significant transactions, and financial instruments Note 1. DESCRIPTION OF THE BUSINESS MSP Recovery, Inc. (d/b/a LifeWallet) operates as a Medicaid and Medicare Secondary Payer Act recovery specialist, utilizing proprietary data analytics to identify and recover improper healthcare payments - MSP Recovery, Inc. (LifeWallet) was formed on May 23, 2022, through a business combination, consolidating Legacy MSP, a Medicaid and Medicare Secondary Payer Act recovery specialist[34] - The company uses a proprietary internal data analytics platform to review assigned health claims and identify recovery opportunities where secondary payers should not have paid or should have been reimbursed by third parties[35][36] - On March 1, 2024, the company settled with 28 affiliated P&C Insurers, securing historical and future data sharing, implementation of LifeWallet's coordination of benefits solution, a 5-year cooperative resolution agreement for Medicare claims, and a cash payment for existing historical claims[37][39] - The Yorkville SEPA allows the company to sell up to $250 million in Class A Common Stock to Yorkville, with $15 million in convertible notes issued, and proceeds partially used to repay Nomura and VRM obligations[39][44][46] Note 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note outlines the basis of presentation for the unaudited condensed consolidated financial statements, emphasizing compliance with SEC rules and GAAP, and the consolidation of entities controlled by the company - The financial statements are prepared in accordance with SEC rules and GAAP, reflecting all necessary recurring adjustments for fair presentation[58] - The company consolidates entities it controls through majority voting interest or as the primary beneficiary of a Variable Interest Entity (VIE), such as MSP Recovery[62][63] - Significant estimates and assumptions are made for Claims recovery income, Claims recovery service income recognition, recoverability of long-lived assets, and cost of Claims recoveries[64] - As of March 31, 2024, the non-controlling interest of Class V shareholders was 88.8%, reflecting their economic ownership percentage[66] Note 3. BUSINESS COMBINATION The business combination, completed on May 23, 2022, involved MSP Recovery, Inc. acquiring Legacy MSP through an 'Up-C' structure, accounted for as a reverse recapitalization - The business combination of MSP Recovery, Inc. (formerly LCAP) and Legacy MSP was consummated on May 23, 2022, structured as an 'Up-C' model[71][72] - The transaction was accounted for as a reverse recapitalization, with Legacy MSP treated as the acquired entity for financial reporting, and LCAP's net assets recorded at historical cost without goodwill[73] - The company assumed Public Warrants and issued approximately 1.03 billion New Warrants as a dividend, with exercise prices adjusted[77][78] - A Tax Receivable Agreement (TRA) was entered into, requiring payment of 85% of realized tax benefits to sellers, but no TRA liability has been recognized as of March 31, 2024, due to the improbability of realizing future tax benefits[80][81][82][83] Note 4. ASSET ACQUISITIONS This note details the acquisition of Claims and rights to proceeds from VRM MSP and Hazel, incurring a significant guaranty obligation and involving amendments to the Virage MTA - The company acquired Claims from Series MRCS by issuing approximately 7.9 million Up-C Units, recorded as intangible assets with an eight-year useful life[86][87] - Rights to proceeds from VRM MSP Claims were acquired for approximately 14.3 million Up-C Units, leading to a guaranty obligation of $984.4 million as of March 31, 2024, for the VRM Full Return (contributions plus 20% annual rate)[88][89][92] - The Third Virage MTA Amendment (April 1, 2024) extended the VRM Full Return payment due date to September 30, 2025, and introduced the issuance of VRM Warrants as a payment method for interest[97] - On March 29, 2023, the company acquired controlling interests in nine legal entities holding CCRAs from Hazel (Claims Purchase) and sold controlling interests in three entities to Hazel (Claims Sale), resulting in a $4.6 million gain on the combined Claims Transactions[102][103][105] Note 5. INVESTMENT IN EQUITY METHOD INVESTEES The company holds equity method investments in Series PMPI, MAO-MSO entities, and VRM MSP, recorded at $0 on the balance sheet due to preferred returns or insignificant earnings/losses - The company accounts for investments in Series PMPI, MAO-MSO Recovery LLC, MAO-MSO Recovery II LLC, and VRM MSP using the equity method[107] - The equity method investment in Series PMPI is valued at $0 as of March 31, 2024, and December 31, 2023, because the preferred return exceeds total members' equity[110] - The MAO-MSO entities' investments are also valued at $0 due to no initial contribution and recorded losses, with insignificant activity for the periods presented[111] | (in thousands) | For the Three Months Ended March 31, 2024 | For the Three Months Ended March 31, 2023 | | :------------- | :---------------------------------------- | :---------------------------------------- | | Revenue | $7 | $0 | | Amortization | $500 | $500 | | Other expenses | $10 | $0 | | Profit (Loss) | $(503) | $(500) | | (in thousands) | As of March 31, 2024 | As of December 31, 2023 | | :------------- | :------------------- | :---------------------- | | Total Assets | $911 | $1,403 | | Total Liabilities | $410 | $399 | Note 6. PROPERTY AND EQUIPMENT, NET Property and equipment, net, primarily consists of internally developed software, office and computer equipment, and leasehold improvements, with a slight decrease in net value due to depreciation and amortization | (In thousands) | March 31, 2024 | December 31, 2023 | | :------------- | :------------- | :---------------- | | Office and computer equipment | $455 | $434 | | Leasehold improvements | $113 | $113 | | Internally developed software | $5,810 | $5,789 | | Other software | $67 | $67 | | Property and equipment, gross | $6,445 | $6,403 | | Less: accumulated depreciation and amortization of software | $(1,559) | $(1,492) | | Property and equipment, net | $4,886 | $4,911 | - Depreciation and amortization expense for property and equipment was $67 thousand for the three months ended March 31, 2024, a significant increase from $9 thousand in the same period of 2023[113] Note 7. INTANGIBLE ASSETS, NET Intangible assets, net, primarily comprise Claims Cost Recovery Agreements (CCRAs), amortized over an eight-year useful life, decreasing to $3.01 billion at March 31, 2024, due to amortization expense - Intangible assets, net, primarily consist of CCRAs, which are amortized over an eight-year useful life[114] | (in thousands) | March 31, 2024 | December 31, 2023 | | :------------- | :------------- | :---------------- | | Intangible assets, gross | $3,872,456 | $3,872,356 | | Accumulated amortization | $(860,574) | $(739,560) | | Net | $3,011,882 | $3,132,796 | - Claims amortization expense was $121.0 million for the three months ended March 31, 2024, up from $113.5 million in the prior year[114] - The company did not identify any new impairment indicators for its definite-lived CCRA intangible assets as of March 31, 2024[116] Note 8. LEASES The company leases office space in Puerto Rico under a non-cancellable operating lease, resulting in a right-of-use (ROU) asset and lease liability, and also rents office space from a related party on a month-to-month basis - The company leases office space in Puerto Rico under a non-cancellable operating lease expiring in August 2026[118] - Lease expense for the three months ended March 31, 2024, was $39.5 thousand[118] - Short-term rent expense from the Law Firm (a related party) was $0.5 million for Q1 2024, compared to $0.3 million for Q1 2023[119] | (In thousands) | March 31, 2024 | December 31, 2023 | | :------------- | :------------- | :---------------- | | Right-of-use asset | $315 | $342 | | Total Lease Liability | $(319) | $(344) | Note 9. VARIABLE INTEREST ENTITIES The company consolidates several Variable Interest Entities (VIEs) where it is the primary beneficiary, with total assets of $2.1 billion and liabilities of $0.4 million as of March 31, 2024 - The company consolidates VIEs where it is the primary beneficiary, meaning it directs activities and absorbs losses or receives significant benefits[122][123] - Total assets of consolidated VIEs were $2.1 billion and liabilities were $0.4 million as of March 31, 2024, with intangible assets (CCRAs) accounting for $1.9 billion[124] - The company also has investments in unconsolidated VIEs, with total assets of $0.9 million and liabilities of $0.4 million at March 31, 2024, where its exposure is limited to its investment[125][126] Note 10. CLAIMS FINANCING OBLIGATIONS AND NOTES PAYABLE The company's claims financing obligations and notes payable totaled $584.3 million as of March 31, 2024, with a weighted average interest rate of 14.8%, including amounts owed to Brickell Key Investments, Hazel, and Nomura - Claims financing obligations and notes payable amounted to $584.3 million as of March 31, 2024, with a weighted average interest rate of 14.8%[130] - The company has an $80 million obligation to Brickell Key Investments, which can be paid through claims proceeds, cash, or monetization of warrants[132] - The Hazel Working Capital Credit Facility provides up to $80 million (with a 40% OID), with $4.5 million funded under Term Loan B in Q1 2024, and $14.0 million additional availability; the Purchase Money Loan from Hazel is $250.0 million[134][135][138][140] - The Nomura Promissory Note was amended to increase the principal to $30.0 million and extend the maturity date to September 30, 2025, with a 16% annual interest rate[85][145] Note 11. WARRANT LIABILITY The company recognized a warrant liability of $33.3 million as of March 31, 2024, for Public Warrants, New Warrants, and VRM Warrants, significantly increasing from December 31, 2023, due to new issuances and fair value changes - As of March 31, 2024, the company recognized a warrant liability of $33.3 million, up from $268 thousand at December 31, 2023[149] - The warrant liability includes Public Warrants (2.95 million outstanding), New Warrants (894.75 million outstanding), and VRM Warrants (48.52 million shares purchasable)[148] | in thousands | Warrant Liability | | :----------- | :---------------- | | Balance at December 31, 2023 | $(268) | | Issuance of new warrants | $(84,508) | | Change in fair value of outstanding warrants | $51,460 | | Balance at March 31, 2024 | $(33,316) | | | of Shares | Weighted Average Exercise Price | | :------------------------ | :---------- | :------------------------------ | | Balance at December 31, 2023 | 35,908,200 | $286.56 | | Issued | 48,517,817 | $0.0001 | | Balance at March 31, 2024 | 84,426,017 | $121.88 | Note 12. NONCONTROLLING INTEREST Non-controlling interest primarily represents the Up-C Units held by Members, which constituted 88.8% of the company's ownership as of March 31, 2024, and are convertible into Class A Common Stock - Non-controlling interest primarily represents the Up-C Units held by Members, which accounted for 88.8% of the company's ownership as of March 31, 2024[150] | | Ownership | Percentage | | :------------------------ | :-------- | :--------- | | Ownership of Class A Common Stock | 15,636,062 | 11.2 % | | Ownership of Class V Common Stock | 124,067,498 | 88.8 % | | Balance at end of period | 139,703,560 | 100.0 % | - As of March 31, 2024, 2.7 million Up-C Units have been exchanged into Class A Common Stock[150] Note 13. COMMITMENTS AND CONTINGENCIES The company is involved in various legal proceedings and investigations, including ongoing SEC and U.S. Attorney's Office inquiries, and litigation with Cano Health, LLC, which filed for bankruptcy - The company is subject to ongoing investigations by the SEC and the U.S. Attorney's Office regarding its business combination, financial results, investor agreements, and data analytic platforms[155][157][158][318][319][320] - The RAMP Act, if passed, could impact the company's ability to pursue recoveries on prospective claims under the Medicare Secondary Payer Act by striking 'primary plan' and inserting 'group health plan'[154] - The company is involved in litigation with Cano Health, LLC, which filed for Chapter 11 bankruptcy, resulting in a $5.0 million receivable from Cano being reserved[159][322] Note 14. FAIR VALUE MEASUREMENTS The company measures certain liabilities at fair value on a recurring basis, including derivative liability and warrant liability, totaling $33.5 million as of March 31, 2024 | in thousands | Level | March 31, 2024 | December 31, 2023 | | :----------- | :---- | :------------- | :---------------- | | Derivative liability – fair value of beneficial conversion feature | 3 | $190 | $37 | | Warrant liability | 2 | $33,316 | $268 | | Total | | $33,506 | $305 | - The embedded derivative liability within the Yorkville SEPA is valued at $190 thousand as of March 31, 2024, with a $153 thousand impact on the Statement of Operations for the three months ended March 31, 2024[55][161] | in thousands | March 31, 2024 | December 31, 2023 | | :----------- | :------------- | :---------------- | | Price of Common Stock | $0.685 | $2.27 | | Volatility | 35 % | 40 % | | Market Risk Spread | 11.69 % | 12.37 % | | Expected Term (in years) | 1.50 | 1.25 | Note 15. RELATED PARTY TRANSACTIONS The company has significant related party transactions, including loans from MSP Principals ($112.8 million promissory note) and the Law Firm ($4.95 million loan), and interest expense related to VRM ($73.4 million in Q1 2024) - The company has an unsecured promissory note of $112.8 million from MSP Principals (John H. Ruiz and Frank C. Quesada), bearing 4% annual interest, maturing June 16, 2026[163] - Interest expense related to the MSP Principals Promissory Note was $1.3 million for both Q1 2024 and Q1 2023[163] - Professional fees – legal included $3.0 million and $4.2 million of related party expenses to the Law Firm for Q1 2024 and Q1 2023, respectively[166] - Interest expense related to VRM was $73.4 million for Q1 2024, significantly up from $37.1 million in Q1 2023[174] - The company issued VRM Warrants in Q1 2024, entitling Virage to purchase 48.5 million Class A Common Stock shares, and further Monthly Virage Warrants were issued in April and May 2024[175] Note 16. NET LOSS PER COMMON SHARE Basic and diluted net loss per share for Class A Common Stock was $(1.26) for the three months ended March 31, 2024, compared to $(1.39) in the prior year, with potentially dilutive securities excluded as anti-dilutive | (In thousands except shares and per share amounts) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Net loss attributable to MSP Recovery, Inc. | $(18,882) | $(4,916) | | Weighted-average shares of Class A common stock outstanding – basic | 15,013,881 | 3,544,381 | | Basic and diluted net income per share, Class A common stock | $(1.26) | $(1.39) | - The calculation excluded 124.1 million Class V Common Stock shares, 2.95 million Public Warrants, 2.67 million CPIA Warrants, 894.75 million New Warrants, and 48.52 million VRM Warrants for Q1 2024, as their inclusion would be anti-dilutive[182] Note 17. SUBSEQUENT EVENTS Subsequent to March 31, 2024, the company reached another comprehensive settlement with an additional group of affiliated property and casualty insurers, including historical data provision and a 10-year cooperative resolution agreement - On April 18, 2024, the company reached a comprehensive settlement with an additional group of affiliated property and casualty insurers[184] - The settlement terms include historical data provision, assistance in reconciling claims, assignment of collection rights against third parties, and a 10-year agreement for cooperative resolution or binding mediation of claims[185] 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 and results of operations, highlighting its business model, key performance factors, and liquidity position Our Business MSP Recovery, Inc. (LifeWallet) is a healthcare recovery and data analytics company focused on identifying and recovering improper payments in Medicare, Medicaid, and commercial insurance - LifeWallet is a leading healthcare recovery and data analytics company, disrupting the reimbursement system by identifying and recovering improper payments in Medicare, Medicaid, and commercial insurance[188][189] - The company utilizes proprietary algorithms and a team of data scientists and medical professionals to analyze historical medical claims data and identify recoverable opportunities[190] - The business model relies on irrevocable assignments of claims, giving the company control over litigation and the ability to pursue additional recoveries under various legal theories, including double damages under the MSP Act[191][192] - As of March 31, 2024, the company's claims portfolio includes approximately $1,545 billion in Billed Amount and $370 billion in Paid Amount, with $86.6 billion in Paid Value of Potentially Recoverable Claims[194] Healthcare Industry The company's business is deeply intertwined with the healthcare industry, particularly Medicare and Medicaid, which represent a significant market for recovery services - The company's total potentially serviceable market is estimated to be over $150 billion annually, primarily in the Medicare and Medicaid segments[195] - CMS projects health spending to grow at an average rate of 5.4% annually between 2022 and 2031, which could increase the complexity and number of claims, impacting demand for the company's solutions[196] - Approximately 95.6% of expected recoveries are based on the Medicare Secondary Payer Act, making the business highly dependent on the stability of this law[197] Our Business Model The company operates primarily under a Recovery Model, acquiring irrevocable assignments of health claim recovery rights and using proprietary algorithms to identify and pursue recoveries - Under the Recovery Model, the company receives irrevocable assignments of health claim recovery rights (CCRAs) and uses proprietary algorithms to identify and pursue potential recoveries, typically retaining 50% of Net Proceeds[198][199][200] - The 'Chase to Pay' model aims to use near real-time analytics to identify the proper primary insurer at the point of care, preventing wrongful payments and potentially decreasing legal costs[201][203][204] - The company also provides Claims Recovery Services to assist other entities in identifying and pursuing claims recovery rights for a fee, not tied to recovery amounts[206] Recent Updates The company recently achieved comprehensive settlements with two groups of affiliated property and casualty insurers, generating revenue and securing data sharing agreements, and amended key claims financing obligations - On March 1, 2024, the company reached a comprehensive settlement with 28 affiliated P&C Insurers, generating revenue and securing data sharing, coordination of benefits, and cooperative resolution agreements[209] - On April 18, 2024, an additional settlement was reached with another group of P&C Insurers, including historical data provision, assignment of collection rights, and a 10-year cooperative resolution agreement[210][211] - Amendments were made to the Nomura Note, Yorkville SEPA convertible notes, and Virage MTA, extending maturity dates and modifying payment terms[212] Key Factors Affecting Our Results The company's financial results are heavily influenced by its Claims portfolio, which includes $86.6 billion in Paid Value of Potentially Recoverable Claims, and the ability to attract new assignors and collect on identified claims - The company's Claims portfolio holds approximately $86.6 billion in Paid Value of Potentially Recoverable Claims as of March 31, 2024[213] - Future profitability depends on attracting new assignors (grown from 32 in 2015 to over 160 to date) and collecting on identified claims at estimated multiples, including double damages and statutory interest under the MSP Act[215][216][217] - Revenue from claims recovery is typically recognized upon binding settlement, arbitration, or resolution of legal proceedings[218] - As of March 31, 2024, approximately 86.8% of accident-related claims identified as potentially recoverable are already in the recovery process[218] Key Performance Indicators The company tracks several Key Performance Indicators (KPIs) to evaluate business performance, including Total Paid Amount, Paid Value of Potentially Recoverable Claims (PVPRC), Billed Value of Potentially Recoverable Claims (BVPRC), Recovery Multiple, and Penetration Status of Portfolio - Key Performance Indicators (KPIs) include Total Paid Amount, Paid Value of Potentially Recoverable Claims (PVPRC), Billed Value of Potentially Recoverable Claims (BVPRC), Recovery Multiple, and Penetration Status of Portfolio[219] - PVPRC is a measure of the Paid Amount for potentially recoverable claims, identified using algorithms, and is a useful metric for potential recoveries[221] - BVPRC represents the cumulative Billed Amount of potentially recoverable claims, with the company aiming to recover in excess of the Paid Amount, including double damages[222] | $ in billions | March 31, 2024 | December 31, 2023 | December 31, 2022 | | :------------ | :------------- | :---------------- | :---------------- | | Paid Amount | $370.0 | $369.8 | $374.8 | | Paid Value of Potentially Recoverable Claims | $86.6 | $88.9 | $89.6 | | Billed Value of Potentially Recoverable Claims | $363.8 | $373.5 | $377.8 | | Penetration Status of Portfolio | 86.8 % | 86.8 % | 85.8 % | - For Q1 2024, total recoveries were $6.1 million with a recovery multiple of 1.53x, though this sample is not statistically significant[229] Key Components of Our Results of Operations This section details the components of the company's results of operations, including Claims Recovery Income, Claims Recovery Service Income, and various operating expenses such as Claims Amortization Expense, General and Administrative, Professional Fees, and Interest Expense - Claims Recovery Income is recognized on a gross basis when amounts are reasonably certain of collection, typically upon binding settlement or legal resolution[227][228] - Claims Amortization Expense relates to the amortization of CCRA intangible assets acquired through upfront payments or commitments[232] - Interest expense includes interest on the Nomura Note, Hazel Working Capital Credit Facility and Purchase Money Loan, Virage transactions, Yorkville Advances, and related party loans[239] - Changes in Fair Value of Warrant and Derivative Liabilities reflect mark-to-market adjustments for Public Warrants and Virage Warrants[241] Results of Operations For the three months ended March 31, 2024, the company reported a net loss of $176.6 million, similar to the prior year, with increased claims recovery income offset by higher interest and claims amortization expenses | (in thousands except for percentages) | 2024 | 2023 | $ Change | % Change | | :------------------------------------ | :---------- | :---------- | :---------- | :------- | | Claims recovery income | $6,001 | $3,497 | $2,504 | 72 % | | Claims recovery service income | $0 | $498 | $(498) | (100) % | | Total Claims Recovery | $6,001 | $3,995 | $2,006 | 50 % | | Cost of claim recoveries | $1,673 | $1,021 | $652 | 64 % | | Claims amortization expense | $121,014 | $113,469 | $7,545 | 7 % | | General and administrative | $5,566 | $6,855 | $(1,289) | (19) % | | Professional fees | $4,420 | $9,728 | $(5,308) | (55) % | | Professional fees - legal | $3,467 | $8,551 | $(5,084) | (59) % | | Allowance for credit losses | $0 | $5,000 | $(5,000) | (100) % | | Total operating expenses | $136,207 | $144,633 | $(8,426) | (6) % | | Operating Loss | $(130,206) | $(140,638) | $10,432 | (7) % | | Interest expense | $(97,953) | $(42,390) | $(55,563) | 131 % | | Change in fair value of warrant and derivative liabilities | $51,307 | $2,255 | $49,052 | 2,175 % | | Net loss | $(176,600) | $(174,146) | $(2,454) | 1 % | | Net loss attributable to MSP Recovery, Inc. | $(18,882) | $(4,916) | $(13,966) | 284 % | - Claims recovery income increased by $2.5 million (72%) to $6.0 million, driven by increased settlements, including from P&C Insurers[244] - Interest expense surged by $55.6 million (131%) to $98.0 million, primarily due to the guaranty obligation, new Hazel financing, and accrued interest on related party loans[251] - A significant gain of $51.3 million was recorded from the change in fair value of warrant and derivative liabilities, compared to $2.3 million in the prior year[253] Non-GAAP Financial Measures The company uses non-GAAP financial measures, 'adjusted net loss' and 'adjusted operating loss,' to provide insights into its ongoing operating performance by excluding certain non-cash and non-recurring expenses - Adjusted net loss and adjusted operating loss are non-GAAP measures used to evaluate ongoing operating performance[254] | (In thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :------------- | :-------------------------------- | :-------------------------------- | | GAAP Operating Loss | $(130,206) | $(140,638) | | Professional fees paid in stock | $469 | $7,557 | | Claims amortization expense | $121,014 | $113,469 | | Allowance for credit losses | $0 | $5,000 | | Adjusted Operating Loss | $(8,723) | $(14,612) | | GAAP Net Loss | $(176,600) | $(174,146) | | Professional fees paid in stock | $469 | $7,557 | | Claims amortization expense | $121,014 | $113,469 | | Allowance for credit losses | $0 | $5,000 | | Interest expense | $97,953 | $42,390 | | Change in fair value of warrant and derivative liabilities | $(51,307) | $(2,255) | | Adjusted Net Loss | $(8,471) | $(7,985) | Liquidity and Capital Resources The company has incurred substantial net losses and negative cash flows, with an accumulated deficit of $104.4 million as of March 31, 2024, relying on the Working Capital Credit Facility, Yorkville SEPA, and debt agreement amendments to address liquidity concerns - As of March 31, 2024, the company had $12.0 million in unrestricted cash and an accumulated deficit of $104.4 million, having used $2.1 million in cash from operations during Q1 2024[255] - The company's liquidity strategy includes the Working Capital Credit Facility (up to $80 million, with $14.0 million additional availability under Term Loan B as of March 31, 2024) and the Yorkville SEPA (up to $250 million in equity sales)[256][258][259][260][261][275] - Key actions to address liquidity include extending the VRM Full Return payment to September 30, 2025, and the Nomura Note maturity to September 30, 2025[256][263][269][272] - The Yorkville SEPA includes $15.0 million in convertible promissory notes, with a third $5.0 million note issued on April 8, 2024, and an agreement for an additional $13.0 million advance[263][278][289] Going Concern The company has incurred substantial net losses and negative cash flows since inception, resulting in an accumulated deficit of $104.4 million as of March 31, 2024, but management believes actions taken alleviate substantial doubt about its ability to continue as a going concern - The company had an accumulated deficit of $104.4 million as of March 31, 2024, and used $2.1 million in cash from operations during the three months ended March 31, 2024[255] - Management concluded that actions such as the Working Capital Credit Facility, Yorkville SEPA, and extensions of payment obligations (VRM Full Return to Sept 30, 2025, Nomura Note to Sept 30, 2025) alleviate substantial doubt about the company's ability to continue as a going concern[256][257][263] Sources of Liquidity The company's primary liquidity sources include the Hazel Working Capital Credit Facility (up to $80 million), a $250 million Hazel Purchase Money Loan, a $112.8 million promissory note from MSP Principals, and the Yorkville SEPA, which allows for up to $250 million in equity sales - The Hazel Working Capital Credit Facility provides up to $80 million (with a 40% original issue discount), with $4.5 million funded under Term Loan B in Q1 2024, and $14.0 million additional availability[258][259][260] - The MSP Principals provided a $112.8 million unsecured promissory note to finance operations, bearing 4% annual interest and maturing on June 16, 2026[262] - The Third Virage MTA Amendment (April 1, 2024) extended the VRM Full Return payment due date to September 30, 2025, and allows for payment via cash, sale of reserved shares, or issuance of Monthly Virage Warrants[269] - The Yorkville SEPA allows the company to sell up to $250 million of Class A Common Stock to Yorkville and includes $15 million in convertible promissory notes, with maturity extended to September 30, 2025[275][278][289] Cash Flows For the three months ended March 31, 2024, net cash used in operating activities significantly decreased to $2.1 million from $10.0 million in the prior year, while investing activities shifted to a net cash outflow and financing activities decreased | (in thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :------------- | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(2,145) | $(9,976) | | Net cash (used in) provided by investing activities | $(143) | $8,073 | | Net cash provided by financing activities | $2,628 | $8,405 | | Increase in cash | $340 | $6,502 | | Cash at end of period | $11,973 | $21,583 | - Net cash used in operating activities decreased by $7.8 million, primarily due to net loss, claims amortization, paid-in-kind interest, and changes in warrant liability fair value[303] - Net cash provided by financing activities decreased by $5.8 million, mainly due to $4.5 million in new debt financing offset by $1.5 million in claims financing obligation repayments and $0.4 million in related party loan repayment[305] Contractual Obligations, Commitments and Contingencies As of March 31, 2024, the company's claims financing obligations and notes payable had a present value of $584.3 million, with minimum required payments totaling $727.5 million, and guaranty obligations amounted to $984.4 million - Claims financing obligations and notes payable had a present value of $584.3 million as of March 31, 2024, with minimum required payments of $727.5 million[306][307] - Guaranty obligations totaled $984.4 million as of March 31, 2024, with the VRM Full Return payment date extended to September 30, 2025[308] - Repayment of the VRM Full Return will utilize 25% of the company's portion of net proceeds from the Yorkville SEPA (after Convertible Notes are satisfied) and proceeds from the sale of certain reserved shares of Messrs. John H. Ruiz and Frank C. Quesada[308] Critical Accounting Estimates The company's critical accounting estimates, as disclosed in its 2023 Form 10-K, remain unchanged for the three months ended March 31, 2024, involving significant judgment and assumptions - There have been no material changes to the company's critical accounting policies and estimates during the three months ended March 31, 2024[310] 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 and is not required to provide quantitative and qualitative disclosures about market risk[311] Item 4. Controls and Procedures Management concluded that the company's internal controls over financial reporting were not effective as of March 31, 2024, due to unremediated material weaknesses, though these did not affect financial results - Management concluded that internal controls over financial reporting were not effective as of March 31, 2024[313] - Material weaknesses identified include issues with human resources processes (user access, IT change management, payroll approval) and accounting for contract terminations[313] - Remediation of these material weaknesses is in progress, and management believes they did not affect the financial results[313][314] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in ongoing legal proceedings and investigations, including subpoenas from the SEC and the U.S. Attorney's Office, and litigation with Cano Health, LLC - The company is cooperating with ongoing investigations by the SEC and the U.S. Attorney's Office, which involve subpoenas for documents related to the business combination, financial results, and data analytic platforms[318][319][320] - The company is involved in litigation with Cano Health, LLC, which filed for Chapter 11 bankruptcy, leading to a $5.0 million receivable from Cano being reserved[322] - On January 4, 2024, Cano sued Simply Healthcare Plans, Inc. and the company, seeking a declaratory judgment on the rescission of the Cano Purchase Agreement and standing to recover claims[323] Item 1A. Risk Factors There have been no material changes to the principal risk factors affecting the company's business, results of operations, and financial condition since the 2023 Form 10-K - No material changes to principal risk factors have occurred since the 2023 Form 10-K[325] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the quarter ended March 31, 2024, the company issued unregistered equity securities, including warrants to Virage entitling them to purchase 48.5 million Class A Common Stock shares, and unregistered Class A Common Stock shares to Palantir and Virage - The company issued warrants to Virage entitling them to purchase 48,517,817 shares of Class A Common Stock during Q1 2024[326] - 472,772 unregistered shares of Class A Common Stock were issued to Palantir Technologies, Inc. for services provided[327] - 438,596 unregistered shares of Class A Common Stock were issued to Virage in satisfaction of obligations, which were subsequently purchased by Mr. John H. Ruiz[328] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities - No defaults upon senior securities were reported[329] Item 4. Mine Safety Disclosures This item is not applicable to the company - Mine Safety Disclosures are not applicable to the company[329] Item 5. Other Information No other information was reported under this item - No other information was reported under this item[329] Item 6. Exhibits This section lists all exhibits filed as part of, or incorporated by reference into, the Quarterly Report on Form 10-Q, including various agreements, certifications, and XBRL documents - The exhibits include the VRM Warrant Agreement, Amended and Restated Collateral Administration Agreement, Amended and Restated Promissory Note with Nomura, MTA Amendment No. 3, Yorkville SEPA Side Letters, and various certifications[331] Signatures The report is duly signed on behalf of MSP Recovery, Inc. by Francisco Rivas-Vásquez, Chief Financial Officer, on May 15, 2024 - The report was signed by Francisco Rivas-Vásquez, Chief Financial Officer, on May 15, 2024[336]