What changed in this filing

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Item 1. Financial Statements

2022-11-10 compared with 2022-08-12 · 333 added, 300 removed, 1077 unchanged (37% of the section changed)

3 unchanged sentences

Condensed Consolidated Balance Sheets

September 30,

(In thousands except per share amounts)

27 unchanged sentences

Commitments and contingencies (Note 12)

Class A common stock subject to possible redemption, 1,129,589 shares at redemption value as of June 30, 2022.

Class A common stock subject to possible redemption, 1,129,589 shares at redemption value as of September 30, 2022.

Stockholders' Equity (Deficit):

1 unchanged sentence

5,500,000,000 shares authorized;

66,051,029 issued and outstanding as of June 30, 2022

72,909,609 issued and outstanding as of September 30, 2022

Class V common stock, $ 0.0001 par value;

3,250,000,000 shares authorized;

3,154,473,292 issued and outstanding as of June 30, 2022

3,148,720,212 issued and outstanding as of September 30, 2022

Additional paid-in capital

4 unchanged sentences

Total liabilities and equity

As of June 30, 2022 and December 31, 2021, the total affiliate receivable, indemnification asset, affiliate payable and loan from related parties balances are with related parties.

As of September 30, 2022 and December 31, 2021, the total affiliate receivable, indemnification asset, affiliate payable, guaranty obligation and loan from related parties balances are with related parties.

In addition, the prepaid expenses and other current assets and claims financings obligation and notes payable includes balances with related parties.

See Note 13, Related Party, for further details.

See Note 13, Related Party, for furthe r details.

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

2 unchanged sentences

Condensed Consolidated Statements of Operations

For the three months

ended June 30,

For the six months

ended June 30,

Three months ended

September 30,

Nine months ended September 30,

(In thousands except per share amounts)

20 unchanged sentences

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

For the three and six months ended June 30, 2022 and 2021, claims recovery service income included $ 3.2 million and $ 10.6 million , respectively, and $ 2.6 million and $ 5.3 million , respectively, of claims recovery service income from VRM MSP Recovery Partners LLC (“VRM”).

For th e three and nine months ended September 30, 2022 and 2021, claims recovery service income included $ 0 million and $ 10.6 million , respectively, and $ 1.7 million and $ 7.0 million , respectively, of claims recovery service income from VRM MSP Recovery Partners LLC (“VRM MSP”).

See Note 13, Related Party, for further details.

For the three and six months ended June 30, 2022, cost of claim recoveries in cluded $ 231 thousand and $ 271 thousand , respectively, of related party expenses.

For the three and nine months ended September 30, 2022 , cost of claim recoveries included $ 0 and $ 271 thousand , respectively, of related party expenses.

This relates to contingent legal expenses earned from claims recovery income pursuant to legal service agreements with the La Ley con John H.

1 unchanged sentence

See Note 13, Related Party, for further details.

For the three and six months ended June 30, 2021 , there were no expenses related to contingent legal expenses.

For the three and six months ended June 30, 2022 and 2021, general and administrative expenses included $ 156 thousand and $ 250 thousand , respectively, and $ 19 thousand and $ 19 thousand , respectively, of related party expenses.

See Note 13, Related Party, for further details.

For the three and six months ended June 30, 2022 and 2021, professional fees - legal included $ 0.0 million and $ 0.3 million , respectively, $ 5 thousand and $ 8 thousand, respectively, of related party expenses related to the Law Firm.

For the three and nine months ended September 30, 2021 , there were no expenses related to contingent legal expenses.

For the three and nine months ended September 30, 2022 and 2021, general and administrative expenses included $ 150 thousand and $ 400 thousand , respectively, and $ 20 thousand and $ 39 thousand , respectively, of related party expenses.

See Note 13, Related Party, fo r further details.

For the three and nine months ended September 30, 2022 and 2021, professional fees - legal included $ 4.6 million and $ 5.0 million , respectively, $ 0 thousand and $ 8 thousand, res pectively, of related party expenses related to the Law Firm.

See Note 13, Related Party, for further details.

Earnings per share information has not been presented for periods prior to the Business Combination (as defined in Note 1), as it resulted in values that would not be meaningful to the users of these unaudited condensed consolidated financial statements.

Refer to Note 15 for further information.

Earnings pe r share information has not been presented for periods prior to the Business Combination (as defined in Note 1, Description of Business ), as it resulted in values that would not be meaningful to the users of these unaudited condensed consolidated financial statements.

Refer to Note 15, Net Loss Per Common Share for further information.

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

2 unchanged sentences

Condensed Consolidated Statements of Changes in Equity

Three Months Ended June 30, 2022

Three Months Ended September 30, 2022

Class A Common Stock

5 unchanged sentences

Non- Controlling Interests

Balance at March 31, 2022

Balance at June 30, 2022

3,154,473,292

Contributions prior to recapitalization transaction

2 unchanged sentences

Cumulative effect of recapitalization transaction

3,154,473,292

Opening net assets of Lionheart II Holdings, LLC acquired

2 unchanged sentences

Class A Issuances

Balance at June 30, 2022

Balance at September 30, 2022

3,148,720,212

Six Months Ended June 30, 2022

Nine Months Ended September 30, 2022

(In thousands except shares)

13 unchanged sentences

Class A Issuances

Balance at June 30, 2022

Balance at September 30, 2022

3,148,720,212

Three Months Ended June 30, 2021

Three Months Ended September 30, 2021

(In thousands)

1 unchanged sentence

Non- Controlling Interests

Balance at March 31, 2021

Balance at June 30, 2021

Contributions

Distributions

Balance at June 30, 2021

Six Months Ended June 30, 2021

Balance at September 30, 2021

Nine Months Ended September 30, 2021

(In thousands)

4 unchanged sentences

Distributions

Balance at June 30, 2021

Balance at September 30, 2021

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

2 unchanged sentences

Condensed Consolidated Statements of Cash Flows

For the six months

ended June 30,

Nine months ended September 30,

(In thousands)

10 unchanged sentences

Realized gain on equity securities

Unrealized losses on investments - short position

Gain on debt extinguishment

Change in operating assets and liabilities:

5 unchanged sentences

Accounts payable and accrued liabilities

Deferred service fee income

Net cash used in operating activities

22 unchanged sentences

Purchase of intangible asset through issuance of Class A common stock

Purchase of intangible asset in accrued expenses

Payment of professional fees through issuance of Class A common stock

2 unchanged sentences

Balances include related party transactions.

See Note 13, Related Party , for further details.

See Note 13, Related Party , f or further details.

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

28 unchanged sentences

The Retained Interest is not an asset of the Company, but an obligation to pay these assignors, with the Company keeping the other 50 % interest of any recoveries.

Virage’s funding in connection with future transactions generally will be used to purchase Retained Interests from existing assignors or new MSP assignors, although its funds can also be used to buy 50% of the recoveries from the Company, in the event the applicable assignor did not retain any Retained Interest.

Virage’s fun ding in connection with future transactions generally will be used to purchase Retained Interests from existing assignors or new MSP assignors, although its funds can also be used to buy 50% of the recoveries from the Company, in the event the applicable assignor did not retain any Retained Interest.

In connection with transactions consummated under the ICA, the Company may receive certain fees, including a finder's fee for identifying the recoveries and a servicing fee for servicing the claims.

1 unchanged sentence

Virage will be paid the recovery generated from the purchased Retained Interests when received through litigation or settlements.

The ICA is separate and distinct from Virage’s equity investment in the Company.

The ICA is separate and distinct from the equity investment in the Company by VRM MSP (an affiliate of Virage).

On January 10, 2022, the Company announced the launch of LifeWallet, LLC (“LifeWallet”).

2 unchanged sentences

The Company absorbed part of the technology behind LifeWallet through an employment agreement with the developer of the technology.

As such as of June 30, 2022, the Company's investment related to LifeWallet included in the condensed consolidated balance sheets was limited to activity and expenses incurred during the six months ended June 30, 2022.

Through the d ate the financial statements were issued, LifeWallet has committed to advertising costs within the next 12 months of approximately $ 2.2 million.

As such as of September 30, 2022, the Company's investment related to LifeWallet included in the condensed consolidated balance sheets was limited to activity and expenses incurred during the nine months ended September 30, 2022 .

Through the date the financial statements were issued, LifeWallet has committed to advertising costs within the next 12 months of approximately $ 1.7 million.

MSP RECOVERY, INC.

14 unchanged sentences

Prudent may terminate the Services Agreement upon sixty (60) days prior written notice to the Company.

The Company anticipates the first close to be approximately $ 10 million and to be finalized in the third quarter of 2022.

MSP RECOVERY, INC.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements

The Company plans to utilize the Assignment Agreement as funding is needed.

As an early-stage growth company, the Company has incurred substantial net losses since inception.

3 unchanged sentences

We expect our capital expenditures to increase primarily due to investments in our technology stack.

Our strategy includes the expansion of our existing solutions and the development of new solutions, which will require cash expenditures over the next several years and the Company anticipates will be funded primarily by cash provided by operating activities and financing activities through resources noted below.

Our strategy includes the expansion of our existing solutions and the development of new solutions, which will require cash expenditures over the next several years and the Company anticipates that it will be funded primarily by cash provided by operating activities and financing activities through resources noted below.

We also expect our operating expenses to increase as we hire additional employees to support to the claim recovery team.

We expect these investments to be a key driver of our long-term growth and competitiveness but to negatively impact our free cash flow.

The Company anticipates funding to be available from the CF Purchase Agreeme nt, Prudent Assignment Agreement and the ICA, as noted above.

MSP RECOVERY, INC.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements

The Company anticipates funding to be available from the CF Purchase Agreement, Prudent Assignment Agreement and the ICA, as noted above.

Additionally, on June 16, 2022, the Company executed a promissory note with John H.

4 unchanged sentences

A portion of the proceeds under the MSP Principal Promissory Note in an amount equal to $ 36.5 million was advanced to MSP Recovery Law Firm, an affiliate of certain Members (the “Law Firm”) for certain operating expenses as contemplated by the Legal Services Agreement.

The MSP Principals Promissory Note contains customary events of default that would allow the MSP Principals to declare the MSP Principals Promissory Note immediately due and payable or the MSP Principals Promissory Note will immediately and automatically become due and payable without notice, presentment, demand, protest or other request of any kind.

There were no events of default during the nine months ended September 30, 2022.

This amount is reflected in prepaid expenses and other current assets within the condensed consolidated balance sheets and had a balance of $ 31.9 million as of September 30, 2022.

Actual results, including sources and uses of cash, may differ from our current estimates due to the inherent uncertainty involved in making those estimates and any such differences may impact the Company’s ability to continue as a going concern in the future.

21 unchanged sentences

As a result of the Business Combination, the Company consolidates MSP Recovery, LLC under the VIE model.

Estimates and Assumptions

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, the disclosure of contingent assets and liabilities at the

MSP RECOVERY, INC.

1 unchanged sentence

Notes to Condensed Consolidated Financial Statements

Estimates and Assumptions

date of the financial statements and reported amounts of revenues and expenses during the reporting periods.

Actual results could differ from the Company’s estimates.

2 unchanged sentences

Significant estimates and assumptions reflected in these condensed consolidated financial statements include but are not limited to claims recovery income and claims recovery service income recognition, recoverability of long-lived assets and cost of claims recoveries.

Operating segments are defined as components of an entity for which separate financial information is available and regularly reviewed by the chief operating decision maker (“

CODM”).

Operating segments are defined as components of an entity for which separate financial information is available and regularly reviewed by the chief operating decision maker (“CODM”).

The Company manages its operations as a single segment for the purposes of assessing performance and making decisions.

8 unchanged sentences

The extent of the impact of COVID-19 on the Company’s operational and financial performance will depend on certain developments, including the duration and spread of the outbreak.

As of June 30, 2022, COVID-19 has not had a significant impact on the Company.

As of September 30, 2022 , COVID-19 has not had a significant impact on the Company.

Concentration of credit risk and Off-Balance Sheet Risk

Cash and cash equivalents and affiliate receivable are financial instruments that are potentially subject to concentrations of credit risk.

See Note 13, Related Party , for disclosure of affiliate receivables.

See Note 13, Related Party , fo r disclosure of affiliate receivables.

The Company’s cash and cash equivalents and restricted cash are deposited in accounts at large financial institutions, and amounts may exceed federally insured limits.

4 unchanged sentences

Restricted Cash consists of cash held in escrow related to the Prepaid Forward Agreement with CF.

See Note 16, Derivative Liability , for more information on the Prepaid Forward Agreement.

See Note 16, Derivative Liability , for more info rmation on the Prepaid Forward Agreement.

Fair Value Measurements

The Company applies the provisions of ASC 820, Fair Value Measurements , for fair value measurements of financial assets and financial liabilities and for fair value measurements of non-financial items that are recognized or disclosed at fair value in the financial statements on a recurring basis.

The Company applies the provisions of Accounting Standards Codification ("ASC") 820, Fair Value Measurements , for fair value measurements of financial assets and financial liabilities and for fair value measurements of non-financial items that are recognized or disclosed at fair value in the financial statements on a recurring basis.

The Company also applied the provisions of the subtopic to fair value measurements of non-financial assets and non-financial liabilities that are recognized or disclosed at fair value in the financial statements on a non-recurring basis.

15 unchanged sentences

values of financial instruments are based on carrying values and future cash flows.

As of June 30, 2022 and December 31, 2021 , the Company did no t hold any Level 2 or Level 3 assets or liabilities.

As of September 30, 2022 and December 31, 2021 , the Company did no t hold any Level 2 or Level 3 assets or liabilities.

Cash and cash equivalents and restricted cash are stated at cost, which approximates their fair value.

1 unchanged sentence

The Company’s investments in rights to claim recovery cash flows are carried at cost as no ted in Note 4, Asset Acquisitions.

Outstanding borrowings that qualify as financial instruments are carried at cost, which approximates their fair value as of June 30, 2022 and December 31, 2021 .

Outstanding borrowings that qualify as financial instruments are carried at cost, which approximates their fair value as of September 30, 2022 and December 31, 2021 .

Equity Method Investments

Equity investments that are not consolidated, but over which the Company exercises significant influence, are accounted for in accordance with ASC 323, “Investments—Equity Method and Joint Ventures”

ASC 323”).

Whether or not the Company exercises significant influence with respect to an investee company depends on an evaluation of several factors including, among others, representation on the investee company’s board of directors and ownership level.

(“ASC 323”).

Wh ether or not the Company exercises significant influence with respect to an investee company depends on an evaluation of several factors including, among others, representation on the investee company’s board of directors and ownership level.

An entity is presumptively assumed to have significant influence in a corporation when it holds 20 % or more of the voting stock of the investee company, or at a lower level (e.g., 3 % to 5 %) for entities that track separate members capital accounts.

2 unchanged sentences

in the condensed consolidated statements of operations.

The Company’s carrying value in an equity method investee company is not reflected in the Company’s condensed consolidated balance sheets as of June 30, 2022 or December 31, 2021 as the carrying value is zero .

The Company’s carrying value in equity method investee companies is not reflected in the Company’s condensed consolidated balance sheets as of September 30, 2022 or December 31, 2021 as the carryin g value is zero .

When the Company’s carrying value in an equity method investee company is reduced to zero, no further losses are recorded in the Company’s condensed consolidated financial statements unless the Company has guaranteed obligations of the investee company or has committed additional funding.

20 unchanged sentences

Investment in rights to claim recovery cash flows

MSP RECOVERY, INC.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements

As part of the Business Combination, the Company acquired rights to claims recovery cash flows.

2 unchanged sentences

As cash flows are received the Company evaluates, based on the projected cash flows, whether there was an excess of proceeds received (or receivable) over the portion of the financial asset deemed to be recovered.

In the case of excess, the Company would recognize the excess as income in the same period and the remainder would

MSP RECOVERY, INC.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements

reduce the asset value.

In the case of excess, the Company would recognize the excess as income in the same period and the remainder would reduce the asset value.

In addition, the Company evaluates these assets for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable.

If the estimated future cash flows (undiscounted and without interest charges) from the use of an asset group are less than the carrying value, a write-down would be recorded to reduce the related asset group to its estimated fair value.

There were no impairment indicators in the six months ended June 30, 2022 and 2021 .

There were no impairment indicators in the nine months ended September 30, 2022 and 2021 .

Leases entered into by the Company, in which substantially all the benefits and risk of ownership are transferred to the Company, are recorded as obligations under capital leases.

8 unchanged sentences

The non-controlling interest is classified as permanent equity within the unaudited condensed consolidated balance sheet of the Company.

As of June 30, 2022 , based on the Class A common stock issuances during the period, the non-controlling interest of Class V shareholders was 97.95 %.

As of September 30, 2022, based on the Class A common stock issuances during the period, the non-controlling interest of Class V shareholders w as 97.70 %.

Changes in the Company’s ownership interest in MSP Recovery, LLC, due to Class V shareholders converting their shares to Class A, are accounted for as equity transactions.

3 unchanged sentences

The Company evaluates long-lived assets, such as property and equipment, including capitalized software costs, and finite-lived intangibles such as claims recovery rights, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable.

There were no impairment indicators in the six months ended June 30, 2022 and 2021 .

There were no impairment indicators in the nine months ended September 30, 2022 and 2021 .

Claims Recover y

11 unchanged sentences

Claims recovery service income, ASC 606, Revenue from Contracts with Customers

MSP RECOVERY, INC.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements

The guidance under ASC 606, Revenue from Contracts with Customers, provides that an entity should apply the following steps:

4 unchanged sentences

and (5) recognize revenue when, or as, the entity satisfies a performance obligation.

MSP RECOVERY, INC.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements

The Company derives revenues from contracts with customers primarily from claims recovery services arrangements (“claims recovery services”).

2 unchanged sentences

Amounts estimated and recognized, but not yet fully settled or resolved as part of litigation are recognized as contract assets.

There were no contract assets at June 30, 2022 or December 31, 2021, as amounts associated with unresolved litigation were fully constrained.

There were no contract assets at September 30, 2022 or December 31, 2021, as amounts associated with unresolved litigation were fully constrained.

Claims recovery services are generally paid in advance on a monthly basis.

The Company did not recognize any material revenue for the six months ended June 30, 2022 and 2021 for performance obligations that were fully satisfied in previous periods.

For the six months ended June 30, 2022 and 2021, the majority of the Company’s claims recovery service income was related to a servicing agreement with VRM MSP Recovery Partners LLC (“VRM MSP”), which was entered into on March 27, 2018.

The Company did not recognize any material revenue for the nine months ended September 30, 2022 and 2021 for performance obligations that were fully satisfied in previous periods.

For the nine months ended September 30, 2022 and 2021, the majority of the Company’s claims recovery service income was related to a servicing agreement with VRM MSP, which was entered into on March 27, 2018.

As part of the Business Combination, the Company acquired rights to cash flows in the assets, after certain required returns to VRM MSP, that had been part of the servicing agreement.

As part of this acquisition, the Company will no longer receive service income from this agreement and will instead recognize revenue and reductions in the asset when cash flows are received as outlined in Note 4, Asset Acquisitions .

As part of this acquisition, the Company no longer receives service income from this agreement and instead recognizes revenue and reductions in the asset when cash flows are received as outlined in Note 4, Asset Acquisitions .

For the three months ended September 30, 2022, the Company also recognized $ 5.0 million of servicing income related to a specific contract where the performance obligations were completed during the quarter.

The Company does not have material unfulfilled performance obligation balances for contracts with an original length greater than one year in any years presented.

17 unchanged sentences

Cost of Claims Recoveries

Costs of claims recoveries consist of all directly attributable costs specifically associated with claims processing activities, including contingent payments to assignors (i.e., settlement expenses).

MSP RECOVERY, INC.

1 unchanged sentence

Notes to Condensed Consolidated Financial Statements

Claims amortization expense

46 unchanged sentences

The Company adopted this guidance in June 2022 , which resulted in the Company recognizing the assets acquired as part of the Business Combination at values that were not discounted for contractual sale restrictions, which had a material impact on the Company's condensed consolidated financial statements in relation to the asset acquisitions as noted in Note 4, Asset Acquisitions .

New Accounting Pronouncements Issued but Not Yet Adopted

In February 2016, the FASB issued ASU 2016-02, Leases , to increase transparency and comparability among organizations by recognizing right of use assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.

MSP RECOVERY, INC.

1 unchanged sentence

Notes to Condensed Consolidated Financial Statements

July 2018, ASU 2018-10 , Codification Improvements to ASC 2016-02 , Leases , was issued to provide more detailed guidance and additional clarification for implementing ASU 2016-02.

New Accounting Pronouncements Issued but Not Yet Adopted

In July 2018, ASU 2018-10 , Codification Improvements to ASC 2016-02 , Leases , was issued to provide more detailed guidance and additional clarification for implementing ASU 2016-02.

Furthermore, in July 2018, the FASB issued ASU 2018-11, Leases:

3 unchanged sentences

Furthermore, in June 2020, ASU 2020-05, Revenue from Contracts with Customers and Leases , was issued to defer effective dates of adoption of the new leasing standard for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022.

The Company is currently evaluating the effect that implementation of this standard will have on the Company’s condensed consolidated operating results, cash flows, financial condition and related disclosures.

While the Company does not anticipate the implementation would have a material effect on the Company’s condensed consolidated operating results, cash flows, financial condition and related disclosures, the Company is currently evaluating the effect that implementation of this standard will have.

ASU 2016-13, Financial Instruments –

10 unchanged sentences

This ASU is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years.

BUSINESS COMBINATION

13 unchanged sentences

The net assets of LCAP are stated at historical cost, with no goodwill or other intangible assets recorded.

The Company received net proceeds in the business combination transaction of approximately $ 23.4 million, which includes the restricted cash received as part of FEF shares as defined in Note 16, Derivative Liability .

The Company incurred direct and incremental costs of approximately $ 79.9 million related to the Business Combination, which consisted primarily of investment banking, legal, accounting and other professional fees.

The Company received net proceeds in the business combination tr ansaction of approximately $ 23.4 million, which includes the restricted cash received as part of FEF shares as defined in Note 16, Derivative Liability .

The Company incurred direct and incremental costs of approximately $ 80.6 million relat ed to the Business Combination, which consisted primarily of investment banking, legal, accounting and other professional fees.

These transaction-related costs were recorded as a reduction of additional paid-in capital in the condensed consolidated balance sheets.

As part of the business combination transaction, the Company assumed the liability related to the LCAP public warrants ("Public Warrants") of $ 12.5 million.

Pursuant to the terms of the Existing Warrant Agreement, and after giving effect to the issuance of the New Warrants, as defined below, the exercise price of the Public Warrants decreased to $ 0.0001 per share of Class A Common Stock.

MSP RECOVERY, INC.

1 unchanged sentence

Notes to Condensed Consolidated Financial Statements

the period from the Closing Date to June 30, 2022, approximately 7.2 million warrants of the original 11.8 million warrants had been exercised and the fair value of the warrants increased resulting in other expense of $ 5.4 million for the three months ended June 30, 2022 .

As part of the business combination transaction, the Company assumed the liability related to the LCAP public warrants ("Public Warrants") of $ 12.5 million.

During the period from the Closing Date to September 30, 2022 , approximately 7.9 million war rants of the orig inal 11.8 million warrants had been exercised and the f air value of the remaining warrants decreased resulting in other income of $ 3.7 million for the three months ended September 30, 2022 .

For the nine months ended September 30, 2022, the fair value of the warrants increased resulting in other expense of $ 1.6 million.

Following anti-dilution adjustments made in connection with the Business Combination, the Public Warrants have an exercise price of $ 0.0001 per share, which have become exercisable as of 10 days after closing of the Business Combination, on a cashless basis.

Additionally, in connection with the Business Combination, the Company declared the New Warrant Dividend comprising approximately 1,028 million New Warrants payable to the holders of record of the Class A Common Stock as of the close of business on the Closing Date, after giving effect to the waiver of the right, title and interest in, to or under, participation in any such dividend by the Members, on behalf of themselves and any of their designees.

Additionally, in connection with the Business Combination, the Company declared the New Warrant Dividend comprising approximately 1,028 million New Warrants payable to the holders of record of the Class A Common Stock as of the close of business on the Closing Date, after giving effect to the waiver of the right, title and intere st in, to or under, participation in any such dividend by the Members, on behalf of themselves and any of their designees.

The New Warrants will be exercisable 30 days following the Closing Date until their expiration date, which will be the fifth anniversary of the Closing Date or earlier redemption.

1 unchanged sentence

Pursuant to the terms of the LLC Agreement, at least twice a month, to the extent any New Warrants have been exercised in accordance with their terms, the Company is required to purchase from the MSP Principals, proportionately, the number of Up-C Units or shares of Class A Common Stock owned by such MSP Principal equal to the Aggregate Exercise Price divided by the Warrant Exercise Price in exchange for the Aggregate Exercise Price.

The Company determined that the New Warrants instruments meet the equity scope exception in ASC 815 to be classified in stockholders’

The Company determined that the New Warrants instruments meet the equity scope excepti on in ASC 815 to be classified in stockholders’

equity, and as the repurchase right noted above has a mirrored value designed to offset the New Warrants, if exercised would be an equity only transaction.

1 unchanged sentence

Public Warrants and New Warrants are currently listed on Nasdaq under the symbols “MSPRZ”

and “MSPRW,”

respectively.

and “MSPRW”, respectively.

Tax Receivable Agreement

1 unchanged sentence

Pursuant to the TRA, the Company is required to pay the sellers 85 % of the amount of tax benefits that the Company actually realizes as a result of (i) the Company’s direct and indirect allocable share of existing tax basis acquired in the Business Combination, (ii) increases in the Company’s allocable share of existing tax basis and tax basis adjustments that will increase the tax basis of the tangible and intangible assets of the Company as a result of the Business Combination and as a result of sales or exchanges of Up-C Units for cash or shares of Class A Common Stock, and (iii) certain other tax benefits related to entering into the Tax Receivable Agreement, including tax benefits attributable to payments under the Tax Receivable Agreement.

As of June 30, 2022, there have been no exchanges of Class V units for Class A common stock of the Company and therefore no TRA liabilities currently exist.

During the nine months ended September 30, 2022 , 5,753,080 of Class V units were exchanged for Class A common stock of the Company.

The Company receives an increase in its share of the tax basis in the net assets of MSP Recovery, LLC due to the interests being redeemed.

The Company has assessed the realizability of the net deferred tax assets and in that analysis has considered the relevant positive and negative evidence available to determine whether it is more likely than not that some portion or all of the deferred tax assets will be realized.

The Company has recorded a full valuation allowance against the deferred tax assets as of September 30, 2022, which will be maintained until there is sufficient evidence to support the reversal of all or some portion of these allowances.

As the tax benefits associated with the TRA have not be recognized, based on estimates of future taxable income, the Company has concluded it is not probable to recognize any tax receivable agreement liability.

If the valuation allowance recorded against the deferred tax assets is released in a future period, the Tax Receivable Agreement liability may be considered probable at that time and recorded within earnings.

Non-Controlling interest

3 unchanged sentences

See Note 11, Noncontrolling Interest , for more information on ownership interests in the Company.

Nomura Promissory Note

MSP RECOVERY, INC.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements

On May 27, 2022, the Company issued an unsecured promissory note to Nomura in a principal amount of approximately $ 24.5 million related to advisory fees and deferred underwriting fees and expenses that became due and payable by the Company to Nomura, in connection with the consummation of the Business Combination.

The maturity date of the promissory note is May 29, 2023 .

On the maturity date, the Company is required to pay Nomura an amount in cash equal to the outstanding principal amount, plus accrued and unpaid interest, plus any other obligations then due or payable under the promissory note.

Upon two days prior written notice to Nomura, the Company may prepay all or any portion of the then outstanding principal amount under the promissory note together with all accrued and unpaid interest thereon .

ASSET ACQUISITIONS

On May 23, 2022 as part of the closing of the Business Combination, the Company acquired assets through the issuance of Up-C units.

In exchange for approximately 196.6 million Up-C units, the Company acquired CCRAs previously held by Series MRCS LLC, an affiliate of MSP .

The CCRAs are included as Intangible Assets, net in the condensed consolidated balance sheet.

On May 23, 2022 as part of the closing of th e Business Combination, the Company acquired assets through the issuance of Up-C units.

In exchange for approximately 196.6 million Up-C units, the Company acquired CCRAs previously held by Series MRCS LLC, a series of MDA, Series LLC ("Series MRCS"), an affiliate of MSP.

The CCRAs are included as I ntangible Assets, net in the condensed consolidated balance sheet.

The CCRAs are held at cost, which was determined using the Closing Date market price of the Company's Class A shares discounted by 4.5 % for lack of marketability due to timing before shares are sellable.

The CCRAs are treated as finite life intangible assets similar to other CCRAs that the Company has acquired and have a useful life of 8 years.

The CCRAs are treated as finite life intangible a ssets similar to other CCRAs that the Company has acquired and have a useful life of 8 years.

For further details on this CCRA acquisition, see Note 7, Intangible Assets, Net .

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On May 23, 2022 as part of the closing of the Business Combination, the Company acquired assets through the issuance of Up-C units.

In exchange for approximately 356.8 million Up-C units, the Company acquired the rights to receive the distributable net proceeds of a portfolio of claims owned by VRM MSP, a Delaware limited liability company and joint investment vehicle of Virage Recovery Master LP ("VRM") and Series MRCS LLC, an affiliate of MSP (the “Proceeds”).

Under this asset acquisition structure, the Company

MSP RECOVERY, INC.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements

determined that the arrangements to acquire the rights to proceeds from certain claims recovery rights would be treated as an investment in a financial asset under ASC 825.

Under this asset acquisition structure, the Company determined that the arrangements to acquire the rights to proceeds from certain claims recovery rights would be treated as an investment in a financial asset under ASC 825.

These rights to cash flows differ from the CCRAs included in Intangibles Assets, net in the condensed consolidated balance sheet as the Company does not hold the rights to the CCRAs, but rather holds the rights to cash flows.

The Company has not elected the fair value option and therefore will hold the investment at cost, which was determined using the Closing Date market price of the shares discounted by 4.5 % for lack of marketability due to timing before shares are sellable.

As cash flows are received, subject to the VRM Full Return, the Company will reduce its investment for realized (or receivable) distributions of net proceeds from this financial instrument in proportion to the amounts received or receivable to management’s estimate of expected net proceeds from the underlying investments, and subject to potential impairment if indicators are present;

As cash flows are received, subject to the VRM Full Return, the Company will reduce its investment for realized (or receivable) distributions of net proceeds from this financial instrument in prop ortion to the amounts received or receivable to management’s estimate of expected net proceeds from the underlying investments, and subject to potential impairment if indicators are present;

the excess of proceeds received (or receivable) over the portion of the financial asset deemed to be recovered will be recognized as income in the same period.

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Pursuant to which, among other things, if the VRM Full Return (defined below) has not been paid by distribution of recovery proceeds prior to such time, then the Members, along with the Company, will guarantee the payment to VRM of any amount of the VRM Full Return, that remains unpaid at such time, on or prior to the one-year anniversary of the Closing by any of the following means (or any combination thereof):

(a) sale of the Reserved Shares, and delivery of the resulting net cash proceeds thereof to VRM, or (b) sale of additional shares of Company Class A Common Stock and delivery of the net cash proceeds thereof to VRM.

(a) sale of the Reserved Shares, and delivery of the resulting net cash proceeds thereof t o VRM, or (b) sale of additional shares of Company Class A Common Stock and delivery of the net cash proceeds thereof to VRM.

The “VRM Full Return”

means an amount of recovery proceeds distributed (i) first, until VRM received, in the aggregate, a 20 % annual compounded return on its contributions to VRM MSP, (ii) second, until VRM received an aggregate amount equal to its contributions to VRM MSP (the aggregate amount of clauses (i) and (ii), collectively, the “VRM Full Return”).

The value of the VRM Full Return was $ 719.4 million as of June 30, 2022.

The value of the VRM Full Return was $ 752.5 million as of September 30, 2022.

Upon payment of the VRM Full Return, VRM and Series MRCS would assign and transfer to the Company their respective rights to receive all Proceeds.

As the Members have guaranteed payment through the Reserved Shares or through conversion and subsequent sale of their Up-C Units, an indemnification asset is included in the condensed consolidated balance sheet for the full value of the VRM Full Return.

In addition, as the Company is the primary obligor, the value of the VRM Full Return is included as a guaranty obligation in the condensed consolidated balance sheet.

In addition, as the Company is the primary obligor, the value of the VRM Full Return is included as a guaranty obligation in the condensed consolidated bala nce sheet.

INVESTMENT IN EQUITY METHOD INVESTEES

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MAO-MSO Recovery II LLC Series PMPI (“Series PMPI”), MAO-MSO Recovery LLC and MAO-MSO Recovery II LLC (both collectively the “MAO-MSO entities”).

Series PMPI is a series entity of MAO-MSO Recovery II LLC.

Series PMPI is a series of MAO-MSO Recovery II LLC.

The Company exercises significant influence over the operating and financial activities of Series PMPI, but does not exercise control of the entity.

In accordance with Series PMPI’s operating agreement, the controlling member is entitled to a preferred return of 20 % per annum (the “Preferred Return”).

Once the Preferred Return has been met, the controlling member is entitled to 50 % of claims recoveries by PMPI.

Once the Preferred Return has been met, the controlling member is entitled to 50 % of claim s recoveries by PMPI.

The noncontrolling member is allocated 100 % of the costs of PMPI.

Since the Preferred Return exceeds the total members’

equity of PMPI as of both June 30, 2022 and December 31, 2021, the value of the equity method investment in the condensed consolidated balance sheet is $ 0 .

equity of PMPI as of both September 30, 2022 and December 31, 2021, the value of the equity method investment in the condensed consolidated balance sheet is $ 0 .

MSP RECOVERY, INC.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements

The MAO-MSO entities are Delaware limited liability companies formed as master series entities whose central operations are to form other series legal entities that will hold and pursue claims recovery rights.

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As equity method investments, the Company recognizes its proportionate share of net earnings or losses as equity earnings in Other income.

The activity of these entities has been insignificant for the six months ended June 30, 2022 and 2021.

Since the Company did not make a contribution to the MAO-MSO entities and the entities have recorded losses, the value of the equity method investment in the condensed consolidated balance sheets is $ 0 as of both June 30, 2022 and December 31, 2021.

Summary financial information for equity accounted investees, not adjusted for the percentage ownership of the Company is as follows (in thousands):

The activity of these entities has been insignificant for the nine months ended September 30, 2022 and 2021.

Summary financial information for equity accounted investees, not adjusted for the percentage ownership of the Company is as follows:

For the three months ended,

For the nine months ended,

Series PMPI (in thousands)

September 30, 2022

September 30, 2021

September 30, 2022

September 30, 2021

Other expenses

Profit (Loss)

For the three months ended June 30, 2022

For the six months ended June 30, 2022

For the three months ended June 30, 2021

For the six months ended June 30, 2021

Series PMPI (in thousands)

September 30, 2022

December 31, 2021

Total Liabilities

As of June 30, 2022

As of December 31, 2021

MSP RECOVERY, INC.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements

PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment, net consist of the following (in thousands):

Property, plant and equipment, net consist of the following:

September 30,

(In thousands)

Office and computer equipment

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Property, plant and equipment, net

For the three and six months ended June 30, 2022 and 2021, depreciation expense and amortization expense was $ 72 thousand and $ 151 thousand , respectively, and $ 135 thousand and $ 167 thousand , respectively.

For the three and nine months ended September 30, 2022 and 2021, depreciation expense and amortization expense was $ 103 thousand and $ 254 thousand , respectively, and $ 89 thousand and $ 256 thousand , respectively.

INTANGIBLE ASSETS, NET

During the three months ended June 30, 2022 , the Company acquired CCRAs held by Series MRCS LLC, an affiliate of MSP.

The assets were acquired through the issuance of equity as part of the Business Combination.

During the nine months ended September 30, 2022, the Company acquired CCRAs held by Series MRCS.

The as sets were acquired through the issuance of equity as part of the Business Combination.

The assets are held at cost and treated as a finite intangible asset with a useful life of 8 years, similar to Intangible assets, net.

Intangible assets, net consists of the following (in thousands):

June 30, 2022

Intangible assets, gross

Accumulated amortization

Intangible assets, net consists of the following:

(in thousands)

September 30, 2022

December 31, 2021

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Accumulated amortization

During the six months ended June 30, 2022, in addition to the CCRAs acquired as part of the Business Combination, the Company also purchased $ 12.7 million of CCRAs included in Intangible assets, net, of which $ 2.7 million was paid in cash and $ 10.0 million was paid through Class A Common Stock issuance.

During the three months ended September 30, 2022, the Company purchased $ 48.2 million of CCRAs included in Intangible Assets, net, all payable in cash or through Class A common stock issuance.

The payment is due March 31, 2023 and is recorded within Other Current Liabilities in the condensed consolidated balance sheet as of September 30, 2022.

Durin g the nine months ended September 30, 2022, in addition to the CCRAs acquired as part of the Business Combination and the acquired CCRAs noted for the three months ended September 30, 2022, the Company also purchased $ 12.7 million of CCRAs included in Intangible assets, net, of which $ 2.7 million was paid in cash and $ 10.0 million was paid through Class A Common Stock issuance.

For the CCRAs acquired through equity issuance, the Company is required to provide additional shares or cash if the value of the shares provided is not equal to $ 10.0 million or greater within 1 year of issuance.

As such, the Company recorded a liability of $ 8.4 million for the difference between $ 10.0 million and the fair value of the shares at issuance.

For the three and six months ended June 30, 2022 and 2021, claims amortization expense was $ 23.8 million and $ 26.5 million , respectively, and $ 36 thousand and $ 67 thousand , respectively.

Future amortization for CCRAs is expected to be as follows (in thousands):

As such, the Company recorded a liability of $ 8.7 million within Other current liabilities in the condensed consolidate balance sheet for the difference between $ 10.0 million and the fair value of the shares as of September 30, 2022.

MSP RECOVERY, INC.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the three and nine months ended September 30, 2022 and 2021, claims amortization expense was $ 66.0 million and $ 92.5 million , respectively, and $ 47 thousand and $ 114 thousand , respectively.

Future amortization for CCRAs is expected to be as follows:

(in thousands)

CCRAs Amortization

2022 (remaining)

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In addition, the Company rents an office space from the Law Firm, which is on a month-to-month basis and therefore is not included in the future minimum lease payments below.

Rent expense for the three and six months ended June 30, 2022 and 2021 was $ 193 thousand and $ 385 thousand , respectively, and $ 199 thousand and $ 404 thousand , respectively.

MSP RECOVERY, INC.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements

The future minimum lease payments under non-cancelable operating leases as of June 30, 2022 for the next five years and thereafter are as follows (in thousands):

Year Ending December 31,

Rent expense for the three and nine months ended September 30, 2022 and 2021 was $ 194 thousand and $ 579 thousand , respectively, and $ 178 thousand and $ 582 thousand , respectively.

The future minimum lease payments under non-cancelable operating leases as of September 30, 2022 for the next five years and thereafter are as follows:

(In thousands)

Lease Payments

Year Ending December 31,

2022 (remaining)

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Those VIEs are reflected as equity method investments.

Total assets and liabilities for these VIEs were $ 4.3 million and $ 0.3 million , respectively, at June 30, 2022 and $ 5.4 million and $ 0.3 million , respectively, at December 31, 2021.

Total assets and liabilities for these VIEs were $ 3.8 million and $ 0.3 million , respectively, at September 30, 2022 and $ 5.4 million and $ 0.3 million , respectively, at December 31, 2021.

Generally, MSP's exposure is limited to its investment in those VIEs (see Note 5, Investment in Equity Method Investees ).

For MAO-MSO Recovery II, LLC and Series PMPI, MSP may be exposed to providing additional recovery services at its own cost if recovery proceeds allocated to it are insufficient to recover the costs of those services.

MSP does not have any other exposures or any obligation to provide additional funding.

MSP does n ot have any other exposures or any obligation to provide additional funding.

CLAIMS FINANCING OBLIGATIONS AND NOTES PAYABLE

Based on claims financing obligations and notes payable agreements, as of June 30, 2022 and December 31, 2021, the present value of amounts owed under these obligations were $ 222.7 million and $ 201.4 million , respectively, including unpaid interest to date of $ 111.3 million and $ 94.5 million , respectively.

During the three months ended September 30, 2022, the Company finalized an Amendment to Claim Proceeds Investment Agreement and a Warrant Agreement with Brickell Key Investments LP (the "Holder"), pursuant to which the parties have agreed to amend the original Claims Proceeds Investment Agreement ("CPIA") and required payment terms.

The Amendment and Warrant Agreement were executed effective September 30, 2022.

Pursuant to the agreements, the Company grants to the Holder the right to purchase Class A common shares in the Company (the "Class A Shares") in accordance with the terms and conditions of the Agreement.

The maximum amount of Class A Shares that the Holder may purchase from the Company is 66,666,666 (the “Amount”) for a purchase price equal to $ 6,666.67 ($ 0.0001 per Class A Share), and is payable in cash.

This Warrant (the “Warrant”) will expire at 5:00 p.m.

(Eastern Time), on September 30, 2027 and may be exercised in whole or in part by Holder at any time prior to such date.

The Holder can only sell a maximum of 15 % per month of the Class A Shares obtained through the Warrant.

In exchange for the Company issuing

MSP RECOVERY, INC.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements

the Warrant, the amounts owed to the Holder pursuant to CPIA are amended to equal $ 80 million.

The Holder has the right to receive the $ 80 million owed through proceeds as outlined in the CPIA, cash paid by the Company or monetization of the Warrant (through the sale of the Warrant or sale of the underlying Class A Shares).

If the Holder monetizes the Warrant, the amount owed will be reduced at a measure of $ 1.20 per Class A Share.

In connection with the Amendment and Warrant Agreement, the Holder also executed a Stock Pledge Agreement (the "Pledge Agreement") with MSP Founders, John H.

Ruiz and Frank Quesada (the "Founders").

As part of the agreement, the Founders agreed to pledge 50 million shares to secure payment of the original principal amount of the CPIA.

If the Holder were to receive amounts in excess of $ 80 million, the Founders would receive interest of 10 % on the original principal amount of the CPIA.

In addition, the Pledge Agreement provides the right to repurchase the Warrant from the Holder on or before June 30, 2023.

The Founders entered into an agreement with the Company where this repurchase right has been assigned to the Company (the "Side Agreement").

The Pledge Agreement and Side Agreement were executed effective September 30, 2022.

As the Company has, at its option, the ability to pay its obligation through cash proceeds or through monetization of the Warrants, the amount owed as of September 30, 2022 was included as Claims financing obligation and notes payable on the condensed consolidated balance sheet.

Also the liability related to the remaining amounts due was recorded as $ 80 million as of September 30, 2022 as the Company, at its option, has the ability to repurchase the Warrants for $ 80 million on or before June 30, 2023.

The resulting gain on debt extinguishment from the amendment was $ 63.4 million and was recorded in Other (expense) income, net within the condensed consolidated statement of operations for the three and nine months ended September 30, 2022.

Based on claims financing obligations and notes payable agreements, as of September 30, 2022 and December 31, 2021, the present value of amounts owed under these obligations were $ 172.3 million and $ 201.4 million , respectively, including unpaid interest to date of $ 1.5 million and $ 94.5 million , respectively.

The weighted average interest rate is 5.8 % based on the current book value of $ 172.3 million with rates that range from 2 % to 11 % .

The Company is expected to repay these obligations from cash flows from claim recovery income.

As of June 30, 2022, the minimum required payments on these agreements are $ 384.8 million with $ 134.3 million of the required payments being non-recourse.

The Company is expected to repay these obligations from cash flows from claim recovery income or potentially for the renegotiated debt through class A common stock issuances.

As of September 30, 2022, the minimum required payments on these agreements are $ 330.5 million .

Certain of these agreements have priority of payment regarding any proceeds until full payment of the balance due is satisfied.

However, in some cases, to the extent that, upon final resolution of the claims, the investors receive from proceeds an amount that is less than the agreed upon return, the investors have no recourse to recover such deficit from the Company.

Certain of these agreements fall under ASC 470 for the sale of future revenues classified as debt.

The maturity of the commitments range from the date sufficient claims recoveries are received to cover the required return or in some cases by 2031.

1 unchanged sentence

Since the amount must be repaid unless forgiven in accordance with the Paycheck Protection Program, the Company accounted for the funds as debt under ASC 470.

As of December 31, 2021 , the total amount of the PPP Loans have been forgiven.

As of December 31, 2021, t he total amount of the PPP Loans have been forgiven.

NONCONTROLLING INTEREST

The non-controlling interest balance primarily represents the Up-C Units of the Company held by the Members.

The following table summarizes the ownership of Units in the Company as of June 30, 2022:

The following table summarizes the ownership of Units in the Company as of September 30, 2022:

Ownership Percentage

6 unchanged sentences

As such, future exchanges of Up-C Units by non-controlling interest holders will result in a change in ownership and reduce or increase the amount recorded as non-controlling interest and increase or decrease additional paid-in-capital or retained earnings when the Company has positive or negative net assets, respectively.

As of June 30, 2022, none of the Members has exchanged any Up-C Units.

MSP RECOVERY, INC.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements

As of September 30, 2022 , 5.8 million Up-C Units have exchanged into Class A shares.

In addition to the non-controlling interest related to Up-C Units, the Company also has non-controlling interests related to MAO-MSO Recovery LLC Series FHCP (“FHCP”), which is a non-wholly owned subsidiary of MSP Recovery, LLC.

In accordance with FHCP’s operating agreement, the noncontrolling member is entitled to a preferred return of 20 % per annum (the “Preferred Return”).

Once the Preferred Return has been met, the noncontrolling member is entitled to 80 % of claims recoveries by FHCP.

Once the Preferred Return has b een met, the noncontrolling member is entitled to 80 % of claims recoveries by FHCP.

The controlling member is allocated 100 % of the costs of FHCP.

Since the Preferred Return exceeds the total members’

equity of FHCP as of June 30, 2022 and December 31, 2021 , the non-controlling interest also includes $ 4.3 million representing the entire members’

equity of FHCP as of September 30, 2022 and December 31, 2021 , the non-controlling interest also includes $ 4.3 million representing the entire members’

equity of FHCP.

3 unchanged sentences

These provisions, if any, are reviewed and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case.

Depending on the nature and timing of any such proceedings that may arise, an unfavorable resolution of a matter could materially affect the Company’s future consolidated results of operations, cash flows or financial position in a particular period.

As of June 30, 2022, there was no material pending or threatened litigation against us.

Depending on the nature and timing of any such proceedings that may arise, an unfavorable resolution of a matter could materially affect the

MSP RECOVERY, INC.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Company’s future consolidated results of operations, cash flows or financial position in a particular period.

As of September 30, 2022, there was no material pending or threatened litigation against us.

The Company pursues claims recoveries through settlement, arbitration and legal proceedings.

11 unchanged sentences

Loan from related parties

During the three months ended June 30, 2022 , the Company issued an unsecured promissory note in an aggregate principal amount of $ 112.8 million (the “Promissory Note”) to John H.

During the nine months ended September 30, 2022 , the Company issued an unsecured promissory note in an aggregate principal amount of $ 112.8 million ( the “Promissory Note”) to John H.

Ruiz and Frank C.

Quesada, the Company’s Chief Executive Officer and director and Chief Legal Officer and director, respectively (collectively, the “MSP Principals”), to provide operating cash to the Company.

Quesada, the Company’s Chief Executive Officer and director and Chief Legal Officer and director, respectively (collectively, the “MSP Principals”), t o provide operating cash to the Company.

The Promissory Note bears interest at an annual rate of 4 %, payable in kind, and will mature on the four year anniversary of the issuance.

The Promissory Note is payable by the Company at any time, without prepayment penalties, fees, or other expenses.

During the three and nine months ended September 30, 2022 , the Company recorded $ 1.3 million and $ 1.5 million, respectively, on interest expense related to the Promissory Note.

A portion of the proceeds under the Promissory Note in an amount equal to $ 36.5 million was advanced to the Law Firm, an affiliate of certain Members, for certain operating expenses as contemplated by the Legal Services Agreement.

This amount is reflected in prepaid expenses and other current assets within the condensed consolidated balance sheets and had a balance of $ 36.5 million as of June 30, 2022.

This amount is reflected in prepaid expenses and other current assets within the condensed consolidated balance sheets and had a balance o f $ 31.9 million as of September 30, 2022.

The payments of Law Firm expenses is reflected in Professional fees - legal within the condensed consolidated statement of operations.

MSP RECOVERY, INC.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Legal Services –

3 unchanged sentences

The Existing LSAs also provide that the Law Firm serves as exclusive lead counsel for any litigation relating to such claims.

As of June 30, 2022 and December 31, 2021, $ 0.1 million and $ 5.5 million , respectively, was due to the Law Firm and included in the condensed consolidated balance sheets in Affiliate Payable.

For the three and six months ended June 30, 2022, $ 27 thousand and $ 31 thousand , respectively was included in Professional fees - legal for expenses related to the Law Firm in the condensed consolidated statements of operations.

For the three and six months ended June 30, 2021, the amounts were de minimus.

For the three and six months ended June 30, 2022, $ 231 thousand and $ 271 thousand , respectively, were included in cost of claims recoveries for expenses related to the Law Firm in the condensed consolidated statements of operations.

For the three and six months ended June 30, 2021, no amounts were included cost of claims recoveries for expenses related to the Law Firm in the condensed consolidated statements of operations.

As of September 30, 2022 there was no amount due, and December 31, 2021, $ 5.5 million , respectively, was due to the Law Firm and included in the condensed consolidated balance sheets in Affiliate Payable.

For the three and nine months ended September 30, 2022, $ 4.6 million and $ 24.7 million , respectively was included in Professional fees - legal for expenses related to the Law Firm in the condensed consolidated statements of operations.

The amounts were largely due to share base compensation as noted below and the payment of Law Firm expenses per the related party loan as noted above.

For the three and nine months ended September 30, 2021, the amounts were de minimus.

For the three and nine months ended September 30, 2022 , $ 0 thousand a nd $ 271 thousand , respectively, were included in cost of claims recoveries for expenses related to the Law Firm in the condensed consolidated statements of operations.

For the three and nine months ended September 30, 2021 , no amounts were included cost of claims recoveries for expenses related to the Law Firm in the condensed consolidated statements of ope rations.

The Law Firm may also collect and/or hold cash on behalf of the Company in the ordinary course of business.

As of June 30, 2022 and December 31, 2021, $ 1.8 million and $ 3.4 million , respectively, was due from the Law Firm and included in the condensed consolidated balance sheets in Affiliate Receivable.

As of September 30, 2022 and December 31, 2021, $ 1.5 million and $ 3.4 million , respectively, was due from the Law Firm and included in the condensed consolidated balance sheets in Affiliate Receivable.

In addition, the Company rents office space from the Law Firm as discussed in Note 8, Operating Lease .

For the three and six months ended June 30, 2022, the Company issued 8,022,000 Class A common stock shares to Law Firm employees, which was deemed to be share based compensation.

As such $ 20.1 million of expense was included within Professional fees - legal for expenses related to the Law Firm in the condensed consolidated statements of operations.

For the nine months ended September 30, 2022 , the Company issued 8,022,000 Class A common stock shares to the Law Firm employees, which was deemed to be share based compensation.

As such $ 20.1 million of expense was included within Professional fees - legal for expenses related to the Law Firm in the condensed consolidated statements of operations for the nine months ended September 30, 2022.

MSP RECOVERY, INC.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements

MSP Recovery Aviation, LLC

The Company may make payments related to operational expenses on behalf of its affiliate, MSP Recovery Aviation, LLC (“MSP Aviation”).

MSP Recovery Aviation, LLC was created to provide aircraft rental to third party customers and the Company.

MSP Aviation was created to provide aircraft rental to third party customers and the Company.

The Company has made payments in the periods of the financial statements only related to specifically billed flights and these rates are at or below the market rate for such services.

As of June 30, 2022 and December 31, 2021, $ 195 thousand and $ 153 thousand was due from MSP Aviation and included in the condensed consolidated balance sheets in Affiliate Receivable.

For the three and six months ended June 30, 2022, $ 156 thousand and $ 250 thousand , respectively was included in General and administrative expenses related to MSP Aviation in the condensed consolidated statements of operations.

For the three and six months ended June 30, 2021, the amounts were de minimus.

As of September 30, 2022 and December 31, 2021, $ 153 thousand and $ 153 thousand , respectively was due from MSP Aviation and included in the condensed consolidated balance sheets in Affiliate Receivable.

For the three and nine months ended September 30, 2022, $ 150 thousand and $ 400 thousand , respectively was included in General and Administrative expenses related to MSP Aviation in the condensed consolidated statements of operations.

For the three and nine months ended September 30, 2021, the amounts were de minimus.

Funds held for other entities

The Company may collect and/or hold cash on behalf of its affiliates in the ordinary course of business.

As of June 30, 2022 and December 31, 2021, $ 20.1 million and $ 39.7 million was due to affiliates of the Company and included in the condensed consolidated balance sheets in Affiliate Payable.

These amounts were primarily due to Series MRCS LLC, an affiliate of MSP, and will be repaid either through excess cash flows from operations or other financing.

As of September 30, 2022 and December 31, 2021, $ 19.8 million and $ 39.7 million was due to affiliates of the Company and included in the condensed consolidated balance sheets in Affiliate Payable.

These amounts were primarily due to Series MRCS, and will be repaid either through excess cash flows from operations or other financing.

During the year ended December 31, 2021, the Company also entered into a note payable with Series MRCS as outlined in Note 7, Intangible Assets, Net .

As of June 30, 2022 and December 31, 2021 , the balance of the note payable was $ 0.5 million and included in the condensed consolidated balance sheets in Claims financing obligation and notes payable.

As of December 31, 2021, $ 0.4 million was due to MSP National, LLC from Series MRCS LLC and as of June 30, 2022 and December 31, 2021, there were additional receivables from other affiliates of $ 130 thousand and $ 92 thousand , respectively.

As of September 30, 2022 and December 31, 2021 , the balance of the note payable was $ 0.5 million and included in the condensed consolidated balance sheets in Claims financing obligation and notes payable.

As of December 31, 2021, $ 0.4 million was due to MSP National, LLC from Series MRCS and as of September 30, 2022 and December 31, 2021, there were additional receivables from other affiliates of $ 146 thousand and $ 92 thousand , respectively.

These were included in the condensed consolidated balance sheets in Affiliate Receivable.

Historically, MSP Recovery, LLC has received claims recovery service income for services provided to VRM.

The Company concluded that VRM is a related party due to ownership interests in the entity held by Series MRCS LLC, an affiliate of MSP.

During the three and six months ended June 30, 2022 and 2021, $ 3.2 million and $ 10.6 million , respectively, and $ 2.6 million and $ 5.3 million , respectively, of claims recovery service income was received from VRM as part of the servicing agreement and was included in the condensed consolidated statements of operations.

MSP RECOVERY, INC.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Historically, MSP Recovery, LLC has received claims recovery service income for services provided to VRM MSP.

The Company concluded that VRM MSP is a related party due to ownership interests in the entity held by Series MRCS LLC.

During the nine months ended September 30, 2022 and 2021, $ 0 million and $ 10.6 million , respectively, and $ 1.7 million and $ 7.0 million , respectively, of claims recovery service income was received from VRM MSP as part of the servicing agreement and was included in the condensed consolidated statements of operations.

INVESTMENTS IN EQUITY SECURITIES AND OBLIGATIONS TO DELIVER SECURITIES

1 unchanged sentence

The short position was classified as a liability, marked-to-market and was evaluated at Level 1 for fair value.

During the three and six months ended June 30, 2021 , the Company covered its short position by acquiring 100,000 equity shares of a publicly traded U.S.

During the nine months ended September 30, 2021 , the Company covered its short position by acquiring 100,000 equity shares of a publicly traded U.S.

company for $ 1.8 million, recognizing a realized loss of $ 193 thousand in Other income, net in the condensed consolidated statements of operations.

As of June 30, 2022 and December 31, 2021 , the Company had no investments in equity securities.

NET LOSS PER COMMON SHARE

As of September 30, 2022 and December 31, 2021 , the Company had no investments in equity securities.

N ET LOSS PER COMMON SHARE

Basic earnings per share of Class A common stock is computed by dividing net income attributable to common shareholders by the weighted-average number of shares of Class A common stock outstanding during the period.

3 unchanged sentences

In reviewing the calculation of earnings per unit for periods prior to the Business Combination, the Company concluded that it resulted in values that would not be meaningful to the users of the unaudited condensed consolidated financial statements.

As such, earnings per share information for the three and six months ended June 30, 2021 has not been presented.

The basic and diluted earnings per share for the three and six months ended June 30, 2022 represent income (loss) from only the period from the Closing Date to June 30, 2022 for the Company.

As such, earnings per share information for the three and nine months ended September 30, 2021 has not been presented.

The basic and diluted earnings per share for the three and nine months ended September 30, 2022 represent income (loss) from only the period from the Closing Date to September 30, 2022 for the Company.

The following table sets forth the computation of basic and diluted earnings per share of Class A common stock:

MSP RECOVERY, INC.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(In thousands except shares and per share amounts)

Three months ended June 30, 2022

Six months ended June 30, 2022

Three months ended September 30, 2022

Nine months ended September 30, 2022

Numerator - basic and diluted:

Net (income) loss attributable to MSP Recovery, LLC pre Business Combination

Net (income) loss attributable to the noncontrolling interest post Business Combination

Net loss attributable to MSP Recovery, LLC pre Business Combination

Net loss attributable to the noncontrolling interest post Business Combination

Net loss attributable to common shareholders

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As such, separate presentation of basic and diluted earnings per share of Class V common stock under the two-class method has not been presented.

MSP RECOVERY, INC.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements

In the calculation for earnings per share for the three and six months ended June 30, 2022 , the Company excluded from the calculation of diluted earnings per share 3,154,473,292 shares of Class V common stock, 4,622,964 Public Warrants outstanding, and 1,028,046,326 shares of New Warrants outstanding because their effect would have been anti-dilutive.

In the calculation for earnings per share for the three and nine months ended September 30, 2022 , the Company excluded from the calculation of diluted earnings per share 3,148,720,212 shares of Class V common stock, 3,916,725 Public Warrants outstanding, and 1,028,046,326 shares of New Warrants ou tstanding because their effect would have been anti-dilutive.

DERIVATIVE LIABILITY

As noted in Note 1, the Company and CF entered into an agreement for an OTC Equity Prepaid Forward Transaction (the “Transaction”).

The Company and CF entered into an agreement for an OTC Equity Prepaid Forward Transaction (the “Transaction”).

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

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The calculation of the derivative liability/asset would be the difference between the restricted cash and current fair value of the outstanding FEF shares (number of FEF shares multiplied by market price of the Company's Class A common stock as of period end).

As of June 30, 2022, CF had not sold any FEF shares.

The aggregate purchase price of $ 11.4 million is reflected in restricted cash with the fair value of the shares of $ 2.4 million included as Class A common stock subject to possible redemption within temporary equity and the derivative liability of $ 9.0 million reflected in current liabilities in the condensed consolidated balance sheets.

As of September 30, 2022 , CF had not sold any FEF shares.

The aggregate purchase price of $ 11.4 million is reflected in restricted cash with the fair value of the shares of $ 1.4 million in cluded as Class A common stock subject to possible redemption within temporary equity and the derivative liability of $ 10.0 million reflecte d in current liabilities in the condensed consolidated balance sheets.

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

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Factors that could cause these differences include, but are not limited to, MSP’s ability to capitalize on its assignment agreements and recover monies that were paid by the assignors;

litigation results;

the inherent uncertainty surrounding settlement negotiations and/or litigation, including with respect to both the amount and timing of any such results;

the validity of the assignments of claims to MSP;

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Rather than provide services under a third-party vendor services contract, we receive the rights to certain recovery proceeds from our Assignors’

claims (and, in many cases, actually take

assignment of the claims themselves, which allow us to step into the Assignors' shoes).

claims (and, in many cases, actually take assignment of the claims themselves, which allow us to step into the Assignors' shoes).

In the instances where we take claims by assignment, we have total control over the direction of the litigation.

We would be the plaintiff in any action filed and would have total control over the direction of the lawsuit.

We would be the plaintiff in any action filed and would have total

control over the direction of the lawsuit.

By receiving claims through assignment, we can pursue additional recoveries under numerous legal theories that our competitors cannot.

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Our current portfolio has scaled significantly.

We are entitled to a portion of any recovery rights associated with approximately $1,553 billion in Billed Amount (and approximately $370 billion in Paid Amount), which contains approximately $88 billion in Paid Value of Potentially Recoverable Claims, as of June 30, 2022.

We are entitled to a portion of any recovery rights associated with approximately $1,568 billion in Billed Amount (and approximately $373 billion in Paid Amount), which contains approximately $89 billion in Paid Value of Potentially Recoverable Claims, as of September 30, 2022.

We are typically entitled to 50% of recovery rights pursuant to our CCRAs but in certain cases we have also purchased from our Assignors, from time to time, rights to 100% of the recovery.

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As part of our “Chase to Pay”

model, we launched LifeWallet

in January 2022, a platform powered by our sophisticated data analysis, designed to locate and organize users’

model, we launched LifeWallet in January 2022, a platform powered by our sophisticated data analysis, designed to locate and organize users’

medical records, facilitating efficient access to enable informed decision-making and improved patient care.

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When we are assigned these rights, we take on the risk that such claims may not be recoverable.

We are entitled to a portion of any recovery rights associated with approximately $1,553 billion in Billed Amount (and approximately $370 billion in Paid Amount), which contained approximately $88 billion in Paid Value of Potentially Recoverable Claims, as of June 30, 2022.

We are entitled to a portion of any recovery rights associated with approximately $1,568 billion in Billed Amount (and approximately $373 billion in Paid Amount), which contained approximately $89 billion in Paid Value of Potentially Recoverable Claims, as of September 30, 2022.

We are typically entitled to 50% of recovery rights pursuant to our CCRAs but in certain cases we have also purchased from our Assignors, from time to time, rights to 100% of the recovery.

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We can recover these amounts under either the Recovery Model or the Chase to Pay Model.

Federal law also expressly provides MAOs with the right to charge providers for the Billed Amount when auto insurer

liability exists.

Federal law also expressly provides MAOs with the right to charge providers for the Billed Amount when auto insurer liability exists.

Per the terms of various legal services agreements that MSP has with the Law Firm, for legal services provided, the Law Firm would receive a percentage of the total claim recovery which would include double damages and additional penalties.

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A decrease in the willingness of courts to grant these judgments, a change in the requirements for filing these cases or obtaining these judgments, or a decrease in our ability to collect on these judgments could have an adverse effect on our business, financial condition and operating results.

Of our Property & Casualty portfolio as of June 30, 2022, approximately 76% of claims are already in the recovery process, which are claims where either the recovery process has been initiated, data has been collected and matched or resolution discussions are in process.

Of our Property & Casualty portfolio as of September 30, 2022, approximately 76% of claims are already in the recovery process, which are claims where either the recovery process has been initiated, data has been collected and matched or resolution discussions are in process.

Key Performance Indicators

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For these purposes, we record values under the Recovery Multiple only once we have recorded claims recovery income either through the receipt of cash or recognition of accounts receivable on the claims.

Management believes this metric is useful to investors and is useful in managing or monitoring company performance because the Recovery Multiple provides

a measure of the Company’s ability to recover on its claims recovery rights.

Management believes this metric is useful to investors and is useful in managing or monitoring company performance because the Recovery Multiple provides a measure of the Company’s ability to recover on its claims recovery rights.

A Recovery Multiple above 1x would illustrate the Company’s ability to collect in excess of the Paid Amount.

MSP has entered into settlement agreements to recover amounts in excess of the paid amount.

In MSPA Claims 1, LLC v.

Ocean Harbor Cas.

2015-1946-CA-01, MSP was granted class certification and obtained approval of a class action settlement agreement, pursuant to which, subject to certain time and threshold limitations, Ocean Harbor has agreed to pay more than the Medicare Fee-for-Service Schedule Rate by 3.5 times, for Medicare Part A emergency services and Medicare Part D claims, and by 1.6 times, for Medicare Part A non-emergency services, claims for MRI services and Medicare Part B claims.

In MSP Recovery Claims, Series LLC v.

Horace Mann Insurance Company , Case No.

1:20-cv-24419, we entered into a settlement agreement with Horace Mann in which Horace Mann has agreed to pay matched claims according to applicable commercial rates, subject to the assertion of certain agreed-upon defenses.

We believe the difference between the Paid Amount of claims in that case and commercial rates would generally be between 4 to 6 times.

To date, because actual recoveries have been limited, this measure has had limited utility in historical periods.

However, management believes this measure will become more meaningful during 2022 and beyond to the extent the Company begins to report actual increases in recoveries during those periods.

As of June 30, 2022, the Company has obtained settlements with two counterparties where the Recovery Multiple would be in excess of the Paid Amount.

However, the settlement amounts have not been finally tabulated and therefore do not provide a large enough sample to be statistically significant and are therefore not shown in the table.

However, management believes this measure will become more meaningful during the next 12 months and beyond to the extent the Company begins to report actual increases in recoveries during those periods.

As of September 30, 2022, the Company has obtained settlements with two counterparties where the Recovery Multiple was or would be in excess of the Paid Amount.

However, the settlement amounts have not been finally tabulated on these settlements and therefore do not provide a large enough sample to be statistically significant and are therefore not shown in the table.

Because the Recovery Multiple is based on actual recoveries, this measure is not based on the Penetration Status of Portfolio, as described below.

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Management believes this metric is useful to investors and in managing or monitoring company performance because it provides insight as to the estimated share of the market that is covered by existing recovery efforts.

We estimate that cases that are in the potential resolution discussions and/or data matching are closer to generating potential future claims recovery income.

As of and for the Six Months Ended

that cases that are in the potential resolution discussions and/or data matching are closer to generating potential future claims recovery income.

As of and for the,

Nine Months Ended

September 30, 2022

Six Months Ended

June 30, 2022

As of and for the Three Months Ended

Three Months Ended

March 31, 2022

As of and for the Year Ended

December 31, 2021

As of and for the Year Ended

December 31, 2020

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Penetration Status of Portfolio

(1) Each claim line that is paid or is otherwise converted from encounter data to Paid Amount and Billed Amount for which recoveries can be made has a potential for recovery through different Funnels.

As of June 30, 2022, the Company has obtained settlements with two counterparties who have agreed to pay multiples of Paid Amount.

However, the settlement amounts have not been finally tabulated and therefore do not provide a large enough sample to be statistically significant, and are therefore not shown in the table.

(1) During the nine months ended September 30, 2022, the Company has received total recoveries of $4.0 million with a recovery multiple of 3.7x.

However, the settlement amounts do not provide a large enough sample to be statistically significant, and are therefore not shown in the table.

Healthcare Industry

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Our addressable market and therefore revenue potential is impacted by the expansion or contraction of healthcare coverage and spending, which directly affects the number of claims available.

CMS has projected that health spending will continue to grow at an average rate of 5.4% a year between 2019 and 2028.

The Centers for Medicare & Medicaid Services ("CMS") has projected that health spending will continue to grow at an average rate of 5.4% a year between 2019 and 2028.

We also believe reimbursement models may become more complex as healthcare payers accommodate new markets and lines of business and as advancements in medical care increase the number of testing and treatment options available.

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Such changes could have a further impact on our results of operations.

Approximately 88% of our expected recoveries arise from claims being brought under the Medicare Secondary Payer Act.

As of September 30, 2022, approximately 93% of our expected recoveries arise from claims being brought under the Medicare Secondary Payer Act.

While we believe the act has bipartisan support, changes to the laws on which we base our recoveries, particularly the Medicare Secondary Payer Act, can adversely affect our business.

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While we were able to continue operations throughout these periods, these delays potentially impacted timing of resolving pending legal matters as a result of court, administrative and other closures and could impact any potential future legislation or litigation.

For the three and six months ended June 30, 2022 and 2021 and the years ended December 31, 2021 and 2020, there was not a material impact to our operations or financial results including total claims recovery, claims recovery service revenue or cost of recoveries.

In addition, changes in KPIs such as Paid Amount, Paid Value of Potentially Recoverable Claims, Recovery Multiple and Penetration Status of Portfolio were not materially impacted for the three and six months ended June 30, 2022 and 2021 and the years ended December 31, 2021 and 2020 and the number of Assignors or Clients has also not been negatively impacted by COVID-19.

For the three and nine months ended September 30, 2022 and 2021 and the years ended December 31, 2021 and 2020, there was not a material impact to our operations or financial results including total claims recovery, claims recovery service revenue or cost of recoveries.

In addition, changes in KPIs such as Paid Amount, Paid Value of Potentially Recoverable Claims, Recovery Multiple and Penetration Status of Portfolio were not materially impacted for the three and nine months ended September 30, 2022 and 2021 and the years ended December 31, 2021 and 2020 and the number of Assignors or Clients has also not been negatively impacted by COVID-19.

For more information on our operations and risks related to health epidemics, including the coronavirus.

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We recognize claims recovery income based on a gain contingency model –

that is, when the amounts are reasonably certain of collection.

that is, when the amounts are

reasonably certain of collection.

This typically occurs upon reaching a binding settlement or arbitration with the counterparty or when the legal proceedings, including any appellate process, are resolved.

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Results of Operations

Comparison of six months ended June 30, 2022 to six months ended June 30, 2021

The following table sets forth a summary of our consolidated results of operations for the six months ended June 30, 2022 and June 30, 2021 indicated.

Six Months Ended June 30

Three months ended September 30, 2022 versus three months ended September 30, 2021

The following table sets forth a summary of our consolidated results of operations for the three months ended September 30, 2022 to three months ended September 30, 2021 indicated.

Three Months Ended September 30

(in thousands except for percentages)

Claims recovery income

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Claims recovery income.

Claims recovery income increased by $1.4 million for the six months ended June 30, 2022 driven by an increase in settlements during the period.

Claims recovery income increased by $2.5 million for the three months ended September 30, 2022 driven by increased settlements during the period.

Claims recovery service income.

Claims recoveries service income increased by $5.3 million, or 78%, to $12 million for the six months ended June 30, 2022 from $6.7 million for the six months ended June 30, 2021, primarily driven by an increase in third party service fees due to volume as the headcount needed and related operational expenses to service the claims expanded.

Claims recoveries service income increased by $3.3 million, or 136%, to $5.7 million for the three months ended September 30, 2022 from $2.4 million for the three months ended September 30, 2021, primarily driven by an increase in third party service fees due to a $5.0 million servicing contract completed during the three months ended September 30, 2022.

Cost of claims recoveries.

Cost of claims recoveries increased by $693 thousand, to $701 thousand for the six months ended June 30, 2022 from $8 thousand for the six months ended June 30, 2021, primarily driven by payments due to assignors and the Law Firm on claims recoveries during the period.

Cost of claims recoveries increased by $1.1 million, or 7,633%, driven by assignor and law firm costs on increased claims recovery income.

Claims amortization expense.

Claims amortization expense increased by $26.5 million, to $26.5 million for the six months ended June 30, 2022 from $0.1 million for the six months ended June 30, 2021, primarily driven by increased amortization due to the acquisition of CCRAs obtained as part of the business combination.

In addition, the Company purchased additional CCRAs during the six months ended June 30, 2022, included in Intangible assets, which further contributed to the increase in claims amortization expense.

Claims amortization expense increased by $66.3 million primarily driven by increased amortization due to the acquisition of CCRAs obtained as part of the business combination.

In addition to the aforementioned CCRAs acquired as part of the Business Combination, the Company also purchased additional CCRAs during the three months ended September 30, 2022, included in Intangible assets, which further contributed to the increase in claims amortization expense.

General and administrative.

General and administrative increased by $5.1 million, or 95%, to $10.4 million for the six months ended June 30, 2022 from $5.3 million for the six months ended June 30, 2021, primarily driven by increase in wages of $2.8 million and advertising expenses of $1.8 million.

General and administrative increased by $3.7 million, to $6.6 million in three months ended September 30, 2022 from $2.9 million for the three months ended September 30, 2021, primarily driven by increases in wages of $3.1 million and advertising of $1.1 million as compared to the three months ended September 30, 2021.

Professional fees.

Professional fees increased by $2.0 million, or 65%, to $5.1 million for the six months ended June 30, 2022 from $3.1 million for the six months ended June 30, 2021, primarily driven by an increase in accounting and consulting fees due to the Business Combination.

Professional fees increased by $3.3 million, or 95%, to $5.0 million for the three months ended September 30, 2022 from $2.5 million for the three months ended September 30, 2021, primarily driven by an increase in consulting fees.

Professional fees - legal.

Professional fees increased by $26.2 million for the six months ended June 30, 2022, primarily driven by a one-time share based payment expense of $20.1 million and fees to outsourced law firms of $6.2 million.

Professional fees - legal increased by $8.0 million, driven by fees to outsourced law firms and Law Firm expenses of $4.6 million covered through the prepaid.

Interest expense.

Interest expense increased by $8.8 million, or 70%, to $21.4 million for the six months ended June 30, 2022 from $12.6 million for the six months ended June 30, 2021, primarily driven by an increase in the basis for which interest is incurred on our Claims Financing Obligations, additional interest on commitments incurred at the end of 2021 and accrued interest on the related party loan incurred in June 2022.

Other income, net.

Other income decreased by $1.3 million, to $37 thousand for the six months ended June 30, 2022 from $1.3 million for the six months ended June 30, 2021 primarily driven by a gain on debt extinguishment related to PPP loans recognized for the six months ended June 30, 2021.

Interest expense increased by $6.1 million, or 87%, to $13.1 million in three months ended September 30, 2022 from $7.0 million for the three months ended September 30, 2021, primarily driven by an increase in the basis for which interest is incurred on our Claims Financing Obligations and accrued interest on the related party loan obtained in June 2022.

Other income (expense), net.

Other income, net increased by $63.3 million to $63.1 million in three months ended September 30, 2022 from a loss of $169 thousand for the three months ended September 30, 2021, driven by a gain associated with the settlement of the Brickell Key Investment debt extinguishment.

Change in fair value of warrant and derivative liabilities.

For the six months ended June 30, 2022, $14.4 million of loss was recorded related to mark to market adjustments for the fair value of warrants for $5.4 million and for the fair value of derivative liabilities related to the Committed Equity facility for $9.0 million.

Provision for income tax benefit.

For the six months ended June 30, 2022, a $0.3 million income tax benefit was recognized related to the increase in the deferred tax asset for current period losses.

Comparison of three months ended June 30, 2022 to three months ended June 30, 2021

The following table sets forth a summary of our consolidated results of operations for the three months ended June 30, 2022 to three months ended June 30, 2021 indicated.

Three Months Ended June 30

For the three months ended September 30, 2022 $2.7 million of gain was recorded related to mark to market adjustments for the fair value of warrants for $3.7 million and a loss for the fair value of derivative liabilities related to the Committed Equity facility for $1.0 million.

Nine months ended September 30, 2022 versus nine months ended September 30, 2021

The following table sets forth a summary of our consolidated results of operations for the nine months ended September 30, 2022 and September 30, 2021 indicated.

Nine Months Ended September 30

(in thousands except for percentages)

Claims recovery income

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Claims recovery income.

Claims recovery income increased by $1.3 million for the three months ended June 30, 2022 driven by an increase in settlements during the period.

Claims recovery income increased by $3.9 million for the nine months ended September 30, 2022 driven by an increase in settlements during the period.

Claims recovery service income.

Claims recoveries service income increased by $0.6 million, or 18%, to $4.0 million for the three months ended June 30, 2022 from $3.4 million for the three months ended June 30, 2021, primarily driven by an increase in third party service fees due to volume as the headcount needed and related operational expenses to service the claims expanded.

Claims recoveries service income increased by $8.6 million, or 93%, to $17.8 million for the nine months ended September 30, 2022 from $9.2 million for the nine months ended September 30, 2021, primarily driven by an increase in third party service fees due to volume as the headcount needed and related operational expenses to service the claims expanded and a $5.0 million servicing contract completed during the three months ended September 30, 2022.

Cost of claims recoveries.

Cost of claims recoveries increased by $0.7 million, or 100%, driven by assignor and law firm payments on claims recovery income.

Cost of claims recoveries increased by $1.8 thousand, to $1.9 thousand for the nine months ended September 30, 2022 from $1.8 thousand for the nine months ended September 30, 2021, primarily driven by payments due to assignors and the Law Firm on claims recoveries during the period.

Claims amortization expense.

Claims amortization expense increased by $23.8 million primarily driven by increased amortization due to the acquisition of CCRAs obtained as part of the business combination.

In addition to the aforementioned CCRAs acquired as part of the Business Combination, the Company also purchased additional CCRAs during the three months ended June 30, 2022, included in Intangible assets, which further contributed to the increase in claims amortization expense.

Claims amortization expense increased by $92.8 million, to $92.9 million for the nine months ended September 30, 2022 from $114 thousand for the nine months ended September 30, 2021, primarily driven by increased amortization due to the acquisition of CCRAs obtained as part of the business combination.

In addition, the Company purchased additional CCRAs during the nine months ended September 30, 2022, included in Intangible assets, which further contributed to the increase in claims amortization expense.

General and administrative.

General and administrative increased by $3.3 million, to $6.0 in three months ended June 30, 2022 from $2.7 million for the three months ended June 30, 2021, primarily driven by increases in legal expenses of $2.4 million, wages of $1.1 million, data storage costs of $0.5 million and advertising of $0.4 million as compared to the three months ended June 30, 2021.

General and administrative increased by $8.8 million, or 108%, to $17.0 million for the nine months ended September 30, 2022 from $8.2 million for the nine months ended September 30, 2021, primarily driven by increase in wages of $4.2 million and advertising expenses of $2.9 million.

Professional fees.

Professional fees increased by $1.1 million, or 58%, to $3.1 million for the three months ended June 30, 20221 from $2.0 million for the three months ended June 30, 2021, primarily driven by an increase in accounting and consulting fees due to the Business Combination.

Professional fees increased by $5.3 million, or 79%, to $10.0 million for the nine months ended September 30, 2022 from $5.6 million for the nine months ended September 30, 2021, primarily driven by an increase in accounting and consulting fees due to the Business Combination.

Professional fees - legal.

Professional fees increased by $23.8 million, primarily driven by a one-time share based payment expense of $20.1 million, and fees to outsourced law firms of $3.7 million.

Professional fees - legal increased by $34.2 million for the nine months ended September 30, 2022, primarily driven by a one-time share based payment expense of $20.1 million and fees to outsourced law firms.

Interest expense.

Interest expense increased by $4.3 million, or 65%, to $11.0 million in three months ended June 30, 2022 from $6.7 million for the three months ended June 30, 2021, primarily driven by an increase in the basis for which interest is incurred on our Claims Financing Obligations, additional interest on commitments incurred at the end of 2021 and accrued interest on the related party loan incurred in June 2022.

Other income (expense), net.

Other income (expense), net decreased by $860 thousand to $39 thousand in three months ended June 30, 2022 from income of $899 thousand for the three months ended June 30, 2021, primarily driven by a gain on debt extinguishment related to PPP loans in 2021.

Interest expense increased by $14.9 million, or 76%, to $34.5 million for the nine months ended September 30, 2022 from $19.6 million for the nine months ended September 30, 2021, primarily driven by an increase in the basis for which interest is incurred on our Claims Financing Obligations, additional interest on commitments incurred at the end of 2021 and accrued interest on the related party loan obtained in June 2022.

Other income, net.

Other income increased by $62.0 million, to $63.2 million for the nine months ended September 30, 2022 from $1.2 million for the nine months ended September 30, 2021 driven by a gain associated with the settlement of the Brickell Key Investment debt extinguishment.

Change in fair value of warrant and derivative liabilities.

For the three months ended June 30, 2022 $14.4 million of loss was recorded related to mark to market adjustments for the fair value of warrants for $5.4 million and for the fair value of derivative liabilities related to the Committed Equity facility for $9.0 million.

For the nine months ended September 30, 2022, $11.7 million of loss was recorded related to mark to market adjustments for the fair value of warrants for $1.6 million and for the fair value of derivative liabilities related to the Committed Equity facility for $10.1 million.

Provision for income tax benefit.

For the three months ended June 30, 2022 a $0.3 million income tax benefit was recognized related to the increase in the deferred tax asset for current period losses.

For the nine months ended September 30, 2022, a $0.3 million income tax benefit was recognized related to the increase in the deferred tax asset for current period losses.

Non-GAAP Financial Measures

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Three months ended

Six months ended

Nine months ended

(In thousands)

June 30, 2022

September 30, 2022

GAAP Operating Loss

5 unchanged sentences

Claims amortization expense

Gain on debt extinguishment

Paid-in-kind Interest

4 unchanged sentences

Since inception, we have financed our operations primarily from partnership contributions.

As of June 30, 2022, we had $25.0 million in cash and cash equivalents.

As of June 30, 2022, we had loan payables of $111.4 million consisting of our Claims Financing Obligations and notes payable.

As of September 30, 2022, we had $14.3 million in cash and cash equivalents.

As of September 30, 2022, we had loan payables of $170.8 million consisting of our Claims Financing Obligations and notes payable.

We had $1.5 million in interest payable related to our Claims Financing Obligations.

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We may be unable to obtain any such additional financing on reasonable terms or at all.

Our ability to access capital when needed is not assured and, if capital is not available to us when, and in the amounts needed, we could be required to delay, scale back or abandon some or all of our claims recovery efforts and other operations, which could materially harm our business, prospects, financial condition and operating results.

Our ability to access capital when needed is not assured and, if capital is not available to us when, and in the amounts needed, we could be required

to delay, scale back or abandon some or all of our claims recovery efforts and other operations, which could materially harm our business, prospects, financial condition and operating results.

MSP Principals Promissory Note

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On the maturity date, the Company is required to pay the MSP Principals an amount in cash equal to the outstanding principal amount, plus accrued and unpaid interest.

The promissory notes is prepayable by the Company at any time, without prepayment penalties, fees or other expenses.

The promissory note is prepayable by the Company at any time, without prepayment penalties, fees or other expenses.

A portion of the proceeds under the MSP Principals Promissory Note in an amount equal to $36.5 million was advanced to the Law Firm for certain operating expenses as contemplated by the Legal Services Agreement.

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In addition, the MSP Principals Promissory Note may be accelerated by the MSP Principals if the board of directors of the Company (excluding the MSP Principals) terminates the Legal Services Agreement.

Nomura and KBW Promissory Notes

On May 27, 2022, the Company issued an unsecured promissory note to Nomura in a principal amount of approximately $24.5 million and an unsecured promissory note to KBW in a principal amount of approximately $20.3 million, in each case related to advisory fees and deferred underwriting fees and expenses that became due and payable by the Company to Nomura and advisory fees and expenses that became due and payable by the Company to KBW, in connection with the consummation of the Business Combination.

The maturity date of each of the promissory notes is May 29, 2023.

On the maturity date, the Company is required to pay to each of Nomura and KBW an amount in cash equal to the outstanding principal amount, plus accrued and unpaid interest, plus any other obligations then due or payable under each of the promissory notes.

Upon two days prior written notice to Nomura or KBW, as applicable, the Company may prepay all or any portion of the then outstanding principal amount under each promissory note together with all accrued and unpaid interest thereon.

As of June 30, 2022, approximately $20.3 million has been repaid on the promissory notes.

Nomura Promissory Note

On May 27, 2022, the Company issued an unsecured promissory note to Nomura in a principal amount of approximately $24.5 million related to advisory fees and deferred underwriting fees and expenses that became due and payable by the Company to Nomura, in connection with the consummation of the Business Combination.

The maturity date of the promissory note is May 29, 2023.

OTC Equity Prepaid Forward Agreement

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The net proceeds from any such sales under the CF Purchase Agreement will depend on the frequency with, and the price at, which the shares of common stock are sold to CF.

Upon the initial satisfaction of the conditions to CF’s obligation to purchase shares of common stock set forth under the CF Purchase Agreement, the Company will have the right, but not the obligation, from time to time, at its sole discretion and on the terms and subject to the limitations contained in the CF Purchase Agreement, until no later than the first day of the month following the 36

month anniversary of the date that the registration statement of the shares is declared effective, to direct CF to purchase up to a specified maximum amount of common stock as set forth in the CF Purchase Agreement by delivering written notice to CF prior to the commencement of trading on any trading day.

anniversary of the date that the registration statement of the shares is declared effective, to direct CF to purchase up to a specified maximum amount of common stock as set forth in the CF Purchase Agreement by delivering written notice to CF prior to the commencement of trading on any trading day.

The purchase price of the common stock that the Company elects to sell to CF pursuant to the CF Purchase Agreement will be 98% of the VWAP of the common stock during the applicable purchase date on which the Company has timely delivered a written notice to CF, directing it to purchase common stock under the CF Purchase Agreement.

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Prudent may terminate the Services Agreement upon sixty (60) days prior written notice to the Company.

The Company anticipates the first close to be approximately $10 million and to be finalized in the third quarter of 2022.

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The following table summarizes our cash flows for the periods indicated:

Six Months ended

Nine Months ended

September 30,

(in thousands)

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Cash Flows Used in Operating Activities

Net cash used in operating activities increased by $54.7 million to $60.9 million for the six months ended June 30, 2022 compared to net cash used of $6.2 million for the six months ended June 30, 2021.

During the six months ended June 30, 2022, Net cash used in operating activities was impacted primarily by our net loss, an increase in Prepaid and other assets of $36.8 million and decrease in affiliate payable of $25.1 million.

Net cash used in operating activities increased by $64.5 million to $70.8 million for the nine months ended September 30, 2022 compared to net cash used of $6.3 million for the nine months ended September 30, 2021.

During the nine months ended September 30, 2022, net cash used in operating activities was impacted primarily by our net loss, an increase in Prepaid and other assets of $32.6 million and decrease in affiliate payable of $25.4 million.

This was partially offset by a $15.5 million increase in accounts payable and accrued liabilities.

Net cash used in operating activities was further offset by non-cash charges primarily relating to claims amortization of $26.5 million, paid in kind interest of $21.4 million, share-based compensation of $20.1 million, change in fair value of derivatives of $9 million and change in fair value of warrant liabilities of $5.4 million.

Net cash used in operating activities was further impacted by non-cash charges including a $63.4 gain on debt extinguishment partially offset by claims amortization expense of $92.9 million, paid in kind interest of $34.5 million, share-based compensation of $20.1 million and change in fair value of derivatives of $10.1 million and change in fair value of warrant liabilities of $1.6 million.

Cash Flows Used in Investing Activities

Net cash used in investing activities decreased by $0.6 million to $3.0 million for the six months ended June 30, 2022 compared to $3.6 million for the six months ended June 30, 2021.

During the six months ended June 30, 2022, our cash used in investing activities was primarily due to acquisition of additional CCRAs included in Intangible assets, net, of which $2.7 million was paid for in cash and $0.3 million of additions to property, plant and equipment.

Net cash used in investing activities increased by $2.7 million to $4.6 million for the nine months ended September 30, 2022 compared to $1.9 million for the nine months ended September 30, 2021.

During the nine months ended September 30, 2022, our cash used in investing activities was primarily due to acquisition of additional CCRAs included in Intangible assets, net, of which $2.7 million was paid for in cash and $1.9 million of additions to property, plant and equipment.

Cash Flows Provided by (Used in) Financing Activities

Net cash provided in financing activities increased to $98.7 million for the six months ended June 30, 2022 compared to $0.3 million net cash used in financing activities for the six months ended June 30, 2021.

Net cash provided by in financing activities increased to $99.4 million for the nine months ended September 30, 2022 compared to $2.4 million net cash used in financing activities for the nine months ended September 30, 2021.

This is primarily due to proceeds from the related party loan of $125.8 million, proceeds from the Business Combination of $12.0 million, and $8.6 million from the issuance of common stock.

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Contractual Obligations, Commitments and Contingencies

The following table and the information that follows summarizes our contractual obligations as of June 30, 2022.

The future minimum lease payments under non-cancelable operating leases as of June 30, 2022 are as follows (in thousands):

Year Ending December 31,

The following table and the information that follows summarizes our contractual obligations as of September 30, 2022.

The future minimum lease payments under non-cancelable operating leases as of September 30, 2022 are as follows:

(In thousands)

Lease Payments

Year Ending December 31,

2022 (remaining)

(1) Operating lease expires before or during the year ending December 31, 2023

Based on claims financing obligations and notes payable agreements, as of June 30, 2022 and December 31, 2021, the present value of amounts owed under these obligations were $222.7 million and $201.4 million, respectively, including unpaid interest to date of $111.3 million and $94.5 million, respectively.

Based on claims financing obligations and notes payable agreements, as of September 30, 2022 and December 31, 2021, the present value of amounts owed under these obligations were $172.3 million and $201.4 million, respectively, including unpaid interest to date of $1.5 million and $94.5 million, respectively.

The weighted average interest rate is 5.8% based on the current book value of $172.3 million with rates that range from 2% to 11%.

The Company is expected to repay these obligations from cash flows from claim recovery income.

As of June 30, 2022, the minimum required payments on these agreements are $384.8 million with $134.3 million of the required payments being non-recourse.

As of September 30, 2022, the minimum required payments on these agreements are $330.5 million.

Certain of these agreements have priority of payment regarding any proceeds until full payment of the balance due is satisfied.

However, in some cases, to the extent that, upon final resolution of the claims, the investors receive from proceeds an amount that is less than the agreed-upon return, the investors have no recourse to recover such deficit from the Company.

Certain of these agreements fall under ASC 470 for the sale of future revenues classified as debt.

The maturity of the commitments range from the date sufficient claims recoveries are received to cover the required return or in some cases by 2031.

Off-Balance Sheet Commitments and Arrangements

As of the balance sheet dates of June 30, 2022 and December 31, 2021, we have not engaged in any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

As of the balance sheet dates of September 30, 2022 and December 31, 2021, we have not engaged in any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

Critical Accounting Policies

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Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of our operations.

See Note 2 to our consolidated financial statements appearing elsewhere in this Form 10-Q for a description of our other significant accounting policies.

See Note 2, Basis of Presentation and Summary of Significant Accounting Policies to our consolidated financial statements appearing elsewhere in this Form 10-Q for a description of our other significant accounting policies.

Revenue Recognition

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There were no impairment indicators or charges in the three and six months ended June 30, 2022 and 2021 and the years ended December 31, 2021 and 2020.

There were no impairment indicators or charges in the three and nine months ended September 30, 2022 and 2021 and the years ended December 31, 2021 and 2020.

For the CCRA intangibles, we will also assess the intangible assets recognized for CCRAs for impairment in accordance with ASC 350-30-35-14, whereby an impairment loss shall be recognized if the carrying amount of the intangible asset is not recoverable and its carrying amount exceeds its fair value based on the model for long-lived assets to be held and used under ASC 360-10.

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As the amount of upfront payments for CCRAs is typically only a fraction of the potential recoveries, it would typically take a substantial negative event (such as an unfavorable court ruling upheld on appeal or a change in law/statute with retroactive effect) to suggest an impairment may be triggered.

There were no impairment indicators or charges in the three and six months ended June 30, 2022 and 2021 or the years ended December 31, 2021 and 2020.

There were no impairment indicators or charges in the three and nine months ended September 30, 2022 and 2021 or the years ended December 31, 2021 and 2020.

Quantitative and Qualitative Disclosures About Market Risk.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements