MSP Recovery, Inc. Q2 FY2022 Earnings Call

Good morning, and welcome to the MSP Recovery Second Quarter Earnings Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to MSP Recovery’s General Counsel, Alexandra Plasencia. Please go ahead.

Good morning. I am Alexandra Plasencia, General Counsel of MSP Recovery. Welcome to our second quarter 2022 earnings conference call. Before we begin, please note that statements made during this presentation, which state the Company or management's intentions, beliefs, expectations, or predictions of the future are forward-looking statements within the meaning of the Private Securities Litigation Reform Act and actual results could differ in a material manner. Additional information about factors that could cause results to differ from those in the forward-looking statements is contained in the Company's SEC filings. This includes, but is not limited to, risk factors contained in our quarterly report on Form 10-Q for the quarter ended June 30, 2022, subsequent SEC filings and in the news release issued earlier today. A copy of these materials can be found in the Investors Section of our website at msprecovery.com. Non-GAAP financial measures are included in our comments today and in our presentation slides. The reconciliation of these non-GAAP measures to the corresponding GAAP measures is included at the end of the presentation slides and can be found in the Investors Section of our website. At this time, all participants are in a listen-only mode. The participants on today's call will be John H. Ruiz, Founder and CEO of MSP Recovery, Frank Quesada, Co-Founder and Chief Legal Officer, and Calvin Hamstra, Chief Financial Officer. I would now like to turn the call over to John H. Ruiz.

Good morning, everyone. This is John H. Ruiz, Founder and CEO of MSP Recovery. We welcome you to today's earnings call. Today, we will discuss MSP Recovery’s second quarter 2022 earnings, including an overview of MSP. I will provide some context on the MSP ecosystem. I started this business in 2014, and at that time, it was designed to disrupt the Medicare, Medicaid, and commercial reimbursement system with data-driven solutions. Over time, our mission has evolved as a result of uncovering the major issues that confront the U.S. patient, provider, and payer ecosystems. In this regard, we have created solutions that will rectify the significant flaws that occur daily, while identifying waste, fraud, and improper payments in a real-time solution. This delivers better care for patients, higher collections for providers, and less improper payments for healthcare providers, including Medicare, Medicaid, and commercial payers when those payers are at financial risk. In 2014, Frank Quesada and I identified the problem where the government was incorrectly paying for billions of dollars of healthcare expenses, where other parties were actually the responsible parties. By addressing this issue, MSP's innovative solutions support the long-term sustainability of Medicare and Medicaid programs relied upon by over 100 million people in the United States. By ensuring that the responsible parties, known as primary payers, properly pay in those instances where such payers are liable, billions of dollars in improper payments are identified, helping sustain the Medicare and Medicaid programs for years to come. MSP continues to be a disruptor in the healthcare technology space, supported by three key pillars. I truly believe that no one has a better understanding of healthcare, healthcare data, and the law combined, making our business unique and difficult to replicate. We own irrevocably assigned recovery rights valued at $88.3 billion as of June 30, 2022, with identified recovery opportunities representing 31% of the recovery rights associated with the Medicare Advantage market. As of June 30, 2022, the total amount of owned claims was $370.2 billion in paid and $1.553 trillion in build amounts. Furthermore, our winning legal and recovery strategies have strengthened the Medicare secondary payer laws as shown by the legal precedent we have established since starting this business. Lastly, our intellectual property, which consists of over 1,400 proprietary algorithms, will only serve to strengthen our association with Palantir, whose innovative engineers are closely collaborating with our team to enhance our next-generation recovery detection systems. Now I'd like to walk you through some of our second quarter highlights regarding our recovery efforts and MSP’s LifeWallet platform. On our recovery efforts, the paid value of potentially recoverable claims continues to grow. As of June 30, we have $88.3 billion in paid value of potentially recoverable claims. During the second quarter, we focused on deploying new strategies that will enable primary payers to make the required payments prior to engaging in litigation. This effort is truly focused on accident-related recoveries. Additionally, we continue to see investor interest in our unique asset, the claim rights, as evidenced by our agreement with Prudent Group, which has committed to invest up to $250 million related to our recovery efforts. To significantly bolster our recovery efforts, MSP Recovery has formed strategic alliances with Milberg Bryson Phillips Grossman law firm as well as the Rivero Mestre law firm, both of which will bring significant resources and nationally recognized litigators to secure our recoveries. Milberg is considered a preeminent firm for mass torts and federal class action cases, having recovered more than $50 billion for their clients. Rivero Mestre is known for handling high-stakes litigation for its large corporate clients. Recently, Rivero Mestre prevailed at trial in a $600 billion dispute representing Dr. Craig Wright, who is considered the creator of Bitcoin by many. We have made significant progress in our recovery efforts, with several cases in settlement discussions, while others have already settled. As it pertains to LifeWallet, we entered into an agreement with SeguriTech, a Mexican data company, to position LifeWallet for international growth. Also, Cano Health and La Colonia Medical Centers have agreed to load all their patient data onto the LifeWallet ecosystem. We are also collaborating with Tokenology on a tokenized healthcare initiative on the Polygon network. This initiative, combined with LifeWallet’s biometric technologies, should significantly reduce fraud and abuse in the healthcare system, as the invoicing, known in the industry as the 837 Form, will be embedded with biometric technology, thereby confirming that the patient was actually present. I want to take a moment to highlight significant growth, which I believe is indicative of the success we have achieved since starting MSP. When we first started, we had very few assignors, just over $2.7 million in paid amounts in our portfolio. Today, we have over 150 assignors with over $370 billion in paid amounts, of which $88.3 billion have been identified as potentially recoverable. 2021 was a positive year in terms of growth as we finalized several agreements with prospects we had been working on since 2019 and 2020. As stated previously, MSP has engaged in data matching with over 10 auto insurance carriers. Through this process, we identified over $4.4 billion in accident-related treatments that were paid by our assignors. In June 2022, MSP deployed a new strategy characterized by demand letters, enabling primary payers to make the required payments outside of litigation and in the ordinary course of business. As we announced in June of 2022, MSP started sending individual claim demands totaling more than $1.5 billion in build amounts for payment from auto insurers that admitted to the federal government CMS that they were the primary payers for the underlying accidents. Now I'll hand it over to Frank Quesada, Co-Founder and Chief Legal Officer of MSP, to discuss our recent accomplishments and provide 2022 guidance.

Good morning. This is Frank Quesada, Co-Founder and Chief Legal Officer of MSP Recovery. I oversee the legal strategy that is employed in our recovery efforts here at MSP Recovery. The 2022 guidance was developed as part of our business combination. As of June 30, 2022, we surpassed our 2022 guidance concerning the paid value of potentially recoverable claims by 3.2x. We estimated that by the end of 2026, we would have approximately $26.9 billion of paid value of potential recoverable claims. Today, we have $88.3 billion. Our total gross recoverable revenue guidance is dependent on the completion of data matching and achieving settlements in our cases. While there are extension risks, we feel comfortable that progress is being made towards meaningful settlements in our recovery efforts. MSP Recovery is currently in data matching or settlement discussions with approximately 27% of the auto liability market. MSP has essentially brought a majority of the data matching exercises in-house, eliminating the need for a third-party administrator. This has increased the speed and efficiency of MSP's ability to identify previously unknown claims. All current data matching exercises have reached the final phases in which claims information is being exchanged with primary payers to detail amounts owed. Due to the volume of claims identified through the data matching process, MSP has consulted with a robust team of statisticians to develop a model using sampling techniques to estimate the aggregate recoveries attributable to a given primary payer. This model is a cornerstone of settlement conversations as it allows MSP Recovery to push forward a lump sum number and avoid a claim-by-claim analysis. MSP Recovery, in conjunction with some primary payers, is also process of developing a real-time recovery platform, which will allow for immediate recoveries without the need to resort to litigation for both past and future claims. We believe that if we can achieve a settlement in 2022, we can hit our projected revenue. Although we have yet to publicize a recovery multiple at this time, we have achieved settlements in the past that exceed 1.9x multiple that we projected for 2022. In the past, MSP Recovery has entered into settlement agreements to recover amounts in excess of the paid amount. For example, Ocean Harbor agreed to pay more than a Medicare fee-for-service schedule rate by 3.5x for Medicare Part A emergency services and Medicare Part D claims. We also entered into a settlement agreement with Horace Mann in which it has agreed to match claims according to applicable commercial rates, subject to certain agreed-upon defenses. We believe the difference between the paid amount of claims in that case and commercial rates is typically between 4x to 6x. I would now like to turn the call back over to John, so that he can explain how MSP has developed a solution to address the ongoing problems.

Focusing on the American healthcare system, this system relies on a series of data systems, which are currently fragmented. Data is stored in passive knowledge silos that are ill-equipped to handle the complexities of the healthcare system. In analyzing the medical claims data for millions of Americans, we realized that there are three main components when providing care to patients: knowledge of the law, knowledge of medicine, and knowledge of healthcare data. We believe our team's knowledge of all three has continued to grow our legal and healthcare data ecosystem. To identify the proper payer, you need medical expertise, legal expertise, and healthcare data expertise. MSP's LifeWallet combines these three areas and supplements our existing business. For example, from a patient's perspective, LifeWallet is delivering biometrics and providing patients ultimate access and control over their own healthcare data. From a payer's perspective, LifeWallet is providing blockchains for billing in an effort to eliminate fraud and abuse from the billing process by combining biometrics with the particular bills in question. Lastly, with MSP's legal expertise, LifeWallet will have the technology to identify the proper payer at the point of care. Through the functionality of billing the proper payer in real-time, LifeWallet will ultimately lead to visible and predictable revenues for our company, something that has not always been the case in the historical claims recovery business. The LifeWallet, or Chase to Pay revenue streams will allow MSP to transition its financials to more consistent and predictable revenue. Now I'd like to introduce Calvin Hamstra, our CFO, who will walk you through our quarterly financials.

Thank you, John. Good morning, everyone. I'll provide a brief overview of our quarter two 2022 financials. To start, I'd like to cover some highlights of our financials as this is the first quarter reporting as a public company under MSPR. Our balance sheet consists mostly of our intangible assets, or claims recovery rights, amounting to $2.1 billion, and investments in rights to claim recovery cash flows totaling $3.7 billion. These assets are held at cost, not fair value. The intangible assets are amortized over eight years, while the investments and rights to claim recovery cash flows are financial instruments and therefore not amortized. Cash increased to $25.0 million, restricted cash to $11.4 million, and prepaids to $36.9 million. These increases were driven by the cash from the business combination and the funds from the related party loan obtained during the quarter. For liabilities outside of the related party loan, our liabilities also increased related to the mark-to-market of the warrants, the derivative liability related to the Cantor facility as noted in previous filings, and liabilities payable and stock related to the purchase of claims recovery assets also noted in previous filings. Our income statement for the period has a lot of noise from the business combination transaction. I will delve deeper into this in another slide, but overall, most of the items driving the increase in expenses are due to one-time and non-cash items, such as changes in fair value of warrants, derivative liability, stock-based compensation, interest expense, and claims amortization expense. Additionally, during the period, we strategically entered into alliances with other law firms, as noted previously. While these have increased expenses in the short term, we anticipate these alliances will drive and accelerate claims recoveries, allowing us to maximize returns from our historical portfolio. Next, I would like to provide the overall balance sheet. Some key items to highlight on the asset side are that the increases are driven by asset acquisitions as part of the business combination, as well as increases in cash, prepaids, and acquisitions of other intangible assets. Our liabilities are largely non-current when excluding the guarantee obligation, which is a gross-up of Virage Recovery Master LP's full return, offset by the indemnification asset. The non-current assets consist of claims, financing obligations, and notes payable, along with related interest accrual and loans from related parties. It is important to note that approximately $134.3 million from the claims financing obligations and notes payable, as well as related interest payable, is non-recourse and represents a sale of future revenue on claims portfolios. Regarding the income statement, as previously mentioned, the main drivers of our quarter and year-to-date losses are one-time and non-cash items. Apart from the previously mentioned items, expenses within general and administrative and professional fees have increased from previous periods related to the development of additional revenue sources, such as LifeWallet, as John previously discussed. Our management team has focused not only on extracting value from our historical portfolio but also on addressing the future healthcare billing challenges by developing these new revenue streams that will drive consistent revenue periods. While the unique assets we hold as part of our historical portfolio will generate significant revenue, we believe MSP’s value to shareholders will come from developing these applications that will address healthcare billing challenges going forward. To help clarify some of the noise in the financials related to the business combination, we have highlighted one-time and non-cash items passing through the financials. This is a non-GAAP measure, but we feel it is important to understand what we would anticipate as expenses going forward. In the income statement for the three and six months ended June 30, 2022, there were one-time, non-cash items totaling $20.1 million related to a share grant to non-employees, along with changes in the fair value of warrants and derivative liabilities linked to the Cantor facility, which totaled $14.4 million as disclosed in previous filings. Additionally, there were non-cash items for the period related to claims amortization expense and paid-in-kind interest. These, along with the one-time noted items, amounted to $69.2 million for the three months and $82.3 million for the six months. Excluding these one-time and non-cash items, our net loss was approximately $8 million for the three months and approximately $9 million for the six months. While we expect to start generating meaningful revenue from our operations in the next few quarters, we have also announced several cash sources that could provide resources to cover current needs. Based on our current cash, funds included in prepaids to cover law firm-related expenses, and our announced facilities or agreements with Cantor, Virage, and Prudent, we have potential sources of approximately $1.5 billion to continue funding our operations. As noted in the announcements of these agreements or facilities, these are all still being implemented. In summary, our current balance sheet and publicly announced resources should allow MSP to drive strong cash flows from operations and continue developing additional revenue streams as we have disclosed. Thank you all for joining us today.

This is Diana Diaz, Chief Communications Officer of MSP Recovery. We encourage everyone to visit our website in the Investor Relations portion for a recording with the attached presentation of what you just heard. Thank you so much.

We will now begin the question-and-answer session. Our first question today comes from Meyer Shields of KBW. Please go ahead.

Thanks. Two quick questions, if I can. First, is there any way of getting a little bit more insight into the $1.3 million of claims recovery income in the quarter in terms of, I guess, how long those were being litigated? I don't know if you can characterize the sources of income.

Yes. Good morning. How are you? This is John H. Ruiz. There are a couple of different buckets of claims that we process, which I'll break down. There are claims that are in litigation and claims that we process daily. They fall into three categories: one type of claim is where the insurer actually insures the Medicare beneficiary directly; another type is where there's already been a settlement with a Medicare beneficiary, but those claims are not extinguished, meaning we own those liens; and the third category comprises claims that are currently in progress, where individuals are injured and have lawyers, and those lawyers have claims that they process and we own those lien rights. Concerning the $1.3 million in total, half of those claims were paid by a primary payer for a batch of claims sent to them, acknowledging that they owed primary responsibility, and those were paid only at the paid amount. This payer had been previously paying at the build amount. So even in those revenues we reported, there is potential upside even with what we've gathered, as we are in the process of obtaining that difference. Some of the other claims with established settlements, as Mr. Quesada indicated, represent another primary payer that is also paid the paid amount, but the settlement agreement requires them to pay 4x to 6x the amount we have already collected. Thus, we believe futuristically, as Mr. Quesada mentioned, with significant progress in data matching and ongoing settlement strategy conversations with major primary payers, that's the path we are taking. So to answer that question directly, that recovery likely represents half, what I call the daily flow of what transpires, while the other half encompasses historical claims we've been processing.

Okay. Thank you. That's very helpful. And for a bigger picture question, when we discuss the relationships and partnerships with other law firms, should we assume that there's a particular percentage of recoveries they are going to collect? Should we assume they are doing this on a percentage basis rather than billable hours?

Yes. Great question. The projected numbers do not change at all because, even though we have many more lawyers involved, collectively, now we have over 100 lawyers working on these cases between all the respective law firms. The monetary impact to MSPR remains unchanged. We feel positively about this, as there have been two significant cases decided by the federal public court. One case, decided in late 2020, was where the insurers petitioned the United States Supreme Court for review, and the Supreme Court rejected that. This ruling established the rights of downstream providers in addition to Medicare Advantage Organizations to prosecute these cases and collect upon them. So, we won that significant issue. Just within the last two weeks, we also won another important case called MSP versus Metropolitan, where the court established that we had the necessary elements to file the lawsuit. As a result, we've seen increased pressure on the primary payers, which are the defendants, to respond to the lawsuits rapidly, and we're starting to witness substantial progress. We have publicly reported that we commenced a significant effort to send out demand letters, which we believe will lead to much less litigation and promote what normally occurs in the industry: bills being sent and paid automatically. If you consider this on a larger scale, we have established these rights for Medicare Advantage Organizations and downstream providers in court, which is now behind us. The primary payers are now essentially left with little room to defend themselves against these claims. So now we focus on data matching, and we are confident that this paves the way for a more efficient processing of these claims.

Okay. Fantastic. Thank you so much.

You're welcome.

I am seeing no more questions in the queue. This concludes our question-and-answer session as well as the conference. Thank you for your participation. You may disconnect.