Abacus Life, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. The company provides life-settlement policy origination, servicing, and investment/portfolio management services; it is not an insurance company. The June 30, 2023 business combination brought Abacus Settlements together with legacy LMA. Q3 results include the combined businesses from July 1, while the reported 2022 comparative results are principally legacy LMA, so year-over-year comparisons are not fully like-for-like.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $21.1 million | $11.5 million | $42.7 million | $29.8 million |
| Gross profit | $17.8 million | $9.8 million | $37.9 million | $25.9 million |
| Operating income | $6.3 million | $10.7 million | $22.1 million | $23.1 million |
| Net income attributable to Abacus Life, Inc. | $0.9 million | $10.0 million | $15.7 million | $21.5 million |
| Basic and diluted EPS | $0.01 | $0.20 | $0.29 | $0.43 |
- Q3 revenue rose 83.5%, led by active management revenue of $18.9 million, up 70.1%, and newly included origination activity. The quarter’s increase in active management revenue was driven substantially by fair-value policy activity; investment-method policy income fell 82.9%.
- Q3 operating income and attributable net income fell year over year despite higher revenue, reflecting higher operating costs, interest expense, taxes, amortization, and warrant remeasurement. Q3 general and administrative expense included $4.6 million of stock-based compensation.
- For the nine months, active management revenue increased 40.5% to $39.9 million. Portfolio servicing revenue declined 40.6% to $0.8 million, primarily because of fewer non-recurring consulting projects.
- Reported originations segment revenue was $10.2 million, including $8.2 million of intersegment revenue eliminated in consolidation; consolidated origination revenue was $2.0 million. The filing also presents pro forma combined nine-month revenue of $55.9 million versus $48.8 million, an illustrative non-GAAP comparison.
Cash flow, balance sheet, and debt
- Cash and cash equivalents were $36.6 million at September 30, 2023, compared with $30.1 million at December 31, 2022. Current assets were $39.5 million and current liabilities $5.5 million.
- Nine-month operating cash flow was negative $51.2 million, versus negative $6.4 million in 2022. Management attributed the use principally to life-settlement policy purchases: $55.5 million for fair-value policies and $5.6 million for investment-method policies. Policy purchases and related proceeds are classified as operating activities.
- Investing activities provided $2.6 million, and financing activities provided $55.2 million. Financing included $87.5 million from debt certificates, offset in part by $23.5 million of capital distributions and $10.8 million of transaction costs.
- Total long-term debt carrying value was approximately $118.8 million, including $36.5 million of related-party debt. Components included a $25.0 million Owl Rock term loan, a $25.75 million SPV note, a $10.8 million Sponsor PIK note, income-fund borrowings, and market-indexed notes. Interest expense was $2.7 million for Q3 and $3.6 million for the nine months.
- The Owl Rock facility bears interest at adjusted SOFR plus 7.25% or an alternative base rate plus 6.25%, is secured by substantially all company and guarantor assets, and includes maximum net leverage of 2.50:1 and minimum liquid-asset coverage of 1.80:1 covenants.
Material changes, outlook, and risks
- The merger materially changed the business mix, reporting segments, capital structure, and comparability of results. The acquisition generated $140.3 million of goodwill and $32.9 million of identified intangible assets; purchase accounting, particularly deferred taxes, remained preliminary. Management reported no impairment indicators at September 30.
- Life-settlement assets are valued using Level 3 inputs and significant actuarial assumptions. The filing estimates that a two-percentage-point increase in the weighted-average discount rate would reduce policy fair value by $5.3 million; a two-point decrease would increase it by $5.5 million. Policy outcomes also depend on actual mortality and premium requirements.
- The company reported a $0.9 million Q3 loss on remeasurement of private warrant liabilities. Q3 effective tax rate was 61.9%, attributed primarily to non-deductible equity compensation and non-taxable flow-through entities.
- Management gave no specific revenue or earnings guidance in the supplied filing text. It identified possible future financing needs and risks from market and economic conditions, interest rates, competition, regulation, and business relationships. Certain customer and related-party concentrations are disclosed; for example, two related-party customers each represented 39% of Q3 portfolio servicing revenue.
- After quarter-end, the company filed to issue up to $40 million of fixed-rate senior unsecured notes; the offering closed November 10, 2023. The filing says net proceeds were used to repay the Owl Rock facility, with any remainder for general corporate purposes. The notes bear 9.875% interest and mature November 15, 2028; the actual amount issued is not clear in the supplied filing text.
- The filing identifies a material weakness related to financial instruments and accounting for accruals and describes planned remediation, including additional accounting resources and communication with outside professionals. It states that remediation may take time and may not achieve its intended effects. No material litigation was identified.
Important facts for investors to verify
- Reconcile reported GAAP results with the company’s pro forma and other non-GAAP measures, including the effects of merger timing, intersegment eliminations, stock compensation, and fair-value changes.
- Review the composition, terms, rates, collateral, covenants, and refinancing status of debt, including the November 2023 note issuance and repayment of the Owl Rock facility.
- Assess cash conversion and liquidity needs alongside the pace and funding of policy purchases, required premiums, and the timing of policy maturities or sales.
- Evaluate the sensitivity and assumptions behind Level 3 policy valuations, goodwill, and preliminary acquisition accounting, as well as customer and related-party concentrations.
- Track remediation of the disclosed accounting material weakness and the potential dilution from the CEO’s restricted shares, the post-quarter RSU grants, and outstanding warrants.