Notes to Condensed Consolidated Financial Statements
NOTE 1 — ORGANIZATION AND BASIS OF PRESENTATION
Description of Business
Altisource Portfolio Solutions S.A., together with its subsidiaries (which may be referred to as “Altisource,” the “Company,” “we,” “us” or “our”), is an integrated service provider and marketplace for the real estate and mortgage industries. Combining operational excellence with a suite of innovative services and technologies, Altisource helps solve the demands of the ever-changing markets we serve.
We are publicly traded on the NASDAQ Global Select Market under the symbol “ASPS.” We are organized under the laws of the Grand Duchy of Luxembourg.
Basis of Accounting and Presentation
The unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Securities and Exchange Commission (“SEC”) Regulation S-X. Accordingly, these financial statements do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, the interim data includes all normal recurring adjustments considered necessary to fairly state the results for the interim periods presented. The preparation of interim condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of our interim condensed consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Intercompany transactions and accounts have been eliminated in consolidation.
Effective January 1, 2022, our reportable segments changed as a result of a change in the way our Chief Executive Officer (our chief operating decision maker) manages our businesses, allocates resources and evaluates performance, and the related changes in our internal organization. We now report our operations through two new reportable segments: Servicer and Real Estate and Origination. In addition, we report Corporate and Others separately. Prior to the January 1, 2022 change in reportable segments, the Company operated with one reportable segment (total Company). Prior year comparable period segment disclosures have been restated to conform to the current year presentation. See Note 22 for a description of our business segments.
Altisource consolidates Best Partners Mortgage Cooperative, Inc., which is managed by The Mortgage Partnership of America, L.L.C. (“MPA”), a wholly-owned subsidiary of Altisource. Best Partners Mortgage Cooperative, Inc. is a mortgage cooperative doing business as Lenders One® (“Lenders One”). MPA provides services to Lenders One under a management agreement that ends on December 31, 2025 (with renewals for three successive five-year periods at MPA’s option).
The management agreement between MPA and Lenders One, pursuant to which MPA is the management company, represents a variable interest in a variable interest entity. MPA is the primary beneficiary of Lenders One as it has the power to direct the activities that most significantly impact the cooperative’s economic performance and the right to receive benefits from the cooperative. As a result, Lenders One is presented in the accompanying condensed consolidated financial statements on a consolidated basis and the interests of the members are reflected as non-controlling interests. As of March 31, 2022, Lenders One had total assets of $1.7 million and total liabilities of $1.0 million. As of December 31, 2021, Lenders One had total assets of $2.2 million and total liabilities of $1.4 million.
In 2019, Altisource created Pointillist, Inc. (“Pointillist”) and contributed the Pointillist® customer journey analytics business and $8.5 million to it. On May 27, 2021, Pointillist issued $1.3 million in principal of convertible notes to related parties with a maturity date of January 1, 2023. The notes bore interest at a rate of 7% per annum. The principal and unpaid accrued interest then outstanding under the notes (1) would automatically convert to Pointillist equity at the earlier of the time Pointillist receives proceeds of $5.0 million or more from the sale of its equity or January 1, 2023, or (2) are repaid in cash or converted into Pointillist common stock equity based on a $13.1 million Pointillist valuation (at the Lenders’ option) in the event of a corporate transaction or initial public offering of Pointillist. On December 1, 2021, the notes were converted to Pointillist equity and Altisource and other shareholders of Pointillist sold all of the equity interests in Pointillist (See Note 3 for additional information). Prior to the sale, Pointillist was owned by Altisource and management of Pointillist, with management of Pointillist owning a non-controlling interest representing 12.1% of the outstanding equity of Pointillist. Through December 1, 2021, Pointillist is presented in the accompanying condensed consolidated financial statements on a consolidated basis and the portion of Pointillist owned by Pointillist management is reported as non-controlling interests.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
These interim condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on March 3, 2022.
Fair Value Measurements
Fair value is defined as an exit price, representing the amount that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The three-tier hierarchy for inputs used in measuring fair value, which prioritizes the inputs used in the methodologies of measuring fair value for assets and liabilities, is as follows:
Level 1 — Quoted prices in active markets for identical assets and liabilities
Level 2 — Observable inputs other than quoted prices included in Level 1
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of assets or liabilities
Financial assets and financial liabilities are classified based on the lowest level of input that is significant to the fair value measurements. Our assessment of the significance of a particular input to the fair value measurements requires judgment and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy.
Future Adoption of New Accounting Pronouncements
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting and in January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope. This standard applies only to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. This standard provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting, in response to concerns about structural risks of interbank offered rates, and, particularly, the risk of cessation of LIBOR. This standard is effective from the period from March 12, 2020 through December 31, 2022. An entity may elect to apply the amendments for contract modifications as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a topic or an industry subtopic, the standard must be applied prospectively for all eligible contract modifications for that topic or industry subtopic. The Company is currently evaluating the impact this guidance may have on its condensed consolidated financial statements.
NOTE 2 — CUSTOMER CONCENTRATION
Ocwen
Ocwen Financial Corporation (together with its subsidiaries, “Ocwen”) is a residential mortgage loan servicer of mortgage servicing rights (“MSRs”) it owns, including those MSRs in which others have an economic interest, and a subservicer of MSRs owned by others.
During the three months ended March 31, 2022, Ocwen was our largest customer, accounting for 35% of our total revenue. Ocwen purchases certain mortgage services from us under the terms of services agreements and amendments thereto (collectively, the “Ocwen Services Agreements”) with terms extending through August 2030. Certain of the Ocwen Services Agreements contain a “most favored nation” provision and also grant the parties the right to renegotiate pricing, among other things.
Revenue from Ocwen primarily consists of revenue earned from the loan portfolios serviced and subserviced by Ocwen when Ocwen engages us as the service provider, and revenue earned directly from Ocwen, pursuant to the Ocwen Services Agreements. For the three months ended March 31, 2022 and 2021, we recognized revenue from Ocwen of $13.7 million and $16.9 million, respectively. Revenue from Ocwen as a percentage of segment and consolidated revenue was as follows for the three months ended March 31:
| | | | | | | | | | | | | | |
| | 2022 | | 2021 |
| | | | |
| Servicer and Real Estate | | 48 | % | | 52 | % |
| Origination | | — | % | | — | % |
| Corporate and Others | | — | % | | 2 | % |
| Consolidated revenue | | 35 | % | | 34 | % |
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
We earn additional revenue related to the portfolios serviced and subserviced by Ocwen when a party other than Ocwen or the MSR owner selects Altisource as the service provider. For the three months ended March 31, 2022 and 2021, we recognized revenue of $2.4 million and $2.6 million, respectively, of such revenue. These amounts are not included in deriving revenue from Ocwen and revenue from Ocwen as a percentage of revenue discussed above.
As of March 31, 2022, accounts receivable from Ocwen totaled $4.3 million, $3.3 million of which was billed and $1.0 million of which was unbilled. As of December 31, 2021, accounts receivable from Ocwen totaled $3.0 million, $2.8 million of which was billed and $0.2 million of which was unbilled.
NRZ
New Residential Investment Corp. (individually, together with one or more of its subsidiaries or one or more of its subsidiaries individually, “NRZ”) is a real estate investment trust that invests in and manages investments primarily related to residential real estate, including MSRs and excess MSRs.
Ocwen has disclosed that NRZ is its largest client. As of December 31, 2021, approximately 21% of loans serviced and subserviced by Ocwen (measured in unpaid principal balance (“UPB”)) were related to NRZ MSRs or rights to MSRs (the “Subject MSRs”).
NRZ purchases brokerage services for real estate owned (“REO”) exclusively from us, irrespective of the subservicer, subject to certain limitations, for certain MSRs set forth in and pursuant to the terms of a Cooperative Brokerage Agreement, as amended, and related letter agreement (collectively, the “Brokerage Agreement”) with terms extending through August 2025.
For the three months ended March 31, 2022 and 2021, we recognized revenue from NRZ of $0.9 million and $0.8 million, respectively, under the Brokerage Agreement. For the three months ended March 31, 2022 and 2021, we recognized additional revenue of $3.7 million and $3.4 million, respectively, relating to the Subject MSRs when a party other than NRZ selects Altisource as the service provider.
NOTE 3 — SALE OF BUSINESSES
Pointillist Business
On October 6, 2021, Altisource and other shareholders of Pointillist entered into a definitive Stock Purchase Agreement (as amended, the “SPA”) to sell all of the equity interests in Pointillist to Genesys Cloud Services, Inc. (“Genesys”) for $150.0 million (the “Purchase Price”) (the “Transaction”). The Purchase Price consisted of (1) an up-front payment of $144.5 million, subject to certain adjustments, (2) $0.5 million deposited into an escrow account to be used to satisfy potential deficits between estimated closing date working capital and actual closing date working capital (the “Working Capital Escrow”), with excess amounts remaining after satisfying such deficits (if any) being paid to the sellers, and (3) $5.0 million deposited into an escrow account to satisfy certain Genesys indemnification claims that may arise on or prior to the first anniversary of the sale closing and, at Genesys’ election, any working capital deficits that exceed the Working Capital Escrow (the “Indemnification Escrow”), with the balance to be paid to the sellers thereafter. The Transaction closed on December 1, 2021. On a fully diluted basis, Altisource owned approximately 69% of the equity of Pointillist. After working capital and other applicable adjustments, Altisource received approximately $106.0 million from the sale of its Pointillist equity and the collection of outstanding receivables, with $102.2 million received at closing, approximately $0.3 million deposited into the Working Capital Escrow and approximately $3.5 million deposited into the Indemnification Escrow. The present value of the amounts in escrow is included in other current assets in the accompanying condensed consolidated balance sheets at a discounted value of $3.7 million and $3.6 million as of March 31, 2022 and December 31, 2021, respectively.
Rental Property Management Business
In August 2018, Altisource entered into an amendment to its agreements with Front Yard Residential Corporation (“RESI”) to sell Altisource’s rental property management business to RESI and permit RESI to internalize certain services that had been provided by Altisource. The proceeds from the transaction totaled $18.0 million, payable in two installments. The first installment of $15.0 million was received in August 2018 and the second installment of $3.0 million was received in January 2021.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
NOTE 4 — ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consists of the following:
| | | | | | | | | | | | | | |
| (in thousands) | | March 31,
2022 | | December 31,
2021 |
| | | | |
| Billed | | $ | 15,717 | | | $ | 17,907 | |
| Unbilled | | 7,412 | | | 5,398 | |
| | 23,129 | | | 23,305 | |
| Less: Allowance for credit losses | | (4,811) | | | (5,297) | |
| | | | |
| Total | | $ | 18,318 | | | $ | 18,008 | |
Unbilled accounts receivable consist primarily of certain real estate asset management, REO sales, title and closing services for which we generally recognize revenue when the service is provided but collect upon closing of the sale, and foreclosure trustee services, for which we generally recognize revenues over the service delivery period but bill following completion of the service. We also include amounts in unbilled accounts receivable that are earned during a month and billed in the following month.
We are exposed to credit losses through our sales of products and services to our customers which are recorded as accounts receivable, net on the Company’s condensed consolidated financial statements. We monitor and estimate the allowance for credit losses based on our historical write-offs, historical collections, our analysis of past due accounts based on the contractual terms of the receivables, relevant market and industry reports and our assessment of the economic status of our customers, if known. Estimated credit losses are written off in the period in which the financial asset is determined to be no longer collectible. There can be no assurance that actual results will not differ from estimates or that consideration of these factors in the future will not result in an increase or decrease to our allowance for credit losses.
Changes in the allowance for expected credit losses consist of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Additions | |
| (in thousands) | | Balance at Beginning of Period | | Charged to Expenses | | Deductions Note (1) | | Balance at End of Period |
| | | | | | | | |
Allowance for expected credit losses: | | | | | | | | |
| | | | | | | | |
Three months ended March 31, 2022 | | $ | 5,297 | | | $ | 343 | | | $ | 829 | | | $ | 4,811 | |
Twelve months ended December 31, 2021 | | 5,581 | | | 1,354 | | | 1,638 | | | 5,297 | |
| | | | | | | | |
______________________________________
(1) Amounts written off as uncollectible or transferred to other accounts or utilized.
NOTE 5 — PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following:
| | | | | | | | | | | | | | |
| (in thousands) | | March 31,
2022 | | December 31,
2021 |
| | | | |
| Income taxes receivable | | $ | 7,650 | | | $ | 8,403 | |
| Maintenance agreements, current portion | | 1,281 | | | 1,717 | |
| Prepaid expenses | | 5,783 | | | 2,865 | |
| Other current assets | | 10,708 | | | 8,879 | |
| | | | |
| Total | | $ | 25,422 | | | $ | 21,864 | |
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
NOTE 6 — PREMISES AND EQUIPMENT, NET
Premises and equipment, net consists of the following:
| | | | | | | | | | | | | | |
| (in thousands) | | March 31,
2022 | | December 31,
2021 |
| | | | |
| Computer hardware and software | | $ | 48,935 | | | $ | 50,452 | |
| Leasehold improvements | | 5,837 | | | 5,927 | |
| Furniture and fixtures | | 3,856 | | | 4,441 | |
| Office equipment and other | | 438 | | | 811 | |
| | | | |
| | 59,066 | | | 61,631 | |
| Less: Accumulated depreciation and amortization | | (53,139) | | | (54,758) | |
| | | | |
| Total | | $ | 5,927 | | | $ | 6,873 | |
Depreciation and amortization expense amounted to $1.0 million and $1.2 million for the three months ended March 31, 2022 and 2021, respectively, and is included in cost of revenue for operating assets and in selling, general and administrative expenses for non-operating assets in the accompanying condensed consolidated statements of operations and comprehensive loss.
NOTE 7 — RIGHT-OF-USE ASSETS UNDER OPERATING LEASES, NET
Right-of-use assets under operating leases, net consists of the following:
| | | | | | | | | | | | | | |
| (in thousands) | | March 31,
2022 | | December 31,
2021 |
| | | | |
| Right-of-use assets under operating leases | | $ | 14,886 | | | $ | 19,595 | |
| Less: Accumulated amortization | | (8,580) | | | (12,001) | |
| | | | |
| Total | | $ | 6,306 | | | $ | 7,594 | |
Amortization of operating leases was $1.1 million and $1.9 million for the three months ended March 31, 2022 and 2021, respectively, and is included in cost of revenue for operating assets and in selling, general and administrative expenses for non-operating assets in the accompanying condensed consolidated statements of operations and comprehensive loss.
NOTE 8 — GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill
The following is a summary of goodwill by segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Servicer and Real Estate | | Origination | | Corporate and Others | | Total |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Balance as of March 31, 2022 and December 31, 2021 | | $ | 30,681 | | | $ | 25,279 | | | $ | — | | | $ | 55,960 | |
We determined that each reportable segment represents a reporting unit. Goodwill was allocated to each reporting unit based on the relative fair value of each of our reporting units.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
Intangible Assets, net
Intangible assets, net consist of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Weighted average estimated useful life
(in years) | | Gross carrying amount | | Accumulated amortization | | Net book value |
| (in thousands) | | | March 31,
2022 | | December 31,
2021 | | March 31,
2022 | | December 31,
2021 | | March 31,
2022 | | December 31,
2021 |
| | | | | | | | | | | | | | |
| Definite lived intangible assets: | | | | | | | | | | | | | | |
| Customer related intangible assets | | 9 | | $ | 214,307 | | | $ | 214,307 | | | $ | (195,344) | | | $ | (194,594) | | | $ | 18,963 | | | $ | 19,713 | |
| Operating agreement | | 20 | | 35,000 | | | 35,000 | | | (21,292) | | | (20,854) | | | 13,708 | | | 14,146 | |
| Trademarks and trade names | | 16 | | 9,709 | | | 9,709 | | | (6,805) | | | (6,709) | | | 2,904 | | | 3,000 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Total | | | | $ | 259,016 | | | $ | 259,016 | | | $ | (223,441) | | | $ | (222,157) | | | $ | 35,575 | | | $ | 36,859 | |
Amortization expense for definite lived intangible assets was $1.3 million and $2.6 million for the three months ended March 31, 2022 and 2021, respectively. Forecasted annual definite lived intangible asset amortization expense for 2022 through 2026 is $5.1 million, $5.1 million, $5.1 million, $5.1 million and $4.9 million, respectively.
NOTE 9 — OTHER ASSETS
Other assets consist of the following:
| | | | | | | | | | | | | | |
| (in thousands) | | March 31,
2022 | | December 31,
2021 |
| | | | |
| Restricted cash | | $ | 3,935 | | | $ | 4,017 | |
| Security deposits | | 966 | | | 1,043 | |
| | | | |
| Other | | 1,108 | | | 1,072 | |
| | | | |
| Total | | $ | 6,009 | | | $ | 6,132 | |
NOTE 10 — ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accounts payable and accrued expenses consist of the following:
| | | | | | | | | | | | | | |
| (in thousands) | | March 31,
2022 | | December 31,
2021 |
| | | | |
| Accounts payable | | $ | 18,240 | | | $ | 15,978 | |
| Accrued expenses - general | | 13,565 | | | 13,653 | |
| Accrued salaries and benefits | | 8,833 | | | 12,254 | |
| Income taxes payable | | 1,320 | | | 4,650 | |
| | | | |
| Total | | $ | 41,958 | | | $ | 46,535 | |
Other current liabilities consist of the following:
| | | | | | | | | | | | | | |
| (in thousands) | | March 31,
2022 | | December 31,
2021 |
| | | | |
| Operating lease liabilities | | $ | 2,090 | | | $ | 2,893 | |
| Other | | 877 | | | 977 | |
| | | | |
| Total | | $ | 2,967 | | | $ | 3,870 | |
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
NOTE 11 — LONG-TERM DEBT
Long-term debt consists of the following:
| | | | | | | | | | | | | | |
| (in thousands) | | March 31,
2022 | | December 31,
2021 |
| | | | |
| Senior secured term loans | | $ | 247,204 | | | $ | 247,204 | |
| Less: Debt issuance costs, net | | (1,400) | | | (1,632) | |
| Less: Unamortized discount, net | | (1,328) | | | (1,494) | |
| | | | |
| | | | |
| Total Senior secured term loans | | 244,476 | | | 244,078 | |
| | | | |
| Credit Facility | | — | | | — | |
| Less: Debt issuance costs, net | | (397) | | | (441) | |
| Net Credit Facility | | (397) | | | (441) | |
| | | | |
| | | | |
| | | | |
| Total Long-term debt | | $ | 244,079 | | | $ | 243,637 | |
Credit Agreement
Altisource Portfolio Solutions S.A. and its wholly-owned subsidiary, Altisource S.à r.l. entered into a credit agreement (the “Credit Agreement”) in April 2018 with Morgan Stanley Senior Funding, Inc., as administrative agent and collateral agent, and certain lenders. Under the Credit Agreement, Altisource borrowed $412.0 million in the form of Term B Loans and obtained a $15.0 million revolving credit facility. The Term B Loans mature in April 2024. Altisource terminated the revolving credit facility on December 1, 2021. Altisource Portfolio Solutions S.A. and certain subsidiaries are guarantors of the Term B Loans (collectively, the “Guarantors”).
There are no mandatory repayments of the Term B Loans except as set forth below until the April 2024 maturity when the balance is due. All amounts outstanding under the Term B Loans will become due on the earlier of (i) April 3, 2024, and (ii) the date on which the loans are declared to be due and owing by the administrative agent at the request (or with the consent) of the Required Lenders (as defined in the Credit Agreement; other capitalized terms, unless defined herein, are defined in the Credit Agreement) or as otherwise provided in the Credit Agreement upon the occurrence of any event of default.
In addition to the scheduled principal payments, subject to certain exceptions, the Term B Loans are subject to mandatory prepayment upon issuances of debt, certain casualty and condemnation events and sales of assets, as well as from a percentage of Consolidated Excess Cash Flow if our leverage ratio as of each year-end computation date is greater than 3.00 to 1.00, as calculated in accordance with the provisions of the Credit Agreement (the percentage increases if our leverage ratio exceeds 3.50 to 1.00).
Altisource may incur incremental indebtedness under the Credit Agreement from one or more incremental lenders, which may include existing lenders, in an aggregate incremental principal amount not to exceed $125.0 million, subject to certain conditions set forth in the Credit Agreement, including a sublimit of $80.0 million with respect to incremental revolving credit commitments and, after giving effect to the incremental borrowing, the Company’s leverage ratio does not exceed 3.00 to 1.00. The lenders have no obligation to provide any incremental indebtedness.
The Term B Loans bear interest at rates based upon, at our option, the Adjusted Eurodollar Rate or the Base Rate. Adjusted Eurodollar Rate term loans bear interest at a rate per annum equal to the sum of (i) the greater of (x) the Adjusted Eurodollar Rate for a three month interest period and (y) 1.00% plus (ii) 4.00%. Base Rate term loans bear interest at a rate per annum equal to the sum of (i) the greater of (x) the Base Rate and (y) 2.00% plus (ii) 3.00%. The interest rate as of March 31, 2022 was 5.00%.
The payment of all amounts owing by Altisource under the Credit Agreement is guaranteed by the Guarantors and is secured by a pledge of all equity interests of certain subsidiaries of Altisource, as well as a lien on substantially all of the assets of Altisource S.à r.l. and the Guarantors, subject to certain exceptions.
The Credit Agreement includes covenants that restrict or limit, among other things, our ability, subject to certain exceptions and baskets, to incur indebtedness; incur liens on our assets; sell, transfer or dispose of assets; make Restricted Junior Payments including share repurchases, dividends and repayment of junior indebtedness; make investments; dispose of equity interests of any Material Subsidiaries; engage in a line of business substantially different than existing businesses and businesses reasonably related, complimentary or ancillary thereto; amend material debt agreements or other material contracts; engage in certain transactions with affiliates; enter into sale/leaseback transactions; grant negative pledges or agree to such other
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
restrictions relating to subsidiary dividends and distributions; make changes to our fiscal year; and engage in mergers and consolidations.
The Credit Agreement contains certain events of default including (i) failure to pay principal when due or interest or any other amount owing on any other obligation under the Credit Agreement within five days of becoming due, (ii) material incorrectness of representations and warranties when made, (iii) breach of certain other covenants, subject to cure periods described in the Credit Agreement, (iv) failure to pay principal or interest on any other debt that equals or exceeds $40.0 million when due, (v) default on any other debt that equals or exceeds $40.0 million that causes, or gives the holder or holders of such debt the ability to cause, an acceleration of such debt, (vi) occurrence of a Change of Control, (vii) bankruptcy and insolvency events, (viii) entry by a court of one or more judgments against us in an amount in excess of $40.0 million that remain unbonded, undischarged or unstayed for a certain number of days after the entry thereof, (ix) the occurrence of certain ERISA events and (x) the failure of certain Loan Documents to be in full force and effect. If any event of default occurs and is not cured within applicable grace periods set forth in the Credit Agreement or waived, all loans and other obligations could become due and immediately payable and the facility could be terminated.
As of March 31, 2022, debt issuance costs were $1.4 million, net of $3.1 million of accumulated amortization. As of December 31, 2021, debt issuance costs were $1.6 million, net of $2.9 million of accumulated amortization.
Credit Facility
On June 22, 2021 Altisource S.à r.l, a subsidiary of Altisource Portfolio Solutions S.A., entered into a revolving credit facility with a related party, STS Master Fund, Ltd. (“STS”) (the “Credit Facility”). STS is an investment fund managed by Deer Park Road Management Company, LP. Deer Park Road Management Company, LP owns approximately 24% of Altisource’s common stock as of March 31, 2022. Deer Park’s Chief Investment Officer and managing partner was a member of Altisource’s Board of Directors until his resignation on March 1, 2022. The replacement director appointed by the Board of Directors is a current employee of Deer Park. Under the terms of the Credit Facility, STS will make loans to Altisource from time to time, in amounts requested by Altisource and Altisource may voluntarily prepay all or any portion of the outstanding loans at any time. The Credit Facility provides Altisource the ability to borrow a maximum amount of $20.0 million through June 22, 2022, $15.0 million through June 22, 2023, and $10.0 million until the end of the term. Amounts that are repaid may be re-borrowed in accordance with the limitations set forth below.
Outstanding amounts borrowed pursuant to the Credit Facility will amortize over the three-year term as follows: on June 22, 2022, the difference between the then outstanding balance above $15.0 million and $15.0 million, on June 22, 2023, the difference between the then outstanding balance above $10.0 million and $10.0 million, and on June 22, 2024, the then outstanding balance of the loan will be due and payable by Altisource.
Borrowings under the Credit Facility bear interest at 9.00% per annum and are payable quarterly on the last business day of each March, June, September and December, commencing on September 30, 2021. In connection with the Credit Facility, Altisource is required to pay customary fees, including an upfront fee equal to $0.5 million at the initial extension of credit pursuant to the facility, an unused line fee of 0.5% and, an early termination fee in the event of a refinancing transaction.
Altisource’s obligations under the Credit Facility are secured by a lien on all equity in Altisource’s subsidiary incorporated in India, Altisource Business Solutions Private Limited, pursuant to a pledge agreement entered into by Altisource Asia Holdings Ltd I, a wholly owned Altisource subsidiary.
The Credit Facility contains additional representations, warranties, covenants, terms and conditions customary for transactions of this type, that restrict or limit, among other things, our ability to use the proceeds of credit only for general corporate purposes.
The Credit Facility contains certain events of default including (i) failure to pay principal when due or interest or any other amount owing on any other obligation under the Credit Facility within three business days of becoming due, (ii) failure to perform or observe any material provisions of the Credit Documents to be performed or complied with, (iii) material incorrectness of representations and warranties when made, (iv) default on any other debt that equals or exceeds $40.0 million that causes, or gives the holder or holders of such debt the ability to cause, an acceleration of such debt, (v) entry by a court of one or more judgments against us in an amount in excess of $40.0 million that remain unbonded, undischarged or unstayed for a certain number of days after the entry thereof, (vi) occurrence of a Change of Control, (vii) bankruptcy and insolvency events. If any event of default occurs and is not cured within applicable grace periods set forth in the Credit Facility or waived, all loans and other obligations could become due and immediately payable and the facility could be terminated.
As of March 31, 2022 and December 31, 2021, there was no outstanding debt under the Credit Facility. As of March 31, 2022 and December 31, 2021, debt issuance costs were $0.4 million, net of $0.1 million of accumulated amortization.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
NOTE 12 — OTHER NON-CURRENT LIABILITIES
Other non-current liabilities consist of the following:
| | | | | | | | | | | | | | |
| (in thousands) | | March 31,
2022 | | December 31,
2021 |
| | | | |
| Operating lease liabilities | | $ | 4,409 | | | $ | 5,029 | |
| Income tax liabilities | | 14,034 | | | 14,156 | |
| Deferred revenue | | 70 | | | — | |
| Other non-current liabilities | | 81 | | | 81 | |
| | | | |
| Total | | $ | 18,594 | | | $ | 19,266 | |
NOTE 13 — FAIR VALUE MEASUREMENTS AND FINANCIAL INSTRUMENTS
The following table presents the carrying amount and estimated fair value of financial instruments and certain liabilities measured at fair value as of March 31, 2022 and December 31, 2021. The following fair values are estimated using market information and what the Company believes to be appropriate valuation methodologies under GAAP:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2022 | | December 31, 2021 |
| (in thousands) | | Carrying amount | | Fair value | | Carrying amount | | Fair value |
| | | | Level 1 | | Level 2 | | Level 3 | | | | Level 1 | | Level 2 | | Level 3 |
| Assets: | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 79,952 | | | $ | 79,952 | | | $ | — | | | $ | — | | | $ | 98,132 | | | $ | 98,132 | | | $ | — | | | $ | — | |
| Restricted cash | | 3,935 | | | 3,935 | | | — | | | — | | | 4,017 | | | 4,017 | | | — | | | — | |
| | | | | | | | | | | | | | | | |
| Short-term receivable | | 3,688 | | | — | | | — | | | 3,688 | | | 3,643 | | | — | | | — | | | 3,643 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | | | | | | |
| Senior secured term loan | | 247,204 | | | — | | | 220,012 | | | — | | | 247,204 | | | — | | | 224,956 | | | — | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Fair Value Measurements on a Recurring Basis
Cash and cash equivalents and restricted cash are carried at amounts that approximate their fair values due to the highly liquid nature of these instruments and were measured using Level 1 inputs.
The fair value of our senior secured term loan is based on quoted market prices. Based on the frequency of trading, we do not believe that there is an active market for our debt. Therefore, the quoted prices are considered Level 2 inputs.
In connection with the sale of Pointillist in December 1, 2021, Altisource is to receive $3.5 million on the first anniversary of the sale closing and $0.3 million following the confirmation of closing date working capital (See Note 3 for additional information). We measure short-term receivables without a stated interest rate based on the present value of the future payments.
There were no transfers between different levels during the periods presented.
Concentrations of Credit Risk
Financial instruments that subject us to concentrations of credit risk primarily consist of cash and cash equivalents and accounts receivable. Our policy is to deposit our cash and cash equivalents with larger, highly rated financial institutions. The Company derived 35% of its revenue from Ocwen for the three months ended March 31, 2022 (see Note 2 for additional information on Ocwen revenues and accounts receivable balance). The Company strives to mitigate its concentrations of credit risk with respect to accounts receivable by actively monitoring past due accounts and the economic status of larger customers, if known.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
NOTE 14 — SHAREHOLDERS’ EQUITY AND SHARE-BASED COMPENSATION
Share Repurchase Program
On May 15, 2018, our shareholders approved the renewal and replacement of the share repurchase program previously approved by the shareholders on May 17, 2017. Under the program, we are authorized to purchase up to 4.3 million shares of our common stock, based on a limit of 25% of the outstanding shares of common stock on the date of approval, at a minimum price of $1.00 per share and a maximum price of $500.00 per share, for a period of five years from the date of approval. As of March 31, 2022, approximately 2.4 million shares of common stock remain available for repurchase under the program. There were no purchases of shares of common stock during the three months ended March 31, 2022 and 2021. Luxembourg law limits share repurchases to the balance of Altisource Portfolio Solutions S.A. (unconsolidated parent company) retained earnings, less the value of shares repurchased. As of March 31, 2022, we can repurchase up to approximately $74 million of our common stock under Luxembourg law. Our Credit Agreement also limits the amount we can spend on share repurchases, which limit was approximately $420 million as of March 31, 2022, and may prevent repurchases in certain circumstances, including if our leverage ratio exceeds 3.50 to 1.00.
Share-Based Compensation
We issue share-based awards in the form of stock options, restricted shares and restricted share units for certain employees, officers and directors. We recognized share-based compensation expense of $1.3 million and $1.4 million for the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022, estimated unrecognized compensation costs related to share-based awards amounted to $6.1 million, which we expect to recognize over a weighted average remaining requisite service period of approximately 1.64 years.
Stock Options
Stock option grants are composed of a combination of service-based, market-based and performance-based options.
Service-Based Options. These options generally vest over three or four years with equal annual vesting and generally expire on the earlier of ten years after the date of grant or following termination of service. A total of 186 thousand service-based options were outstanding as of March 31, 2022.
Market-Based Options. These option grants generally have two components, each of which vests only upon the achievement of certain criteria. The first component, which we refer to as “ordinary performance” grants, generally consists of two-thirds of the market-based grant and begins to vest if the stock price is at least double the exercise price, as long as the stock price realizes a compounded annual gain of at least 20% over the exercise price. The remaining third of the market-based options, which we refer to as “extraordinary performance” grants, generally begins to vest if the stock price is at least triple the exercise price, as long as the stock price realizes a compounded annual gain of at least 25% over the exercise price. Market-based options vest in three or four year installments with the first installment vesting upon the achievement of the criteria and the remaining installments vesting thereafter in equal annual installments. Market-based options generally expire on the earlier of ten years after the date of grant or following termination of service, unless the performance criteria is met prior to termination of service or in the final three years of the option term, in which case vesting will generally continue in accordance with the provisions of the award agreement. A total of 96 thousand market-based options were outstanding as of March 31, 2022.
Performance-Based Options. These option grants generally will vest if certain specific financial measures are achieved; typically with one-fourth vesting on each anniversary of the grant date. The award of performance-based options is adjusted based on the level of achievement specified in the award agreements. If the performance criteria achieved is above threshold performance levels, participants generally have the opportunity to vest in 50% to 200% of the option grants, depending upon performance achieved. If the performance criteria achieved is below a certain threshold, the options are canceled. The options generally expire on the earlier of ten years after the date of grant or following termination of service, unless the performance criteria is met prior to termination of service in which case vesting will generally continue in accordance with the provisions of the award agreement. There were 450 thousand performance-based options outstanding as of March 31, 2022.
The Company granted 105 thousand stock options (at a weighted average exercise price of $11.86 per share) for the three months ended March 31, 2022 (no comparative amount for the three months ended March 31, 2021).
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
The fair values of the performance-based options are determined using the Black-Scholes option pricing model. The following assumptions were used to determine the fair values as of the grant date:
| | | | | | | | | | | |
| Three months ended March 31, 2022 | | |
| | Black-Scholes | | | | | | |
| | | | | | | |
| Risk-free interest rate (%) | 1.62 | | | | | | | |
| Expected stock price volatility (%) | 67.75 | % | | | | | | |
| Expected dividend yield | — | | | | | | | |
| Expected option life (in years) | 6.00 | | | | | | |
| Fair value | $ | 7.27 | | | | | | | |
We determined the expected option life of all service-based stock option grants using the simplified method, determined based on the graded vesting term plus the contractual term of the options, divided by two. We use the simplified method because we believe that our historical data does not provide a reasonable basis upon which to estimate expected option life.
The following table summarizes the grant date fair value of stock options that vested during the periods presented:
| | | | | | | | | | | | | | |
| | | Three months ended March 31, |
| (in thousands, except per share data) | | 2022 | | 2021 |
| | | | |
| Weighted average grant date fair value of stock options granted per share | | $ | 8.19 | | | $ | — | |
| Intrinsic value of options exercised | | — | | | — | |
| Grant date fair value of stock options that vested | | 1,031 | | | 1,186 | |
The following table summarizes the activity related to our stock options:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Number of options | | Weighted average exercise price | | Weighted average contractual term (in years) | | Aggregate intrinsic value (in thousands) |
| | | | | | | |
| Outstanding as of December 31, 2021 | 687,339 | | | $ | 27.99 | | | 4.57 | | $ | — | |
| Granted | 105,000 | | | 11.86 | | | | | |
| | | | | | | |
| Forfeited | (59,900) | | | 59.99 | | | | | |
| | | | | | | |
| Outstanding as of March 31, 2022 | 732,439 | | | 27.35 | | | 5.47 | | — | |
| | | | | | | |
| Exercisable as of March 31, 2022 | 544,190 | | | 25.45 | | | 4.92 | | — | |
Other Share-Based Awards
The Company’s other share-based and similar types of awards are comprised of restricted shares and restricted share units. The restricted shares and restricted share units are comprised of a combination of service-based awards, performance-based awards and market-based awards.
Service-Based Awards. These awards generally vest over one to four year periods with vesting in equal annual installments. A total of 422 thousand service-based awards were outstanding as of March 31, 2022.
Performance-Based Awards. These awards generally vest if certain specific financial measures are achieved; generally one-third vests on each anniversary of the grant date or cliff-vest on the third anniversary of the grant date. The number of performance-based restricted shares and restricted share units that may vest is based on the level of achievement as specified in the award agreements. If the performance criteria achieved is above certain financial performance levels and Altisource’s share performance is above certain established criteria, participants have the opportunity to vest in up to 150% of the restricted share unit award for certain awards. If the performance criteria achieved is below certain thresholds, the award is canceled. A total of 159 thousand performance-based awards were outstanding as of March 31, 2022.
Market-Based Awards. 50% of these awards generally vest if certain specific market conditions are achieved over a 30-day period and the remaining 50% of these awards generally vest on the one year anniversary of the initial vesting. The
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
Company estimates the grant date fair value of these awards using a lattice (binomial) model. A total of 112 thousand market-based awards were outstanding as of March 31, 2022.
Performance-Based and Market-Based Awards. These awards generally vest if certain specific financial measures are achieved and if certain specific market conditions are achieved. If the performance criteria achieved is above certain financial performance levels and Altisource’s share performance is above certain established criteria, participants have the opportunity to vest in up to 300% of the restricted share unit award for certain awards. If the performance criteria or the market criteria is below certain thresholds, the award is canceled. The Company estimates the grant date fair value of these awards using a Monte Carlo simulation model. A total of 98 thousand performance-based and market-based awards were outstanding as of March 31, 2022.
The Company granted 388 thousand restricted share units (at a weighted average grant date fair value of $10.81 per share) during the three months ended March 31, 2022. These grants include 46 thousand performance-based awards that include both a performance condition and a market condition, and 46 thousand performance-based awards for the three months ended March 31, 2022.
The following table summarizes the activity related to our restricted shares and restricted share units:
| | | | | |
| Number of restricted shares and restricted share units |
| |
| Outstanding as of December 31, 2021 | 677,175 | |
| Granted | 387,761 | |
| Issued | (146,567) | |
| Forfeited/canceled | (126,564) | |
| |
| Outstanding as of March 31, 2022 | 791,805 | |
NOTE 15 — REVENUE
We classify revenue in three categories: service revenue, revenue from reimbursable expenses and non-controlling interests. Service revenue consists of amounts attributable to our fee-based services. Reimbursable expenses and non-controlling interests are pass-through items for which we earn no margin. Reimbursable expenses consist of amounts we incur on behalf of our customers in performing our fee-based services that we pass directly on to our customers without a markup. Non-controlling interests represent the earnings of Lenders One, a consolidated entity that is a mortgage cooperative managed, but not owned, by Altisource. The Lenders One members’ earnings are included in revenue and reduced from net income to arrive at net income attributable to Altisource (see Note 1). Our services are provided to customers located in the United States. The components of revenue were as follows:
| | | | | | | | | | | | | | | | | | |
| | | | Three months ended March 31, |
| (in thousands) | | | | | | 2022 | | 2021 |
| | | | | | | | |
| Service revenue | | | | | | $ | 37,763 | | | $ | 48,080 | |
| Reimbursable expenses | | | | | | 1,592 | | | 2,013 | |
| Non-controlling interests | | | | | | 161 | | | 372 | |
| | | | | | | | |
| Total | | | | | | $ | 39,516 | | | $ | 50,465 | |
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
Disaggregation of Revenue
Disaggregation of total revenues by segment and major source is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, 2022 |
| (in thousands) | | Revenue recognized when services are performed or assets are sold | | Revenue related to technology platforms and professional services | | Reimbursable expenses revenue | | Total revenue |
| | | | | | | | |
| Servicer and Real Estate | | $ | 24,659 | | | $ | 2,498 | | | $ | 1,379 | | | $ | 28,536 | |
| Origination | | 10,759 | | | 8 | | | 213 | | | 10,980 | |
| | | | | | | | |
| Total revenue | | $ | 35,418 | | | $ | 2,506 | | | $ | 1,592 | | | $ | 39,516 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, 2021 |
| (in thousands) | | Revenue recognized when services are performed or assets are sold | | Revenue related to technology platforms and professional services | | Reimbursable expenses revenue | | Total revenue |
| | | | | | | | |
| Servicer and Real Estate | | $ | 28,045 | | | $ | 2,631 | | | $ | 1,965 | | | $ | 32,641 | |
| Origination | | 17,206 | | | 13 | | | 48 | | | 17,267 | |
| Corporate and Others | | — | | | 557 | | | — | | | 557 | |
| Total revenue | | $ | 45,251 | | | $ | 3,201 | | | $ | 2,013 | | | $ | 50,465 | |
Contract Balances
Our contract assets consist of unbilled accounts receivable (see Note 4). Our contract liabilities consist of current deferred revenue and other non-current liabilities as reported on the accompanying condensed consolidated balance sheets. Revenue recognized that was included in the contract liability at the beginning of the period was $1.8 million and $2.2 million for the three months ended March 31, 2022 and 2021, respectively.
NOTE 16 — COST OF REVENUE
Cost of revenue principally includes payroll and employee benefits associated with personnel employed in customer service, operations and technology roles, fees paid to external providers related to the provision of services, reimbursable expenses, technology and telecommunications costs as well as depreciation and amortization of operating assets. The components of cost of revenue were as follows:
| | | | | | | | | | | | | | | | | | |
| | | | Three months ended March 31, |
| (in thousands) | | | | | | 2022 | | 2021 |
| | | | | | | | |
| Compensation and benefits | | | | | | $ | 13,521 | | | $ | 22,035 | |
| Outside fees and services | | | | | | 12,903 | | | 18,723 | |
| Technology and telecommunications | | | | | | 5,232 | | | 6,587 | |
| Reimbursable expenses | | | | | | 1,592 | | | 2,013 | |
| Depreciation and amortization | | | | | | 621 | | | 800 | |
| | | | | | | | |
| Total | | | | | | $ | 33,869 | | | $ | 50,158 | |
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
NOTE 17 — SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses include payroll and employee benefits associated with personnel employed in executive, sales and marketing, finance, technology, law, compliance, human resources, vendor management, facilities and risk management roles. This category also includes professional services fees, occupancy costs, marketing costs, depreciation and amortization of non-operating assets and other expenses. The components of selling, general and administrative expenses were as follows:
| | | | | | | | | | | | | | | | | | |
| | | | Three months ended March 31, |
| (in thousands) | | | | | | 2022 | | 2021 |
| | | | | | | | |
| Compensation and benefits | | | | | | $ | 5,409 | | | $ | 7,852 | |
| Amortization of intangible assets | | | | | | 1,284 | | | 2,599 | |
| Professional services | | | | | | 2,749 | | | 3,218 | |
| Occupancy related costs | | | | | | 1,624 | | | 3,180 | |
| Marketing costs | | | | | | 887 | | | 474 | |
| Depreciation and amortization | | | | | | 337 | | | 384 | |
| Other | | | | | | 1,684 | | | 1,179 | |
| | | | | | | | |
| Total | | | | | | $ | 13,974 | | | $ | 18,886 | |
NOTE 18 — OTHER (EXPENSE) INCOME, NET
Other (expense) income, net consists of the following:
| | | | | | | | | | | | | | | | | | |
| | | | Three months ended March 31, |
| (in thousands) | | | | | | 2022 | | 2021 |
| | | | | | | | |
| Interest income (expense) | | | | | | $ | 45 | | | $ | (21) | |
| Other, net | | | | | | 695 | | | 970 | |
| | | | | | | | |
| Total | | | | | | $ | 740 | | | $ | 949 | |
NOTE 19 — INCOME TAXES
We recognized an income tax provision of $0.9 million and $0.8 million for the three months ended March 31, 2022 and 2021, respectively. The income tax provision for the three months ended March 31, 2022 was driven by income tax on transfer pricing income from India, no tax benefit on the pretax loss from our Luxembourg operating company and uncertain tax positions.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
NOTE 20 — LOSS PER SHARE
Basic loss per share is computed by dividing loss available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted net loss per share excludes all dilutive securities because their impact would be anti-dilutive, as described below.
Basic and diluted loss per share are calculated as follows:
| | | | | | | | | | | | | | | | | | |
| | | | Three months ended March 31, |
| (in thousands, except per share data) | | | | | | 2022 | | 2021 |
| | | | | | | | |
| Net loss attributable to Altisource | | | | | | $ | (12,190) | | | $ | (22,002) | |
| | | | | | | | |
| Weighted average common shares outstanding, basic | | | | | | 15,956 | | | 15,717 | |
| | | | | | | | |
| | | | | | | | |
| Weighted average common shares outstanding, diluted | | | | | | 15,956 | | | 15,717 | |
| | | | | | | | |
| Loss per share: | | | | | | | | |
| Basic | | | | | | $ | (0.76) | | | $ | (1.40) | |
| Diluted | | | | | | $ | (0.76) | | | $ | (1.40) | |
For the three months ended March 31, 2022 and 2021, 1.5 million and 1.7 million, respectively, stock options, restricted shares and restricted share units, were excluded from the computation of loss per share, as a result of the following:
•For both the three months ended March 31, 2022 and 2021, 0.3 million stock options, restricted shares and restricted share units were anti-dilutive and have been excluded from the computation of diluted loss per share because the Company incurred a net loss
•For both the three months ended March 31, 2022 and 2021, 0.3 million stock options were anti-dilutive and have been excluded from the computation of diluted loss per share because their exercise price was greater than the average market price of our common stock
•For the three months ended March 31, 2022 and 2021, 0.9 million and 1.2 million, respectively, stock options, restricted shares and restricted share units, which begin to vest upon the achievement of certain market criteria related to our common stock price, performance criteria and a total shareholder return compared to the market benchmark, that have not yet been met in each period have been excluded from the computation of diluted loss per share
NOTE 21 — COMMITMENTS, CONTINGENCIES AND REGULATORY MATTERS
We record a liability for contingencies if an unfavorable outcome is probable and the amount of loss can be reasonably estimated, including expected insurance coverage. For proceedings where the reasonable estimate of loss is a range, we record a best estimate of loss within the range.
Litigation
We are currently involved in legal actions in the course of our business, some of which seek monetary damages. We do not believe that the outcome of these proceedings, both individually and in the aggregate, will have a material impact on our financial condition, results of operations or cash flows.
Regulatory Matters
Periodically, we are subject to audits, examinations and investigations by federal, state and local governmental authorities and receive subpoenas, civil investigative demands or other requests for information from such governmental authorities in connection with their regulatory or investigative authority. We are currently responding to such inquiries from governmental authorities relating to certain aspects of our business. We believe it is premature to predict the potential outcome or to estimate any potential financial impact in connection with these inquiries.
Ocwen Related Matters
As discussed in Note 2, during the three months ended March 31, 2022, Ocwen was our largest customer, accounting for 35% of our total revenue. Additionally, 6% of our revenue for the three months ended March 31, 2022 was earned on the loan portfolios serviced by Ocwen, when a party other than Ocwen or the MSRs owner selected Altisource as the service provider.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
Ocwen has disclosed that it is subject to a number of ongoing federal and state regulatory examinations, consent orders, inquiries, subpoenas, civil investigative demands, requests for information and other actions and is subject to pending and threatened legal proceedings, some of which include claims against Ocwen for substantial monetary damages. Previous regulatory actions against Ocwen have subjected Ocwen to independent oversight of its operations and placed certain restrictions on its ability to acquire servicing rights. Existing or future similar matters could result in adverse regulatory or other actions against Ocwen. In addition to the above, Ocwen may become subject to future adverse regulatory or other actions.
Ocwen has disclosed that NRZ is its largest client. As of December 31, 2021, approximately 21% of loans serviced and subserviced by Ocwen (measured in UPB) were related to NRZ MSRs or rights to MSRs.
The existence or outcome of Ocwen regulatory matters or the termination of the NRZ sub-servicing agreement with Ocwen may have significant adverse effects on Ocwen’s business and/or our continuing relationship with Ocwen. For example, Ocwen may be required to alter the way it conducts business, including the parties it contracts with for services, it may be required to seek changes to its existing pricing structure with us, it may lose its non-government-sponsored enterprise (“GSE”) servicing rights or subservicing arrangements or may lose one or more of its state servicing or origination licenses. Additional regulatory actions or adverse financial developments may impose additional restrictions on or require changes in Ocwen’s business that could require it to sell assets or change its business operations. Any or all of these effects and others could result in our eventual loss of Ocwen as a customer or a reduction in the number and/or volume of services they purchase from us or the loss of other customers.
If any of the following events occurred, Altisource’s revenue could be significantly reduced and our results of operations could be materially adversely affected, including from the possible impairment or write-off of goodwill, intangible assets, property and equipment, other assets and accounts receivable:
•Altisource loses Ocwen as a customer or there is a significant reduction in the volume of services they purchase from us
•Ocwen loses, sells or transfers a significant portion of its GSE or Federal Housing Administration servicing rights or subservicing arrangements or remaining other servicing rights or subservicing arrangements and Altisource fails to be retained as a service provider
•The contractual relationship between Ocwen and NRZ changes significantly, including Ocwen’s sub-servicing arrangement with NRZ expiring without renewal, and this change results in a change in our status as a provider of services related to the Subject MSRs
•Ocwen loses state servicing licenses in states with a significant number of loans in Ocwen’s servicing portfolio
•The contractual relationship between Ocwen and Altisource changes significantly or there are significant changes to our pricing to Ocwen for services from which we generate material revenue
•Altisource otherwise fails to be retained as a service provider
Management cannot predict whether any of these events will occur or the amount of any impact they may have on Altisource.
Leases
We lease certain premises and equipment, primarily consisting of office space and information technology equipment. Certain of our leases include options to renew at our discretion or terminate leases early, and these options are considered in our determination of the expected lease term. Certain of our lease agreements include rental payments adjusted periodically for inflation. Our lease agreements generally do not contain any material residual value guarantees or material restrictive covenants. We sublease certain office space to third parties. Sublease income was $0.3 million for the three months ended March 31, 2022 and 2021. The amortization periods of right-of-use assets are generally limited by the expected lease term. Our leases generally have expected lease terms at adoption of one to six years.
Information about our lease terms and our discount rate assumption is as follows for the three months ended March 31:
| | | | | | | | | | | | | | |
| | | | |
| | 2022 | | 2021 |
| | | | |
| Weighted average remaining lease term (in years) | | 3.48 | | 3.06 |
| Weighted average discount rate | | 5.70 | % | | 7.01 | % |
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
Our lease activity during the period is as follows:
| | | | | | | | | | | | | | | | | | |
| | | | Three months ended March 31, |
| (in thousands) | | | | | | 2022 | | 2021 |
| | | | | | | | |
| Operating lease costs: | | | | | | | | |
| Selling, general and administrative expense | | | | | | $ | 934 | | | $ | 2,092 | |
| Cost of revenue | | | | | | 265 | | | 171 | |
| | | | | | | | |
| Cash used in operating activities for amounts included in the measurement of lease liabilities | | | | | | $ | 1,182 | | | $ | 3,078 | |
| Short-term (twelve months or less) lease costs | | | | | | 28 | | | 481 | |
Maturities of our lease liabilities as of March 31, 2022 are as follows:
| | | | | | | | |
| (in thousands) | | Operating lease obligations |
| | |
| 2022 | | $ | 1,658 | |
| 2023 | | 2,047 | |
| 2024 | | 1,543 | |
| 2025 | | 1,109 | |
| 2026 | | 563 | |
| | |
| Total lease payments | | 6,920 | |
| Less: interest | | (421) | |
| | |
| Present value of lease liabilities | | $ | 6,499 | |
Escrow Balances
We hold customers’ assets in escrow accounts at various financial institutions pending completion of certain real estate activities. These amounts are held in escrow accounts for limited periods of time and are not included in the accompanying condensed consolidated balance sheets. Amounts held in escrow accounts were $23.3 million and $27.5 million as of March 31, 2022 and December 31, 2021, respectively.
NOTE 22 — SEGMENT REPORTING
Our business segments are based upon our organizational structure, which focuses primarily on the services offered, and are consistent with the internal reporting used by our Chief Executive Officer (our chief operating decision maker) to evaluate operating performance and to assess the allocation of our resources.
Effective January 1, 2022, our reportable segments changed as a result of a change in the way our Chief Executive Officer (our chief operating decision maker) manages our businesses, allocates resources and evaluates performance, and the related changes in our internal organization. We now report our operations through two new reportable segments: Servicer and Real Estate and Origination. In addition, we report Corporate and Others separately. Prior to the January 1, 2022 change in reportable segments, the Company operated with one reportable segment (total Company). Prior year comparable period segment disclosures have been restated to conform to the current year presentation.
The Servicer and Real Estate segment provides loan servicers and real estate investors with solutions and technologies that span the mortgage and real estate lifecycle. The Origination segment provides originators with solutions and technologies that span the mortgage origination lifecycle. Corporate and Others includes Pointillist (sold on December 1, 2021), interest expense and costs related to corporate functions including executive, finance, law, compliance, human resources, vendor management, facilities, risk management, as well as eliminations between reportable segments.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
Financial information for our segments is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended March 31, 2022 |
| (in thousands) | | Servicer and Real Estate | | Origination | | Corporate and Others | | Consolidated Altisource |
| | | | | | | | |
| Revenue | | $ | 28,536 | | | $ | 10,980 | | | $ | — | | | $ | 39,516 | |
| Cost of revenue | | 19,740 | | | 9,307 | | | 4,822 | | | 33,869 | |
| Gross profit (loss) | | 8,796 | | | 1,673 | | | (4,822) | | | 5,647 | |
| Selling, general and administrative expenses | | 3,059 | | | 2,120 | | | 8,795 | | | 13,974 | |
| Income (loss) from operations | | 5,737 | | | (447) | | | (13,617) | | | (8,327) | |
| Total other income (expense), net | | — | | | — | | | (2,816) | | | (2,816) | |
| | | | | | | | |
Income (loss) before income taxes and non-controlling interests | | $ | 5,737 | | | $ | (447) | | | $ | (16,433) | | | $ | (11,143) | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended March 31, 2021 |
| (in thousands) | | Servicer and Real Estate | | Origination | | Corporate and Others | | Consolidated Altisource |
| | | | | | | | |
| Revenue | | $ | 32,641 | | | $ | 17,267 | | | $ | 557 | | | $ | 50,465 | |
| Cost of revenue | | 25,771 | | | 14,286 | | | 10,101 | | | 50,158 | |
| Gross profit (loss) | | 6,870 | | | 2,981 | | | (9,544) | | | 307 | |
| Selling, general and administrative expenses | | 3,854 | | | 1,310 | | | 13,722 | | | 18,886 | |
| Income (loss) from operations | | 3,016 | | | 1,671 | | | (23,266) | | | (18,579) | |
| Total other income (expense), net | | 2 | | | — | | | (2,495) | | | (2,493) | |
| | | | | | | | |
Income (loss) before income taxes and non-controlling interests | | $ | 3,018 | | | $ | 1,671 | | | $ | (25,761) | | | $ | (21,072) | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Servicer and Real Estate | | Origination | | Corporate and Others | | Consolidated Altisource |
| | | | | | | | |
| Total assets: | | | | | | | | |
| March 31, 2022 | | $ | 64,451 | | | $ | 59,829 | | | $ | 115,497 | | | $ | 239,777 | |
| December 31, 2021 | | 61,832 | | | 59,741 | | | 136,235 | | | 257,808 | |
Our services are provided to customers primarily located in the United States. Premises and equipment net, consist of the following, by country:
| | | | | | | | | | | | | | |
| (in thousands) | | March 31,
2022 | | December 31,
2021 |
| | | | |
| Luxembourg | | $ | 3,526 | | | $ | 3,883 | |
| United States | | 1,475 | | | 1,932 | |
| India | | 878 | | | 999 | |
| Uruguay | | 48 | | | 59 | |
| | | | |
| | | | |
| Total | | $ | 5,927 | | | $ | 6,873 | |