UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2018March 31, 2019
OR
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 1-34354
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
(Exact name of Registrant as specified in its Charter)
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| |
Luxembourg | 98-0554932 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
40, avenue Monterey
L-2163 Luxembourg
Grand Duchy of Luxembourg
(Address of principal executive offices) (Zip Code)
(352) 24 69 79 00
(Registrant’s telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o | Accelerated filer þ |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
| Emerging growth company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided bypursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of OctoberApril 19, 2018,2019, there were 16,990,83816,278,696 outstanding shares of the registrant’s shares of beneficial interest (excluding 8,421,9109,134,052 shares held as treasury stock).
Table of Contents
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
FORM 10-Q
PART I — FINANCIAL INFORMATION
Item 1. Interim Condensed Consolidated Financial Statements (Unaudited)
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
| | | September 30, 2018 | | December 31, 2017 | March 31, 2019 | | December 31, 2018 |
| | | | | | |
ASSETS | Current assets: | | | | | | |
Cash and cash equivalents | $ | 102,860 |
| | $ | 105,006 |
| $ | 51,509 |
| | $ | 58,294 |
|
Investment in equity securities | 44,967 |
| | 49,153 |
| 38,419 |
| | 36,181 |
|
Accounts receivable, net | 46,929 |
| | 52,740 |
| 28,634 |
| | 36,466 |
|
Short-term investments in real estate | | 40,274 |
| | 39,873 |
|
Assets held for sale (Note 3) | | 26,557 |
| | — |
|
Prepaid expenses and other current assets | 81,622 |
| | 64,742 |
| 29,292 |
| | 30,720 |
|
Total current assets | 276,378 |
| | 271,641 |
| 214,685 |
| | 201,534 |
|
| | | | | | |
Premises and equipment, net | 52,026 |
| | 73,273 |
| |
Premises and equipment, net (Notes 1 and 8) | | 74,991 |
| | 45,631 |
|
Goodwill | 84,027 |
| | 86,283 |
| 79,009 |
| | 81,387 |
|
Intangible assets, net | 98,754 |
| | 120,065 |
| 72,160 |
| | 91,653 |
|
Deferred tax assets, net | 304,383 |
| | 303,707 |
| 308,509 |
| | 309,089 |
|
Other assets | 13,697 |
| | 10,195 |
| 10,194 |
| | 12,406 |
|
| | | | | | |
Total assets | $ | 829,265 |
| | $ | 865,164 |
| $ | 759,548 |
| | $ | 741,700 |
|
| | | | | | |
LIABILITIES AND EQUITY | Current liabilities: | | | | | | |
Accounts payable and accrued expenses | $ | 96,407 |
| | $ | 84,400 |
| $ | 64,538 |
| | $ | 87,240 |
|
Current portion of long-term debt | 34,440 |
| | 5,945 |
| 9,222 |
| | — |
|
Deferred revenue | 12,955 |
| | 9,802 |
| 7,597 |
| | 10,108 |
|
Other current liabilities | 7,912 |
| | 9,414 |
| |
Liabilities held for sale (Note 3) | | 8,736 |
| | — |
|
Other current liabilities (Notes 1 and 11) | | 20,743 |
| | 7,030 |
|
Total current liabilities | 151,714 |
| | 109,561 |
| 110,836 |
| | 104,378 |
|
| | | | | | |
Long-term debt, less current portion | 346,544 |
| | 403,336 |
| 322,577 |
| | 331,476 |
|
Other non-current liabilities | 7,866 |
| | 12,282 |
| |
Other non-current liabilities (Notes 1 and 13) | | 30,767 |
| | 9,178 |
|
| | | | | | |
Commitments, contingencies and regulatory matters (Note 21) |
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Commitments, contingencies and regulatory matters (Note 22) | |
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|
| | | | | | |
Equity: | | | | | | |
Common stock ($1.00 par value; 100,000 shares authorized, 25,413 issued and 17,048 outstanding as of September 30, 2018; 100,000 shares authorized, 25,413 shares issued and 17,418 outstanding as of December 31, 2017) | 25,413 |
| | 25,413 |
| |
Common stock ($1.00 par value; 100,000 shares authorized, 25,413 issued and 16,309 outstanding as of March 31, 2019; 16,276 outstanding as of December 31, 2018) | | 25,413 |
| | 25,413 |
|
Additional paid-in capital | 118,625 |
| | 112,475 |
| 125,288 |
| | 122,667 |
|
Retained earnings | 603,343 |
| | 626,600 |
| 584,759 |
| | 590,655 |
|
Accumulated other comprehensive income | — |
| | 733 |
| |
Treasury stock, at cost (8,365 shares as of September 30, 2018 and 7,995 shares as of December 31, 2017) | (425,767 | ) | | (426,609 | ) | |
Treasury stock, at cost (9,104 shares as of March 31, 2019 and 9,137 shares as of December 31, 2018) | | (441,149 | ) | | (443,304 | ) |
Altisource equity | 321,614 |
| | 338,612 |
| 294,311 |
| | 295,431 |
|
| | | | | | |
Non-controlling interests | 1,527 |
| | 1,373 |
| 1,057 |
| | 1,237 |
|
Total equity | 323,141 |
| | 339,985 |
| 295,368 |
| | 296,668 |
|
| | | | | | |
Total liabilities and equity | $ | 829,265 |
| | $ | 865,164 |
| $ | 759,548 |
| | $ | 741,700 |
|
See accompanying notes to condensed consolidated financial statements.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOMELOSS
(in thousands, except per share data)
| | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended March 31, |
| | 2018 | | 2017 | | 2018 | | 2017 | | 2019 | | 2018 |
| | | | | | | | | | | | |
Revenue | | $ | 204,575 |
| | $ | 234,979 |
| | $ | 620,569 |
| | $ | 726,147 |
| | $ | 169,935 |
| | $ | 197,438 |
|
Cost of revenue | | 147,580 |
| | 174,898 |
| | 457,980 |
| | 538,244 |
| | 124,104 |
| | 147,194 |
|
| | | | | | | | | | | | |
Gross profit | | 56,995 |
| | 60,081 |
| | 162,589 |
| | 187,903 |
| | 45,831 |
| | 50,244 |
|
Operating expenses (income): | | | | | | | | | |
Operating expenses: | | | | | |
Selling, general and administrative expenses | | 46,329 |
| | 46,622 |
| | 132,377 |
| | 146,793 |
| | 41,240 |
| | 43,124 |
|
Gain on sale of business (Note 3) | | (13,688 | ) | | — |
| | (13,688 | ) | | — |
| |
Restructuring charges (Note 20) | | 3,436 |
| | — |
| | 3,436 |
| | — |
| |
Restructuring charges (Note 21) | | | 4,420 |
| | — |
|
| | | | | | | | | | | | |
Income from operations | | 20,918 |
| | 13,459 |
| | 40,464 |
| | 41,110 |
| | 171 |
| | 7,120 |
|
Other income (expense), net: | | | | | | | | | | | | |
Interest expense | | (6,725 | ) | | (5,599 | ) | | (19,615 | ) | | (16,862 | ) | | (6,749 | ) | | (5,863 | ) |
Unrealized gain (loss) on investment in equity securities (Note 4) | | 1,782 |
| | — |
| | (4,186 | ) | | — |
| | 2,238 |
| | (7,501 | ) |
Other income (expense), net | | 154 |
| | 2,497 |
| | (2,435 | ) | | 8,015 |
| | 374 |
| | 1,272 |
|
Total other income (expense), net | | (4,789 | ) | | (3,102 | ) | | (26,236 | ) | | (8,847 | ) | | (4,137 | ) | | (12,092 | ) |
| | | | | | | | | | | | |
Income before income taxes and non-controlling interests | | 16,129 |
| | 10,357 |
| | 14,228 |
| | 32,263 |
| |
Income tax provision | | (6,608 | ) | | (2,591 | ) | | (6,059 | ) | | (7,615 | ) | |
Loss before income taxes and non-controlling interests | | | (3,966 | ) | | (4,972 | ) |
Income tax benefit | | | 1,222 |
| | 1,365 |
|
| | | | | | | | | | | | |
Net income | | 9,521 |
| | 7,766 |
| | 8,169 |
| | 24,648 |
| |
Net loss | | | (2,744 | ) | | (3,607 | ) |
Net income attributable to non-controlling interests | | (854 | ) | | (805 | ) | | (2,066 | ) | | (2,107 | ) | | (440 | ) | | (525 | ) |
| | | | | | | | | | | | |
Net income attributable to Altisource | | $ | 8,667 |
| | $ | 6,961 |
| | $ | 6,103 |
| | $ | 22,541 |
| |
Net loss attributable to Altisource | | | $ | (3,184 | ) | | $ | (4,132 | ) |
| | | | | | | | | | | | |
Earnings per share: | | | | | | | | | |
Loss per share: | | | | | |
Basic | | $ | 0.51 |
| | $ | 0.39 |
| | $ | 0.36 |
| | $ | 1.23 |
| | $ | (0.20 | ) | | $ | (0.24 | ) |
Diluted | | $ | 0.49 |
| | $ | 0.38 |
| | $ | 0.35 |
| | $ | 1.20 |
| | $ | (0.20 | ) | | $ | (0.24 | ) |
| | | | | | | | | | | | |
Weighted average shares outstanding: | | | | | | | | | | | | |
Basic | | 17,033 |
| | 18,023 |
| | 17,184 |
| | 18,337 |
| | 16,292 |
| | 17,378 |
|
Diluted | | 17,575 |
| | 18,429 |
| | 17,669 |
| | 18,854 |
| | 16,292 |
| | 17,378 |
|
| | | | | | | | | | | | |
Comprehensive income: | | | | | | | | | |
Net income | | $ | 9,521 |
| | $ | 7,766 |
| | $ | 8,169 |
| | $ | 24,648 |
| |
Other comprehensive income (loss), net of tax: | | | | | | | | | |
Reclassification of unrealized gain on investment in equity securities, net of income tax provision of $200, to retained earnings from the cumulative effect of an accounting change (Note 1) | | — |
| | — |
| | (733 | ) | | — |
| |
Unrealized (loss) gain on investment in equity securities, net of income tax benefit (provision) of $0, $2,054, $0, $(78) | | — |
| | (5,530 | ) | | — |
| | 212 |
| |
Comprehensive loss: | | | | | |
Net loss | | | $ | (2,744 | ) | | $ | (3,607 | ) |
Other comprehensive loss, net of tax: | | | | | |
Reclassification of unrealized gain on investment in equity securities, net of income tax provision of $200, to retained earnings from the cumulative effect of an accounting change | | | — |
| | (733 | ) |
| | | | | | | | | | | | |
Comprehensive income, net of tax | | 9,521 |
| | 2,236 |
| | 7,436 |
| | 24,860 |
| |
Comprehensive loss, net of tax | | | (2,744 | ) | | (4,340 | ) |
Comprehensive income attributable to non-controlling interests | | (854 | ) | | (805 | ) | | (2,066 | ) | | (2,107 | ) | | (440 | ) | | (525 | ) |
| | | | | | | | | | | | |
Comprehensive income attributable to Altisource | | $ | 8,667 |
| | $ | 1,431 |
| | $ | 5,370 |
| | $ | 22,753 |
| |
Comprehensive loss attributable to Altisource | | | $ | (3,184 | ) | | $ | (4,865 | ) |
See accompanying notes to condensed consolidated financial statements.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Altisource Equity | | | | |
| Common stock | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive income (loss) | | Treasury stock, at cost | | Non-controlling interests | | Total |
| Shares | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Balance, December 31, 2016 | 25,413 |
| | $ | 25,413 |
| | $ | 107,288 |
| | $ | 333,786 |
| | $ | (1,745 | ) | | $ | (403,953 | ) | | $ | 1,405 |
| | $ | 62,194 |
|
| | | | | | | | | | | | | | | |
Comprehensive income: | | | | | | | | | | | | | | | |
Net income | — |
| | — |
| | — |
| | 22,541 |
| | — |
| | — |
| | 2,107 |
| | 24,648 |
|
Other comprehensive income, net of tax | — |
| | — |
| | — |
| | — |
| | 212 |
| | — |
| | — |
| | 212 |
|
Distributions to non-controlling interest holders | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,143 | ) | | (2,143 | ) |
Share-based compensation expense | — |
| | — |
| | 3,237 |
| | — |
| | — |
| | — |
| | — |
| | 3,237 |
|
Cumulative effect of an accounting change (Note 14) | — |
| | — |
| | 932 |
| | (932 | ) | | — |
| | — |
| | — |
| | — |
|
Exercise of stock options and issuance of restricted shares | — |
| | — |
| | — |
| | (11,787 | ) | | — |
| | 13,871 |
| | — |
| | 2,084 |
|
Treasury shares withheld for the payment of tax on restricted share issuances | — |
| | — |
| | — |
| | (1,497 | ) | | — |
| | 409 |
| | — |
| | (1,088 | ) |
Repurchase of shares | — |
| | — |
| | — |
| | — |
| | — |
| | (24,995 | ) | | — |
| | (24,995 | ) |
| | | | | | | | | | | | | | | |
Balance, September 30, 2017 | 25,413 |
| | $ | 25,413 |
| | $ | 111,457 |
| | $ | 342,111 |
| | $ | (1,533 | ) | | $ | (414,668 | ) | | $ | 1,369 |
| | $ | 64,149 |
|
| | | | | | | | | | | | | | | |
Balance, December 31, 2017 | 25,413 |
| | $ | 25,413 |
| | $ | 112,475 |
| | $ | 626,600 |
| | $ | 733 |
| | $ | (426,609 | ) | | $ | 1,373 |
| | $ | 339,985 |
|
| | | | | | | | | | | | | | | |
Net income | — |
| | — |
| | — |
| | 6,103 |
| | — |
| | — |
| | 2,066 |
| | 8,169 |
|
Distributions to non-controlling interest holders | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,912 | ) | | (1,912 | ) |
Share-based compensation expense | — |
| | — |
| | 6,150 |
| | — |
| | — |
| | — |
| | — |
| | 6,150 |
|
Cumulative effect of accounting changes (Note 1) | — |
| | — |
| | — |
| | (9,715 | ) | | (733 | ) | | — |
| | — |
| | (10,448 | ) |
Exercise of stock options and issuance of restricted shares | — |
| | — |
| | — |
| | (18,524 | ) | | — |
| | 22,100 |
| | — |
| | 3,576 |
|
Treasury shares withheld for the payment of tax on restricted share issuances and stock option exercises | — |
| | — |
| | — |
| | (1,121 | ) | | — |
| | 513 |
| | — |
| | (608 | ) |
Repurchase of shares | — |
| | — |
| | — |
| | — |
| | — |
| | (21,771 | ) | | — |
| | (21,771 | ) |
| | | | | | | | | | | | | | | |
Balance, September 30, 2018 | 25,413 |
| | $ | 25,413 |
| | $ | 118,625 |
| | $ | 603,343 |
| | $ | — |
| | $ | (425,767 | ) | | $ | 1,527 |
| | $ | 323,141 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Altisource Equity | | | | |
| Common stock | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive income (loss) | | Treasury stock, at cost | | Non-controlling interests | | Total |
| Shares | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Balance, December 31, 2017 | 25,413 |
| | $ | 25,413 |
| | $ | 112,475 |
| | $ | 626,600 |
| | $ | 733 |
| | $ | (426,609 | ) | | $ | 1,373 |
| | $ | 339,985 |
|
| | | | | | | | | | | | | | | |
Net (loss) income | — |
| | — |
| | — |
| | (4,132 | ) | | — |
| | — |
| | 525 |
| | (3,607 | ) |
Distributions to non-controlling interest holders | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (672 | ) | | (672 | ) |
Share-based compensation expense | — |
| | — |
| | 2,201 |
| | — |
| | — |
| | — |
| | — |
| | 2,201 |
|
Cumulative effect of accounting changes | — |
| | — |
| | — |
| | (9,715 | ) | | (733 | ) | | — |
| | — |
| | (10,448 | ) |
Exercise of stock options and issuance of restricted shares | — |
| | — |
| | — |
| | (12,500 | ) | | — |
| | 15,117 |
| | — |
| | 2,617 |
|
Repurchase of shares | — |
| | — |
| | — |
| | — |
| | — |
| | (9,994 | ) | | — |
| | (9,994 | ) |
| | | | | | | | | | | | | | | |
Balance, March 31, 2018 | 25,413 |
| | $ | 25,413 |
| | $ | 114,676 |
| | $ | 600,253 |
| | $ | — |
| | $ | (421,486 | ) | | $ | 1,226 |
| | $ | 320,082 |
|
| | | | | | | | | | | | | | | |
Balance, December 31, 2018 | 25,413 |
| | $ | 25,413 |
| | $ | 122,667 |
| | $ | 590,655 |
| | $ | — |
| | $ | (443,304 | ) | | $ | 1,237 |
| | $ | 296,668 |
|
| | | | | | | | | | | | | | | |
Net (loss) income | — |
| | — |
| | — |
| | (3,184 | ) | | — |
| | — |
| | 440 |
| | (2,744 | ) |
Distributions to non-controlling interest holders | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (620 | ) | | (620 | ) |
Share-based compensation expense | — |
| | — |
| | 2,621 |
| | — |
| | — |
| | — |
| | — |
| | 2,621 |
|
Exercise of stock options and issuance of restricted shares | — |
| | — |
| | — |
| | (1,549 | ) | | — |
| | 1,577 |
| | — |
| | 28 |
|
Treasury shares withheld for the payment of tax on restricted share unit and restricted share issuances and stock option exercises | — |
| | — |
| | — |
| | (1,163 | ) | | — |
| | 578 |
| | — |
| | (585 | ) |
| | | | | | | | | | | | | | | |
Balance, March 31, 2019 | 25,413 |
| | $ | 25,413 |
| | $ | 125,288 |
| | $ | 584,759 |
| | $ | — |
| | $ | (441,149 | ) | | $ | 1,057 |
| | $ | 295,368 |
|
See accompanying notes to condensed consolidated financial statements.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | Nine months ended September 30, | Three months ended March 31, |
| 2018 | | 2017 | 2019 | | 2018 |
| | | | | | |
Cash flows from operating activities: | |
| | |
| |
| | |
|
Net income | $ | 8,169 |
| | $ | 24,648 |
| |
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
| |
Net loss | | $ | (2,744 | ) | | $ | (3,607 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | |
| | |
|
Depreciation and amortization | 24,743 |
| | 27,411 |
| 9,369 |
| | 8,721 |
|
Amortization of intangible assets | 21,311 |
| | 27,143 |
| 8,647 |
| | 7,147 |
|
Change in the fair value of acquisition related contingent consideration | — |
| | 24 |
| |
Unrealized loss on investment in equity securities | 4,186 |
| | — |
| |
Unrealized (gain) loss on investment in equity securities | | (2,238 | ) | | 7,501 |
|
Share-based compensation expense | 6,150 |
| | 3,237 |
| 2,621 |
| | 2,201 |
|
Bad debt expense | 2,408 |
| | 3,101 |
| 155 |
| | 724 |
|
Gain on early extinguishment of debt | — |
| | (5,419 | ) | |
Amortization of debt discount | 513 |
| | 225 |
| 153 |
| | 89 |
|
Amortization of debt issuance costs | 739 |
| | 625 |
| 170 |
| | 273 |
|
Deferred income taxes | (676 | ) | | — |
| 582 |
| | (1,972 | ) |
Loss on disposal of fixed assets | 723 |
| | 2,776 |
| 331 |
| | 489 |
|
Gain on sale of business (Note 3) | (13,688 | ) | | — |
| |
Loss on debt refinancing (Note 11) | 4,434 |
| | — |
| |
Changes in operating assets and liabilities: | |
| | |
| |
Changes in operating assets and liabilities (excludes assets and liabilities held for sale, see Note 3): | | |
| | |
|
Accounts receivable | 4,515 |
| | 21,543 |
| 1,091 |
| | 2,289 |
|
Short-term investments in real estate | | (401 | ) | | (9,915 | ) |
Prepaid expenses and other current assets | (16,880 | ) | | (17,272 | ) | (781 | ) | | 702 |
|
Other assets | 554 |
| | 760 |
| (92 | ) | | 481 |
|
Accounts payable and accrued expenses | 10,774 |
| | 165 |
| (16,318 | ) | | (18,189 | ) |
Other current and non-current liabilities | (14,325 | ) | | (41,838 | ) | (7,200 | ) | | (5,503 | ) |
Net cash provided by operating activities | 43,650 |
| | 47,129 |
| |
Net cash used in operating activities | | (6,655 | ) | | (8,569 | ) |
| | | | | | |
Cash flows from investing activities: | |
| | |
| |
| | |
|
Additions to premises and equipment | (4,207 | ) | | (7,485 | ) | (790 | ) | | (1,258 | ) |
Proceeds from the sale of business (Note 3) | 15,000 |
| | — |
| |
Net cash provided by (used in) investing activities | 10,793 |
| | (7,485 | ) | |
Net cash used in investing activities | | (790 | ) | | (1,258 | ) |
| | | | | | |
Cash flows from financing activities: | |
| | |
| |
| | |
|
Proceeds from issuance of long-term debt | 407,880 |
| | — |
| |
Repayments and repurchases of long-term debt | (436,821 | ) | | (48,600 | ) | — |
| | (1,486 | ) |
Debt issuance costs | (5,042 | ) | | — |
| — |
| | (496 | ) |
Proceeds from stock option exercises | 3,576 |
| | 2,084 |
| 28 |
| | 2,617 |
|
Purchase of treasury shares | (21,771 | ) | | (24,995 | ) | — |
| | (9,994 | ) |
Distributions to non-controlling interests | (1,912 | ) | | (2,143 | ) | (620 | ) | | (672 | ) |
Payment of tax withholding on issuance of restricted shares and stock option exercises | (608 | ) | | (1,088 | ) | |
Payments of tax withholding on issuance of restricted share units and restricted shares | | (585 | ) | | — |
|
Net cash used in financing activities | (54,698 | ) | | (74,742 | ) | (1,177 | ) | | (10,031 | ) |
| | | | | | |
Net decrease in cash, cash equivalents and restricted cash | (255 | ) | | (35,098 | ) | (8,622 | ) | | (19,858 | ) |
Cash, cash equivalents and restricted cash at the beginning of the period | 108,843 |
| | 153,421 |
| 64,046 |
| | 108,843 |
|
| | | | | | |
Cash, cash equivalents and restricted cash at the end of the period | $ | 108,588 |
| | $ | 118,323 |
| $ | 55,424 |
| | $ | 88,985 |
|
| | |
|
| | |
|
|
Supplemental cash flow information: | |
| | |
| |
| | |
|
Interest paid | $ | 17,889 |
| | $ | 16,203 |
| $ | 5,634 |
| | $ | 5,269 |
|
Income taxes paid, net | 4,162 |
| | 15,445 |
| 2,410 |
| | 946 |
|
| | | | | | |
Non-cash investing and financing activities: | |
| | |
| |
| | |
|
Increase in payables for purchases of premises and equipment | $ | 12 |
| | $ | 52 |
| $ | 28 |
| | $ | 264 |
|
Acquisition of right-to-use assets with lease obligations | | 209 |
| | — |
|
See accompanying notes to condensed consolidated financial statements.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
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. Certain prior year amounts have been reclassified to conform to the current year presentation.
Effective January 1, 2019, the Company reorganized its internal reporting structure in connection with Project Catalyst, a project initiated in August 2018 to optimize our operations and reduce costs to better align our cost structure with our anticipated revenues and improve our operating margins (see Note 21). The internal reorganization included, among other changes, the replacement of segment presidents with a chief operating officer, who is responsible for products, services and operations for the Company’s Mortgage Market and Real Estate Market businesses, reporting to our Chief Executive Officer (our chief operating decision maker) who manages our businesses, regularly reviews operating results and profitability, allocates resources and evaluates performance on a consolidated basis. Prior to January 1, 2019, the Company reported our operations through two reportable segments: Mortgage Market and Real Estate Market. In addition, we reported Other Businesses, Corporate and Eliminations separately. The prior year presentation has been reclassified to conform to the current year presentation.
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 September 30,March 31, 2019, Lenders One had total assets of $2.0 million and total liabilities of $0.9 million. As of December 31, 2018, Lenders One had total assets of $2.7 million and total liabilities of $0.9 million. As of December 31, 2017, Lenders One had total assets of $4.6 million and total liabilities of $3.1$1.3 million.
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, 2017,2018, as filed with the SEC on February 22, 2018.26, 2019.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
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 liabilitiesliabilities.
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.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
Recently Adopted Accounting Pronouncements
Revenue from Contracts with CustomersPronouncement
In May 2014,February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) and during 2016, the FASB issued additional guidance providing clarifications and corrections, including: ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, andASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers (collectively “Topic 606”). Topic 606 establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most prior revenue recognition guidance. This new standard requires that an entity recognize revenue for the transfer of promised goods or services to a customer in an amount that reflects the consideration that the entity expects to receive and consistent with the delivery of the performance obligation described in the underlying contract with the customer.
The Company adopted Topic 606 effective January 1, 2018 using the cumulative effect method. As a result of this adoption, the Company recognized an $11.2 million increase in deferred revenue, a $1.1 million increase in unbilled accounts receivable, a $0.3 million increase in other current liabilities and a $10.4 million decrease in retained earnings as of January 1, 2018. Because the Company adopted Topic 606 retrospectively with a cumulative effect as of January 1, 2018, the comparative results as of December 31, 2017 and for the three and nine months ended September 30, 2017 have not been restated and continue to be reported under Accounting Standards Codification Topic 605, Revenue Recognition and SEC Staff Accounting Bulletin Topic 13, Revenue Recognition. The details of the significant changes and quantitative impact of the adoption of Topic 606 are described below. Also see Note 15 for additional information on revenue, including disaggregation of revenue and contract balances.
As a result of the adoption of Topic 606, the Company’s accounting policy for revenue recognition is as follows:
We recognize revenue from the services we provide in accordance with the 5-step process outlined in Topic 606. We recognize revenue when we satisfy a performance obligation by transferring control of a product or service to a customer in an amount that reflects the consideration that we expect to receive. This revenue can be recognized at a point in time or over time. We invoice customers based on our contractual arrangements with each customer, which may not be consistent with the period that revenues are recognized. When there is a timing difference between when we invoice customers and when revenues are recognized, we record either a contract asset (unbilled accounts receivable) or a contract liability (deferred revenue or other current liabilities), as appropriate. A description of our principal revenue generating activities by reportable segment are as follows:
Mortgage Market
For the majority of the services we provide through the Mortgage Market segment, we recognize transactional revenue when the service is provided.
For loan servicing technologies, we recognize revenue based on the number of loans on the system, on a per-transaction basis or over the estimated average number of months the loans and real estate owned (“REO”) are on the platform, as applicable. We generally recognize revenue for professional services relating to loan servicing technologies over the contract period. For our loan origination system, we generally recognize revenue over the contract term, beginning on the commencement date of each contract. For foreclosure trustee services, we recognize revenue over the period during which we perform the related services, with full recognition upon completion and/or recording the related foreclosure deed. For loan disbursement processing services, we recognize revenue over the period during which we perform the processing services with full recognition upon completion of the disbursements. We use judgment to determine the period over which we recognize revenue for certain of these services. For mortgage charge-off collections performed on behalf of our clients, we recognize revenue as a percentage of amounts collected following collection from the borrowers.
For real estate brokerage and auction services, we recognize revenue on a net basis as we perform services as an agent without assuming the risks and rewards of ownership of the asset and the commission earned on the sale is a fixed percentage or amount.
Reimbursable expenses revenue, primarily related to our property preservation and inspection services, real estate sales and our foreclosure trustee services businesses, is included in revenue with an equal amount recognized in cost of revenue. These amounts are recognized on a gross basis, principally because generally we have control over selection of vendors and the vendor relationships are with us, rather than with our customers.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
Real Estate Market
For the majority of the services we provide through the Real Estate Market segment, we recognize transactional revenue when the service is provided.
For our renovation services, revenue is recognized over the period of the construction activity, based on the estimated percentage of completion of each project. We use judgment to determine the period over which we recognize revenue for certain of these services. For real estate brokerage and auction services, we recognize revenue on a net basis as we perform services as an agent without assuming the risks and rewards of ownership of the asset and the commission earned on the sale is a fixed percentage or amount. For the buy-renovate-lease-sell business, we recognize revenue associated with our sales of short-term investments in real estate on a gross basis as we assume the risks and rewards of ownership of the asset.
Reimbursable expenses revenue, primarily related to our real estate sales business, is included in revenue with an equal offsetting expense recognized in cost of revenue. These amounts are recognized on a gross basis, principally because generally we have control over selection of vendors and the vendor relationships are with us, rather than with our customers.
Other Businesses, Corporate and Eliminations
For the majority of the services we provide through Other Businesses, Corporate and Eliminations, we recognize transactional revenue when the service is provided. We generally earn fees for our post-charge-off consumer debt collection services as a percentage of the amount we collect on delinquent consumer receivables and recognize revenue following collection from the borrowers. We provide customer relationship management services for which we typically earn and recognize revenue on a per-person, per-call or per-minute basis as the related services are performed.
For the information technology (“IT”) infrastructure services we provide to Ocwen Financial Corporation (“Ocwen”), Front Yard Residential Corporation (“RESI”) and Altisource Asset Management Corporation (“AAMC”), we recognize revenue primarily based on the number of users of the applicable systems, fixed fees and the number and type of licensed platforms. We recognize revenue associated with implementation services upon completion and maintenance services ratably over the related service period.
The following table summarizes the impact of adopting Topic 606 on the Company’s condensed consolidated balance sheet as of September 30, 2018:
|
| | | | | | | | | | | | |
| | Impact of the adoption of Topic 606 |
(in thousands) | | As reported | | Adjustments | | Balances without adoption of Topic 606 |
| | | | | | |
Accounts receivable, net | | $ | 46,929 |
| | $ | 789 |
| | $ | 47,718 |
|
Total current assets | | 276,378 |
| | 789 |
| | 277,167 |
|
Total assets | | 829,265 |
| | 789 |
| | 830,054 |
|
| | | | | | |
Other current liabilities | | 7,912 |
| | (2,303 | ) | | 5,609 |
|
Deferred revenue | | 12,955 |
| | (4,048 | ) | | 8,907 |
|
Total current liabilities | | 151,714 |
| | (6,351 | ) | | 145,363 |
|
| | | | | | |
Other non-current liabilities | | 7,866 |
| | 686 |
| | 8,552 |
|
| | | | | | |
Retained earnings | | 603,343 |
| | 6,454 |
| | 609,797 |
|
Altisource equity | | 321,614 |
| | 6,454 |
| | 328,068 |
|
Total equity | | 323,141 |
| | 6,454 |
| | 329,595 |
|
Total liabilities and equity | | 829,265 |
| | 789 |
| | 830,054 |
|
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
The following table summarizes the impact of adopting Topic 606 on the Company’s condensed consolidated statement of operations and comprehensive income for the three months ended September 30, 2018:
|
| | | | | | | | | | | | |
| | Impact of the adoption of Topic 606 |
(in thousands) | | As reported | | Adjustments | | Balances without adoption of Topic 606 |
| | | | | | |
Revenue | | $ | 204,575 |
| | $ | (3,966 | ) | | $ | 200,609 |
|
Cost of revenue | | 147,580 |
| | 392 |
| | 147,972 |
|
Gross profit | | 56,995 |
| | (4,358 | ) | | 52,637 |
|
Income from operations | | 20,918 |
| | (4,358 | ) | | 16,560 |
|
Income before income taxes and non-controlling interests | | 16,129 |
| | (4,358 | ) | | 11,771 |
|
Income tax provision | | (6,608 | ) | | 2,164 |
| | (4,444 | ) |
Net income | | 9,521 |
| | (2,194 | ) | | 7,327 |
|
Net income attributable to Altisource | | 8,667 |
| | (2,194 | ) | | 6,473 |
|
The following table summarizes the impact of adopting Topic 606 on the Company’s condensed consolidated statement of operations and comprehensive income for the nine months ended September 30, 2018:
|
| | | | | | | | | | | | |
| | Impact of the adoption of Topic 606 |
(in thousands) | | As reported | | Adjustments | | Balances without adoption of Topic 606 |
| | | | | | |
Revenue | | $ | 620,569 |
| | $ | (4,757 | ) | | $ | 615,812 |
|
Cost of revenue | | 457,980 |
| | 1,851 |
| | 459,831 |
|
Gross profit | | 162,589 |
| | (6,608 | ) | | 155,981 |
|
Income from operations | | 40,464 |
| | (6,608 | ) | | 33,856 |
|
Income before income taxes and non-controlling interests | | 14,228 |
| | (6,608 | ) | | 7,620 |
|
Income tax provision | | (6,059 | ) | | 2,814 |
| | (3,245 | ) |
Net income | | 8,169 |
| | (3,794 | ) | | 4,375 |
|
Net income attributable to Altisource | | 6,103 |
| | (3,794 | ) | | 2,309 |
|
The adoption of Topic 606 did not have any impact on net cash flows used in operating, financing or investing activities on the Company’s condensed consolidated statement of cash flows for the nine months ended September 30, 2018.
Financial Instruments
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This standard requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. The standard also simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value. It also amends certain financial statement presentation and disclosure requirements associated with the fair value of financial instruments. This standard was effective for the Company on January 1, 2018. The adoption of this standard resulted in a cumulative effect adjustment to increase retained earnings and decrease accumulated other comprehensive income by $0.7 million on January 1, 2018. Changes in the fair value of the Company’s investment in RESI subsequent to January 1, 2018, as well as any equity investments acquired in the future, will be reflected as a component of net income in the Company’s consolidated statements of operations and comprehensive income.
Other Recently Adopted Accounting Pronouncements
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This standard addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This standard was effective for the Company on January 1, 2018, and the adoption of this guidance did not have any effect on the Company’s condensed consolidated statement of cash flows.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This standard requires that companies recognize the income tax consequences of an intra-entity transfer of an asset (other than inventory) when the transfer occurs. Previous guidance prohibited companies from recognizing current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. This standard was effective for the Company on January 1, 2018, and the adoption of this guidance did not have any effect on the Company’s results of operations and financial position.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This standard requires that companies include restricted cash and restricted cash equivalents in their cash and cash equivalent balances in the statement of cash flows. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This standard was effective for the Company on January 1, 2018, and was adopted using the retrospective transition method, as required by the standard. The adoption of this standard resulted in the classification of the Company’s restricted cash with cash and cash equivalents reported in the Company’s condensed consolidated statements of cash flows. As a result, the Company included $5.7 million, $3.8 million, $4.2 million and $4.1 million of restricted cash with cash and cash equivalents in its condensed consolidated statements of cash flows as of September 30, 2018, December 31, 2017, September 30, 2017 and December 31, 2016, respectively.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This standard clarifies the definition of a business and provides a screen to determine if a set of inputs, processes and outputs is a business. The screen requires that when substantially all of the fair value of gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the assets acquired would not be a business. Under the new guidance, in order to be considered a business, an acquisition must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output. In addition, the standard narrows the definition of the term “output” so that it is consistent with how it is described in Topic 606. This standard was effective for the Company on January 1, 2018, and the adoption of this guidance did not have any effect on the Company’s results of operations and financial position.
In February 2017, the FASB issued ASU No. 2017-05, Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. This standard was issued to clarify the scope of Subtopic 610-20, Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets, and to add guidance for partial sales of nonfinancial assets. Subtopic 610-20 provides guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. This standard was effective for the Company on January 1, 2018, and the adoption of this guidance did not have any effect on the Company’s results of operations and financial position.
In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting. This standard provides guidance about which changes to the terms or conditions of a share-based payment award require the application of modification accounting. This standard requires companies to continue to apply modification accounting, unless the fair value, vesting conditions and classification of an award all do not change as a result of the modification. This standard was effective for the Company on January 1, 2018, and the adoption of this guidance did not have any effect on the Company’s results of operations and financial position.
Future Adoption of New Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) and in July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases and ASU No. 2018-11, Leases (Topic 842): Targeted Improvements (collectively “Topic 842”). Topic 842 introduces a new lessee model that brings substantially all leases on the balance sheet. This standard will requirerequires lessees to recognize lease assets and lease liabilities on their balance sheets and disclose key information about leasing arrangements in their financial statements. This standard will beThe Company adopted Topic 842 effective for annual periods beginning after December 15, 2018, including interim periods within that reporting period. Based onJanuary 1, 2019 using the Company’s preliminary analysis of arrangements wheremodified retrospective transition approach. In addition, the Company is a lessee, we estimate thatelected the practical expedients permitted under the transition guidance within the new standard, if implemented asincluding allowing the Company to carry forward its historical lease classification, using hindsight to determine the lease term for existing leases, combining fixed lease and non-lease components and excluding short-term leases. Adoption of September 30, 2018, would havethis new standard resulted in the additionrecognition of approximately $16.8$42.1 million right-of-useof right-to-use assets in premises and equipment, net, $45.5 million of lease obligation liabilities ($16.7 million in other current liabilities and $28.8 million in other non-current liabilities) and reduced accrued rent and lease incentives of $3.4 million in accounts payable and accrued expenses and other non-current liabilities ontoon the Company’saccompanying condensed consolidated balance sheet. The Company will continue to analyze the impactsheets.
Future Adoption of this guidance and refine the estimated impact on its results of operations, financial position and financial disclosures.New Accounting Pronouncements
In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This standard will simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Current guidance requires that companies compute the implied fair value of goodwill under Step 2 by performing procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. This standard will require companies to perform annual or interim goodwill impairment tests by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This standard will be effective for annual periods beginning after December 15, 2019, including interim periods within that reporting period, and will be applied prospectively. Early adoption of this standard is permitted. The Company is currently evaluating the impact this guidance may have on its condensed consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-12, Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts. This standard requires at a minimum the annual review of the assumptions used for liability measurement with the impact of any change recorded in net income, standardizes the liability discount rate with the effect of rate changes recorded in other comprehensive income, requires the measurement of market risk benefits at fair value, simplifies the amortization of deferred acquisition costs and requires enhanced disclosures. This standard will be effective for annual periods beginning after December 15, 2020, including interim periods within that reporting period. Earlystatements; however, adoption of this standard is permitted. The Company is currently evaluatingas of March 31, 2019 would not have had any impact on the impact this guidance may have on itsCompany’s condensed consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. This standard modifies certain disclosure requirements such as the valuation processes for Level 3 fair value measurements. This standard also requires new disclosures such as the disclosure of certain assumptions used to develop significant unobservable inputs for Level 3 fair value measurements. This standard will be effective for annual periods beginning after December 15, 2019, including interim periods within that reporting period. Early adoption of either the entire standard or only the provisions that eliminate or modify requirements is permitted. The Company currently does not expect the adoption of this guidance to have an impact on its results of operations andcondensed consolidated financial position.statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force). This standard aligns the requirements for capitalizing implementation costs in a hosting arrangement service contract with the existing guidance for capitalizing implementation costs incurred for an internal-use software license. This standard also requires capitalizing or expensing implementation costs based on the nature of the costs
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
and the project stage during which they are incurred and establishes additional disclosure requirements. This standard will be effective for annual periods beginning after December 15, 2019, including interim periods within that reporting period. Early adoption of this standard is permitted. The Company currently plans to adopt the standard prospectively and is currently evaluating the impact this guidance may have on its condensed consolidated financial statements.
NOTE 2 — CUSTOMER CONCENTRATION
During the three and nine months ended September 30, 2018, Ocwen
Ocwen was our largest customer, accounting for 53% of our total revenue for the nine months ended September 30, 2018 (56% of our revenue for the third quarter of 2018). OcwenFinancial Corporation (“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, 2019, Ocwen was our largest customer, accounting for 58% of our total revenue. Ocwen purchases certain mortgage services and technology services from us under the terms of services agreements and amendments thereto (collectively, the “Ocwen Services Agreements”) with terms extending through August 2025. Certain of the Ocwen ServiceServices Agreements contain a “most favored nation” provision and also grant the parties the right to renegotiate pricing, among other things. Certain of the Ocwen Service Agreements also prohibit Ocwen from establishing fee-based businesses that would directly or indirectly compete with Altisource’s services with respect to the Homeward Residential, Inc. and Residential Capital, LLC loan portfolios acquired by Ocwen in December 2012 and February 2013, respectively. Ocwen has previously purchased certain origination services from Altisource under an agreement that expires in January 2019, but which is subject to a 90 day termination right by Ocwen.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
Revenue from Ocwen primarily consists of revenue earned from the loan portfolios serviced and subserviced by Ocwen when Ocwen designatesengages us as the service provider, and revenue earned directly from Ocwen.Ocwen, pursuant to the Ocwen Services Agreements. For the ninethree months ended September 30,March 31, 2019 and 2018, and 2017, we recognized revenue from Ocwen of $325.8$98.3 million and $422.1$102.0 million, respectively ($115.0 million and $136.4 million for the third quarter of 2018 and 2017, respectively).respectively. Revenue from Ocwen as a percentage of segment and consolidated revenue was as follows:
|
| | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| | | | | | | | |
Mortgage Market | | 65 | % | | 68 | % | | 62 | % | | 68 | % |
Real Estate Market | | 1 | % | | 1 | % | | 1 | % | | 1 | % |
Other Businesses, Corporate and Eliminations | | 9 | % | | 7 | % | | 9 | % | | 11 | % |
Consolidated revenue | | 56 | % | | 58 | % | | 53 | % | | 58 | % |
58% and 52% for the three months ended March 31, 2019 and 2018, respectively.We earn additional revenue related to the loan portfolios serviced and subserviced by Ocwen when a party other than Ocwen or the MSR owner selects Altisource as the service provider. For the ninethree months ended September 30,March 31, 2019 and 2018, and 2017, we recognized revenue of $37.3$11.1 million and $118.0$15.2 million, respectively, ($11.1 million and $35.1 million for the third quarter of 2018 and 2017, respectively), related to the loan portfolios serviced by Ocwen when a party other than Ocwen or the MSR owner selected Altisource as the service provider. These amounts are not included in deriving revenue from Ocwen and revenue from Ocwen as a percentage of revenue in the table above.
As of September 30,March 31, 2019, accounts receivable from Ocwen totaled $13.3 million, $9.9 million of which was billed and $3.4 million of which was unbilled. As of December 31, 2018, accounts receivable from Ocwen totaled $17.5$15.2 million, $13.9$11.6 million of which was billed and $3.6 million of which was unbilled.
As of DecemberFebruary 22, 2019, Altisource and Ocwen entered into agreements that, among other things, facilitate Ocwen’s transition from REALServicing® and related technologies to another mortgage servicing software platform, establish a process for Ocwen to review and approve the assignment of one or more of our agreements to potential buyers of Altisource’s business lines, permit Ocwen to use service providers other than Altisource for up to 10% of referrals from certain portfolios (determined on a service-by-service basis), subject to certain restrictions, and affirms Altisource’s role as a strategic service provider to Ocwen through August 2025. We do not anticipate that a servicing technology transition would materially impact the other services we provide to Ocwen. For the three months ended March 31, 2017, accounts receivable2019 and 2018, service revenue from Ocwen totaled $18.9REALServicing and related technologies was $8.2 million $13.6and $9.6 million, of which was billed and $5.3 million of which was unbilled.respectively.
As of June 30, 2018, NRZ
New Residential Investment Corp. (individually, together with one or more of its subsidiaries or one or more of its subsidiaries individually, “NRZ”) owned Ocwen-servicedis a residential investment trust that invests in and manages residential mortgage related assets in the United States including MSRs and excess MSRs.
Ocwen has disclosed that NRZ is its largest client. As of December 31, 2018, NRZ owned MSRs or rights to MSRs (the “Subject MSRs”) with underlyingrelating to approximately 57% of loans serviced and subserviced by Ocwen (measured in unpaid principal balances (“UPB”) of $94.7 billion. As of June 30, 2018, Ocwen serviced and subserviced MSRs with underlying UPB of $167.1 billion. As previously disclosed, in) (the “Subject MSRs”). In July 2017 and January 2018, Ocwen and NRZ entered into a series of agreements pursuant to convert NRZ’s economic rightswhich the parties agreed, among other things, to undertake certain actions to facilitate the transfer from Ocwen to NRZ of Ocwen’s legal title to the Subject MSRs into fully-owned MSRs in exchange for payments from NRZ toand under which Ocwen when such Subject MSRs were transferred. The transfers are subject to certain third party consents. Ocwen disclosed that under these agreements, Ocwen wouldwill subservice mortgage loans underlying the transferred Subject MSRs for an initial term of five years, and the agreements provided for the conversion of the existing arrangements into a more traditional subservicing arrangement.
In January 2018, Ocwen disclosed that it and NRZ entered into new agreements to accelerate the implementation of certain parts of their July 2017 arrangement in order to achieve the intent of the July 2017 agreements sooner while Ocwen continues the process of obtaining the third party consents necessary to transfer the Subject MSRs to NRZ.years.
On August 28, 2017, Altisource, through its licensed subsidiaries, entered into a Cooperative Brokerage Agreement, as amended, and related letter agreement (collectively, the “Brokerage Agreement”) with NRZ which extends through August 2025. Under this agreement and related amendments, Altisource remains the exclusive provider of brokerage services for REO associated with the Subject MSRs when Ocwen transfers such MSRs to NRZ or when NRZ acquires both an additional economic interest in such Subject MSRs and the right to designate the broker for REO properties in such portfolios. The Brokerage Agreement provides that Altisource is the exclusive provider of brokerage services for REOreal estate owned (“REO”) associated with the Subject MSRs, irrespective of the sub-servicer.subservicer, subject to certain limitations. NRZ’s brokerage subsidiary receives a cooperative brokerage commission on the sale of certain REO properties from these portfolios subject to certain exceptions.
For the nine months ended September 30, 2018 and 2017, we recognized revenue from NRZ of $24.1 million and $0.8 million, respectively, under the Brokerage Agreement associated with the Subject MSRs transferred from Ocwen to NRZ (the “Transferred MSRs”) ($5.0 million and $0.8 million for the third quarter of 2018 and 2017, respectively). For the nine months ended September 30, 2018 and 2017, we recognized additional revenue of $64.4 million and $1.0 million relating to the Transferred MSRs when a party other than NRZ selects Altisource as the service provider ($21.6 million and $1.0 million for the third quarter of 2018 and 2017, respectively).
On August 28, 2017, Altisource and NRZ also entered into a non-binding Letter of Intent, as amended, to enter into a Services Agreement (the “Services LOI”), setting forth the terms pursuant to which Altisource would remain the exclusive service provider of fee-based services for the Subject MSRs through August 2025. The Services LOI was amended most recently to extend the term through November 15, 2018.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
The Brokerage Agreement can, at Altisource’s discretion, be terminated by Altisource if the Services Agreementa services agreement is not signed by Altisource and NRZ during the term of the Services LOI, as extended.NRZ. The Brokerage Agreement may otherwise only be terminated upon the occurrence of certain specified events. Termination events include, but are not limited to, a breach of the terms of the Brokerage Agreement (including, without limitation, the failure to meet performance standards and non-compliance with law in a material respect), the failure to maintain licenses which failure materially prevents performance of the contract, regulatory allegations of non-compliance resulting in an adversarial proceeding against NRZ, voluntary or involuntary bankruptcy, appointment of a receiver, disclosure in a Form 10-K or Form 10-Q that there is significant uncertainty about Altisource’s ability to continue as a going concern, failure to maintain a specified level of cash and an unapproved change of control.
We anticipate thatFor the three months ended March 31, 2019 and 2018, we recognized revenue from NRZ will increase over timeof $4.0 million and $10.3 million, respectively, under the Brokerage Agreement. For the three months ended March 31, 2019 and 2018, we recognized additional revenue from Ocwen will decrease. Following the anticipated execution of the Services Agreement, we expect that NRZ will become our largest customer. Had all of$17.7 million and $16.1 million, respectively, relating to the Subject MSRs been transferred towhen a party other than NRZ andselects Altisource as the Brokerage Agreement and the Services Agreement with NRZ been in place as of January 1, 2018, we estimate that approximately 48% of our revenue for the nine months ended September 30, 2018 would have been related to NRZ. There can be no assurance that the parties will reach an agreement with respect to the terms of the Services Agreement or that a Services Agreement will be entered into on a timely basis or at all.service provider.
NOTE 3 — SALE OF BUSINESSBUSINESSES AND ASSETS AND LIABILITIES HELD FOR SALE
Rental Property Management Business
In August 2018, Altisource entered into an amendment to its agreements with RESIFront 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. These services were historically provided under an agreement between RESI and Altisource, in which Altisource was the sole provider of rental property management services to RESI through December 2027.2027, subject to certain exceptions. The proceeds from the transaction totaled $18.0 million, payable in two installments. The first installment of $15.0 million was received on the closing date of August 8, 2018. The second installment of $3.0 million will be received on the earlier of a RESI change of control or on August 8, 2023. The second installment was recorded as a long-term receivable with a discounted value of $2.2 million as of September 30, 2018 in Other Assets in the condensed consolidated balance sheets. In connection with the sale of the rental property management business, the Company recognized a pretax gain of $13.7 million in the third quarter of 2018other assets in the accompanying condensed consolidated statementsbalance sheets and has a discounted value of operations$2.3 million and comprehensive income.$2.2 million as of March 31, 2019 and December 31, 2018, respectively.
Financial Services Business
On March 28, 2019, Altisource entered into a definitive agreement to sell its Financial Services business, consisting of its post-charge-off consumer debt collection services and customer relationship management services (the “Financial Services Business”) to Transworld Systems Inc. (“TSI”) for $44.0 million, consisting of an up-front payment of $40.0 million, subject to a working capital adjustment upon closing of the sale, and an additional $4.0 million to be paid on the one year anniversary of the sale closing. In connection with the transaction, the parties will also enter into a transition services agreement that will provide for the management and transition of certain services and technologies to TSI after the sale closes.
Altisource currently estimates it will recognize a pretax gain of more than $20.0 million from the sale, which is anticipated to close before the end of the third quarter 2019, and intends to use the $40.0 million up-front payment, subject to a working capital adjustment, to repay a portion of its senior secured term loan. The sale is subject to closing conditions including the receipt of regulatory consents.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
As a result of entering into a definitive agreement to sell the Financial Services Business, as of March 31, 2019, the assets and liabilities of the Financial Services Business are reported as assets held for sale and liabilities held for sale in the accompanying condensed consolidated balance sheets, and consist of the following:
|
| | | | |
(in thousands) | | March 31, 2019 |
| | |
Accounts receivable, net | | $ | 6,586 |
|
Prepaid expenses and other current assets | | 2,209 |
|
Premises and equipment, net | | 4,073 |
|
Goodwill | | 2,378 |
|
Intangible assets, net | | 10,846 |
|
Other assets | | 465 |
|
Total assets held for sale | | $ | 26,557 |
|
| | |
Accounts payable and accrued expenses | | $ | 4,680 |
|
Other current liabilities | | 1,661 |
|
Other non-current liabilities | | 2,395 |
|
Total liabilities held for sale | | $ | 8,736 |
|
| | |
NOTE 4 — INVESTMENT IN EQUITY SECURITIES
During 2016, we purchased 4.1 million shares of RESI common stock for $48.2 million.stock. This investment is reflected in the accompanying condensed consolidated balance sheets at afair value and changes in fair value are included in other income (expense), net in the accompanying condensed consolidated statements of operations and comprehensive loss. As of March 31, 2019 and December 31, 2018, the fair value of $45.0our investment was $38.4 million as of September 30, 2018 and $49.2$36.2 million, as of December 31, 2017.respectively. During the three and nine months ended September 30,March 31, 2019 and 2018, we recognized an unrealized gain (loss) from the change in fair value of $1.8$2.2 million and $(4.2)$(7.5) million, respectively, on our investment in RESI in other income (expense), net in the condensed consolidated statements of operations and comprehensive income as a result of a change in the market value of RESI common shares.respectively. During the three and nine months ended September 30, 2017, an unrealized gain (loss) on our investment in RESI of $(5.5) millionMarch 31, 2019 and $0.2 million, respectively, net of income tax provision (benefit), was reflected in other comprehensive income in the condensed consolidated statements of operations and comprehensive income (see Note 1 for additional information on the adoption of the new accounting standard on investments in equity securities). During the nine months ended September 30, 2018, and 2017, we earned dividends of $1.9$0.6 million in each period related to this investment ($0.6 million in both the third quarter of 2018 and 2017).investment.
Pursuant to the agreement between Altisource and RESI to sell the rental property management business to RESI (see Note 3 for additional information), Altisource will beis subject to a lock-up period with respect to the sale or transfer of the shares of common stock of RESI owned by Altisource (the “Shares”). During the period between the closing dateeach quarter of the sale and December 31, 2018,2019, Altisource will be restricted from selling any of the Shares. Following the expiration of that period, in each of the four subsequent quarters, Altisource will beis permitted to sell or transfer no more than 25% of the Shares, (approximately 1.0 million shares as of September 30, 2018), provided that any Shares not sold in the applicable quarter will increase the amount that may be sold in the subsequent quarters by 50% of the unsold permitted amount. Thereafter, all transfer restrictions will expire and any remaining Shares will be freely transferable. Notwithstanding these restrictions, Altisource retains the right to sell or transfer the Shares at any time: (i) where Altisource has a good faith belief that its or its affiliates’ liquidity should be increased and the sale is necessary to achieve such an increase; (ii) where the proceeds of sales will be used to finance a strategic acquisition transaction; (iii) in privately negotiated block transactions with unrelated third parties or a similar transaction; or (iv) where RESI is the subject of a tender offer that is reasonably likely to result in a change of control or where RESI undergoes a change of control. Altisource did not sell or transfer any of the Shares during the three months ended March 31, 2019.
NOTE 5 — ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consists of the following:
|
| | | | | | | | |
(in thousands) | | March 31, 2019 | | December 31, 2018 |
| | | | |
Billed | | $ | 27,968 |
| | $ | 35,590 |
|
Unbilled | | 10,780 |
| | 11,759 |
|
| | 38,748 |
| | 47,349 |
|
Less: Allowance for doubtful accounts | | (10,114 | ) | | (10,883 | ) |
| | | | |
Total | | $ | 28,634 |
| | $ | 36,466 |
|
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
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
NOTE 5 — ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consists of the following:
|
| | | | | | | | |
(in thousands) | | September 30, 2018 | | December 31, 2017 |
| | | | |
Billed | | $ | 44,248 |
| | $ | 40,787 |
|
Unbilled | | 14,515 |
| | 22,532 |
|
Subtotal | | 58,763 |
| | 63,319 |
|
Less: Allowance for doubtful accounts | | (11,834 | ) | | (10,579 | ) |
| | | | |
Total | | $ | 46,929 |
| | $ | 52,740 |
|
Unbilled accounts receivable consist primarily of certain real estate asset management and sales 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.
NOTE 6 — PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following:
| | (in thousands) | | September 30, 2018 | | December 31, 2017 | | March 31, 2019 | | December 31, 2018 |
| | | | | | | | |
Short-term investments in real estate | | $ | 51,688 |
| | $ | 29,405 |
| |
Maintenance agreements, current portion | | 3,860 |
| | 8,014 |
| | $ | 3,939 |
| | $ | 5,600 |
|
Income taxes receivable | | 8,354 |
| | 9,227 |
| | 11,880 |
| | 7,940 |
|
Prepaid expenses | | 7,070 |
| | 7,898 |
| | 6,903 |
| | 7,484 |
|
Other current assets | | 10,650 |
| | 10,198 |
| | 6,570 |
| | 9,696 |
|
| | | | | | | | |
Total | | $ | 81,622 |
| | $ | 64,742 |
| | $ | 29,292 |
| | $ | 30,720 |
|
NOTE 7 — DISCONTINUATION OF THE BUY-RENOVATE-LEASE-SELL BUSINESS
On November 26, 2018, the Company announced its plans to sell its short-term investments in real estate (“BRS Inventory”) and discontinue the Company’s Buy-Renovate-Lease-Sell (“BRS”) business. Altisource’s BRS business focuses on buying, renovating, leasing and selling single-family homes to real estate investors. The BRS business is not material in relation to the Company’s results of operations or financial position. In anticipation of receiving the majority of the proceeds from the sale of the BRS Inventory in 2019, the Company repaid $49.9 million of its debt in the fourth quarter of 2018.
NOTE 78 — PREMISES AND EQUIPMENT, NET
Premises and equipment, net consists of the following:
| | (in thousands) | | September 30, 2018 | | December 31, 2017 | | March 31, 2019 | | December 31, 2018 |
| | | | | | | | |
Computer hardware and software | | $ | 181,489 |
| | $ | 179,567 |
| | $ | 177,868 |
| | $ | 182,215 |
|
Office equipment and other | | | 5,264 |
| | 7,384 |
|
Furniture and fixtures | | | 12,222 |
| | 13,313 |
|
Leasehold improvements | | 32,413 |
| | 33,417 |
| | 26,925 |
| | 29,781 |
|
Furniture and fixtures | | 13,438 |
| | 14,092 |
| |
Office equipment and other | | 8,542 |
| | 9,388 |
| |
| | 235,882 |
| | 236,464 |
| | 222,279 |
| | 232,693 |
|
Less: Accumulated depreciation and amortization | | (183,856 | ) | | (163,191 | ) | | (182,882 | ) | | (187,062 | ) |
Net | | | 39,397 |
| | 45,631 |
|
| | | | | | | | |
Total | | $ | 52,026 |
| | $ | 73,273 |
| |
Right-to-use assets under operating leases | | | 39,046 |
| | — |
|
Less: Accumulated depreciation and amortization | | | (3,452 | ) | | — |
|
Net right-to-use assets | | | 35,594 |
| | — |
|
| | | | | |
Total premises and equipment, net | | | $ | 74,991 |
| | $ | 45,631 |
|
Depreciation and amortization expense totaled $24.7$9.4 million and $27.4$8.7 million for the ninethree months ended September 30,March 31, 2019 and 2018, and 2017, respectively, ($7.7 million and $8.5 million for the third quarter of 2018 and 2017, 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 income.loss.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
Premises and equipment, net consist of the following, by country:
|
| | | | | | | | |
(in thousands) | | March 31, 2019 | | December 31, 2018 |
| | | | |
United States | | $ | 34,817 |
| | $ | 25,693 |
|
India | | 20,405 |
| | 3,154 |
|
Luxembourg | | 15,874 |
| | 14,975 |
|
Philippines | | 3,551 |
| | 1,754 |
|
Other | | 344 |
| | 55 |
|
| | | | |
Total | | $ | 74,991 |
| | $ | 45,631 |
|
NOTE 9 — GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill
The change in goodwill during thethree months ended March 31, 2019 is as follows:
|
| | | | |
(in thousands) | | Total |
| | |
Balance as of December 31, 2018 | | $ | 81,387 |
|
Reclassification to net assets held for sale (Note 3) | | (2,378 | ) |
Balance as of March 31, 2019 | | $ | 79,009 |
|
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, 2019 | | December 31, 2018 | | March 31, 2019 | | December 31, 2018 | | March 31, 2019 | | December 31, 2018 |
| | | | | | | | | | | | | | |
Definite lived intangible assets: | | | | | | | | | | | | | | |
Customer related intangible assets | | 8 | | $ | 219,797 |
| | $ | 273,172 |
| | $ | (172,892 | ) | | $ | (207,639 | ) | | $ | 46,905 |
| | $ | 65,533 |
|
Operating agreement | | 20 | | 35,000 |
| | 35,000 |
| | (16,064 | ) | | (15,632 | ) | | 18,936 |
| | 19,368 |
|
Trademarks and trade names | | 15 | | 11,349 |
| | 11,349 |
| | (6,412 | ) | | (6,244 | ) | | 4,937 |
| | 5,105 |
|
Non-compete agreements | | 4 | | 1,230 |
| | 1,230 |
| | (1,103 | ) | | (1,026 | ) | | 127 |
| | 204 |
|
Intellectual property | | 10 | | 300 |
| | 300 |
| | (145 | ) | | (145 | ) | | 155 |
| | 155 |
|
Other intangible assets | | 5 | | 3,745 |
| | 3,745 |
| | (2,645 | ) | | (2,457 | ) | | 1,100 |
| | 1,288 |
|
| | | | | | | | | | | | | | |
Total | | | | $ | 271,421 |
| | $ | 324,796 |
| | $ | (199,261 | ) | | $ | (233,143 | ) | | $ | 72,160 |
| | $ | 91,653 |
|
Amortization expense for definite lived intangible assets was $8.6 million and $7.1 million for three months ended March 31, 2019 and 2018, respectively. Expected annual definite lived intangible asset amortization expense for 2019 through 2023 is $19.6 million, $13.3 million, $10.6 million, $5.3 million and $5.3 million, respectively.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
NOTE 8 — GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill
The following is a summary of goodwill by segment:
|
| | | | | | | | | | | | | | | | |
(in thousands) | | Mortgage Market | | Real Estate Market | | Other Businesses, Corporate and Eliminations | | Total |
| | | | | | | | |
Balance as of December 31, 2017 | | $ | 73,259 |
| | $ | 10,056 |
| | $ | 2,968 |
| | $ | 86,283 |
|
Dispositions(1) | | — |
| | (2,256 | ) | | — |
| | (2,256 | ) |
| | | | | | | | |
Balance as of September 30, 2018 | | $ | 73,259 |
| | $ | 7,800 |
| | $ | 2,968 |
| | $ | 84,027 |
|
| |
(1)
| During the third quarter of 2018, goodwill of $2.3 million attributable to the rental property management business was included in the gain on sale of the rental property management business to RESI (see Note 3). |
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) | | | September 30, 2018 | | December 31, 2017 | | September 30, 2018 | | December 31, 2017 | | September 30, 2018 | | December 31, 2017 |
| | | | | | | | | | | | | | |
Definite lived intangible assets: | | | | | | | | | | | | | | |
Customer related intangible assets | | 10 | | $ | 273,172 |
| | $ | 277,828 |
| | $ | (202,501 | ) | | $ | (188,258 | ) | | $ | 70,671 |
| | $ | 89,570 |
|
Operating agreement | | 20 | | 35,000 |
| | 35,000 |
| | (14,896 | ) | | (13,865 | ) | | 20,104 |
| | 21,135 |
|
Trademarks and trade names | | 14 | | 12,554 |
| | 15,354 |
| | (6,611 | ) | | (8,881 | ) | | 5,943 |
| | 6,473 |
|
Non-compete agreements | | 4 | | 1,230 |
| | 1,560 |
| | (897 | ) | | (897 | ) | | 333 |
| | 663 |
|
Intellectual property | | 10 | | 300 |
| | 300 |
| | (132 | ) | | (115 | ) | | 168 |
| | 185 |
|
Other intangible assets | | 5 | | 3,745 |
| | 3,745 |
| | (2,210 | ) | | (1,706 | ) | | 1,535 |
| | 2,039 |
|
| | | | | | | | | | | | | | |
Total | | | | $ | 326,001 |
| | $ | 333,787 |
| | $ | (227,247 | ) | | $ | (213,722 | ) | | $ | 98,754 |
| | $ | 120,065 |
|
Amortization expense for definite lived intangible assets was $21.3 million and $27.1 million for the nine months ended September 30, 2018 and 2017, respectively ($6.6 million and $8.6 million for the third quarter of 2018 and 2017, respectively). Anticipated annual definite lived intangible asset amortization is $26.9 million in 2018, $20.6 million in 2019, $17.9 million in 2020, $12.5 million in 2021 and $7.3 million in 2022.
NOTE 910 — OTHER ASSETS
Other assets consist of the following:
| | (in thousands) | | September 30, 2018 | | December 31, 2017 | | March 31, 2019 | | December 31, 2018 |
| | | | | | | | |
Security deposits | | $ | 4,063 |
| | $ | 5,304 |
| | $ | 3,575 |
| | $ | 3,972 |
|
Restricted cash | | 5,728 |
| | 3,837 |
| | 3,915 |
| | 5,752 |
|
Other | | 3,906 |
| | 1,054 |
| | 2,704 |
| | 2,682 |
|
| | | | | | | | |
Total | | $ | 13,697 |
| | $ | 10,195 |
| | $ | 10,194 |
| | $ | 12,406 |
|
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
NOTE 1011 — ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accounts payable and accrued expenses consist of the following:
| | (in thousands) | | September 30, 2018 | | December 31, 2017 | | March 31, 2019 | | December 31, 2018 |
| | | | | | | | |
Accounts payable | | $ | 30,065 |
| | $ | 15,682 |
| | $ | 20,908 |
| | $ | 27,853 |
|
Accrued expenses - general | | 31,208 |
| | 27,268 |
| | 24,442 |
| | 27,866 |
|
Accrued salaries and benefits | | 33,153 |
| | 41,363 |
| | 19,156 |
| | 31,356 |
|
Income taxes payable | | 1,981 |
| | 87 |
| | 32 |
| | 165 |
|
| | | | | | | | |
Total | | $ | 96,407 |
| | $ | 84,400 |
| | $ | 64,538 |
| | $ | 87,240 |
|
Other current liabilities consist of the following:
| | (in thousands) | | September 30, 2018 | | December 31, 2017 | | March 31, 2019 | | December 31, 2018 |
| | | | | | | | |
Unfunded cash account balances | | $ | 3,643 |
| | $ | 5,900 |
| | $ | 3,906 |
| | $ | 4,932 |
|
Lease obligation liabilities | | | 15,098 |
| | — |
|
Other | | 4,269 |
| | 3,514 |
| | 1,739 |
| | 2,098 |
|
| | | | | | | | |
Total | | $ | 7,912 |
| | $ | 9,414 |
| | $ | 20,743 |
| | $ | 7,030 |
|
NOTE 1112 — LONG-TERM DEBT
Long-term debt consists of the following:
| | (in thousands) | | September 30, 2018 | | December 31, 2017 | | March 31, 2019 | | December 31, 2018 |
| | | | | | | | |
Senior secured term loans | | $ | 388,760 |
| | $ | 413,581 |
| | $ | 338,822 |
| | $ | 338,822 |
|
Less: Debt issuance costs, net | | (4,080 | ) | | (3,158 | ) | | (3,685 | ) | | (3,855 | ) |
Less: Unamortized discount, net | | (3,696 | ) | | (1,142 | ) | | (3,338 | ) | | (3,491 | ) |
Net long-term debt | | 380,984 |
| | 409,281 |
| | 331,799 |
| | 331,476 |
|
Less: Current portion | | (34,440 | ) | | (5,945 | ) | | (9,222 | ) | | — |
|
| | | | | | | | |
Long-term debt, less current portion | | $ | 346,544 |
| | $ | 403,336 |
| | $ | 322,577 |
| | $ | 331,476 |
|
On April 3, 2018, Altisource Portfolio Solutions S.A. and its wholly-owned subsidiary, Altisource S.à r.l. entered into a credit agreement (the “Credit Agreement”) 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 and the revolving credit facility matures in April 2023. Altisource Portfolio Solutions S.A. and certain subsidiaries are guarantors of the term loan and the revolving credit facility (collectively, the “Guarantors”).
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
Proceeds from the Term B Loans were used to repay the Company’s prior senior secured term loan, which had an outstanding balance of $412.1 million as of April 3, 2018. In connection with the refinancing, we recognized a loss of $4.4 million from the write-off of unamortized debt issuance costs and debt discount in the second quarter of 2018. This loss was included in other income (expense), net in
There are no mandatory repayments of the condensed consolidated statements of operations and comprehensive income.
TheTerm B Loans due until March 2020, when $9.2 million is due to be repaid. Thereafter, the Term B Loans must be repaid in consecutive quarterly principal installments with remaining amounts due as of September 30, 2018 of $1.5$3.1 million, in the fourth quarter of 2018, $41.2 million in 2019, $25.7 million in 2020 and $12.4 million annually thereafter, with the balance due at maturity. During the three months ended September 30, 2018, the Company used the proceeds received from the sale of the rental property management business to RESI (see Note 3) to repay $15.0 million of the Term B Loans. This repayment is applied to contractual amortization payments in the direct order of maturity. 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.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
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 the leverage ratio is greater than 3.00 to 1.00, as calculated in accordance with the provisions of the Credit Agreement (the percentage increases if the leverage ratio exceeds 3.50 to 1.00). Certain mandatory prepayments reduce future contractual amortization payments in direct order of maturity by an amount equal to the mandatory prepayment. No mandatory prepayments were owed for the three months ended September 30, 2018.
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. 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 at September 30, 2018as of March 31, 2019 was 6.39%6.60%.
Loans under the revolving credit facility bear interest at rates based upon, at our option, the Adjusted Eurodollar Rate or the Base Rate. Adjusted Eurodollar Rate revolving loans bear interest at a rate per annum equal to the sum of (i) the Adjusted Eurodollar Rate for a three month interest period plus (ii) 4.00%. Base Rate revolving loans bear interest at a rate per annum equal to the sum of (i) the Base Rate plus (ii) 3.00%. The unused commitment fee is 0.50%. There were no borrowings outstanding under the revolving credit facility as of September 30, 2018.March 31, 2019.
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 restrictions relating to subsidiary dividends and distributions; make changes to our fiscal year; and engage in mergers and consolidations; and to the extent any Revolving Credit Loans are outstanding on the last day of a fiscal quarter, permit the Total Leverage Ratio to be greater than 3.50:1.00 as of the last day of such fiscal quarter, subject to a customary cure provision (the “Revolving Financial Covenant”).
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) a breach of the Revolving Financial Covenant, subject to a customary cure provision and not an Event of Default with respect to the Term Loans unless and until the Required Revolving Lenders accelerate the Revolving Credit Loans, (v) failure to pay principal or interest on any other debt that equals or exceeds $40.0 million when due, (vi) 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, (vii) occurrence of a Change of Control, (viii) bankruptcy and insolvency events, (ix) 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, (x) the occurrence of certain ERISA events and (xi) 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.
At September 30, 2018, debt issuance costs were $4.1 million, net of $0.5 million of accumulated amortization. At December 31, 2017, debt issuance costs related to the prior term loans were $3.2 million, net of $7.1 million of accumulated amortization.
During the nine months ended September 30, 2017, we repurchased portions of our prior senior secured term loan with an aggregate par value of $50.1 million at a weighted average discount of 12.2%, recognizing a net gain of $5.4 million on the early extinguishment of debt (repurchased aggregate par value of $24.1 million at a weighted average discount of 7.5%, recognizing a net gain of $1.5 million on the early extinguishment of debt for the third quarter of 2017). There were no similar repurchases in 2018. The net gain was included in other income (expense), net in the condensed consolidated statements of operations and comprehensive income.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
As of March 31, 2019, debt issuance costs were $3.7 million, net of $0.9 million of accumulated amortization. As of December 31, 2018, debt issuance costs were $3.9 million, net of $0.7 million of accumulated amortization.
NOTE 1213 — OTHER NON-CURRENT LIABILITIES
Other non-current liabilities consist of the following:
| | (in thousands) | | September 30, 2018 | | December 31, 2017 | | March 31, 2019 | | December 31, 2018 |
| | | | | | | | |
Lease obligation liabilities | | | $ | 23,202 |
| | $ | — |
|
Income tax liabilities | | $ | 5,227 |
| | $ | 5,955 |
| | 7,109 |
| | 7,069 |
|
Deferred revenue | | 21 |
| | 2,101 |
| | 52 |
| | 19 |
|
Other non-current liabilities | | 2,618 |
| | 4,226 |
| | 404 |
| | 2,090 |
|
| | | | | | | | |
Total | | $ | 7,866 |
| | $ | 12,282 |
| | $ | 30,767 |
| | $ | 9,178 |
|
NOTE 1314 — 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 September 30, 2018March 31, 2019 and December 31, 2017.2018. The following fair values are estimated using market information and what the Company believes to be appropriate valuation methodologies under GAAP:
| | | | September 30, 2018 | | December 31, 2017 | | March 31, 2019 | | December 31, 2018 |
(in thousands) | | Carrying amount | | Fair value | | Carrying amount | | Fair value | | Carrying amount | | Fair value | | Carrying amount | | Fair value |
| | | | Level 1 | | Level 2 | | Level 3 | | | | Level 1 | | Level 2 | | Level 3 | | | | Level 1 | | Level 2 | | Level 3 | | | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 102,860 |
| | $ | 102,860 |
| | $ | — |
| | $ | — |
| | $ | 105,006 |
| | $ | 105,006 |
| | $ | — |
| | $ | — |
| | $ | 51,509 |
| | $ | 51,509 |
| | $ | — |
| | $ | — |
| | $ | 58,294 |
| | $ | 58,294 |
| | $ | — |
| | $ | — |
|
Restricted cash | | 5,728 |
| | 5,728 |
| | — |
| | — |
| | 3,837 |
| | 3,837 |
| | — |
| | — |
| | 3,915 |
| | 3,915 |
| | — |
| | — |
| | 5,752 |
| | 5,752 |
| | — |
| | — |
|
Investment in equity securities | | 44,967 |
| | 44,967 |
| | — |
| | — |
| | 49,153 |
| | 49,153 |
| | — |
| | — |
| | 38,419 |
| | 38,419 |
| | — |
| | — |
| | 36,181 |
| | 36,181 |
| | — |
| | — |
|
Long-term receivable (Note 3) | | 2,165 |
| | — |
| | — |
| | 2,165 |
| | — |
| | — |
| | — |
| | — |
| | 2,258 |
| | — |
| | — |
| | 2,258 |
| | 2,221 |
| | — |
| | — |
| | 2,221 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Long-term debt | | 388,760 |
| | — |
| | 388,760 |
| | — |
| | 413,581 |
| | — |
| | 407,377 |
| | — |
| |
Senior secured term loan | | | 338,822 |
| | — |
| | 328,657 |
| | — |
| | 338,822 |
| | — |
| | 330,351 |
| | — |
|
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.
Investment in equity securities is carried at fair value and consistsconsist of 4.1 million shares of RESI common stock. The investment in equity securities is measured using Level 1 inputs as this security has athese securities have quoted priceprices in an active market.markets.
The fair value of our long-term debtsenior 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 the rental property management business in August 2018, Altisource received cash proceeds of $15.0 million on the closing date and will receive $3.0 million on the earlier of a RESI change of control or on August 8, 2023 (see Note 3 for additional information). We measure long-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 derives over 50% of its revenues from Ocwen (see Note 2 for additional information on Ocwen revenues and accounts receivable
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
balance). The Company mitigates 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 1415 — 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, which replaced2017. Under the previous share repurchase program. Weprogram, 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 September 30, 2018,March 31, 2019, approximately 4.23.4 million shares of common stock remain available for repurchase under the program. We purchased 0.8 millionThere were no purchases of shares of common stock at an average price of $27.48 per share during the ninethree months ended September 30, 2018 and 1.1March 31, 2019. We purchased 0.4 million shares at an average price of $22.48$27.67 per share during the ninethree months ended September 30, 2017 (21 thousand shares at an average price of $30.93 per share for the third quarter of 2018 and 0.3 million shares at an average price of $23.48 per share for the third quarter of 2017).March 31, 2018. Luxembourg law limits share repurchases to the balance of Altisource Portfolio Solutions S.A. (unconsolidated parent company) retained earnings, less the costvalue of shares previously repurchased. As of September 30, 2018,March 31, 2019, we can repurchase up to approximately $141$107 million of our common stock under Luxembourg law. TheOur Credit Agreement also limits the amount we can spend on share repurchases, which was approximately $477$459 million as of September 30, 2018,March 31, 2019, and may prevent repurchases in certain circumstances.
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 $6.2$2.6 million and $3.2$2.2 million for the ninethree months ended September 30,March 31, 2019 and 2018, and 2017, respectively ($2.0 million and $1.4 million for the third quarter of 2018 and 2017, respectively).respectively. As of September 30, 2018,March 31, 2019, estimated unrecognized compensation costs related to share-based awards amounted to $11.2$17.3 million, which we expect to recognize over a weighted average remaining requisite service period of approximately 1.891.87 years.
In connection with the January 1, 2017 adoption of ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, the Company made an accounting policy election to account for forfeitures in compensation expense as they occur, rather than continuing to apply the Company’s previous policy of estimating forfeitures. Prior to this accounting change, share-based compensation expense for stock options and restricted shares was recognized net of estimated forfeiture rates ranging from 0% to 40%. This policy election resulted in a cumulative effect adjustment of $0.9 million to retained earnings and additional paid-in capital as of January 1, 2017 using the modified retrospective transition method.
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 expire on the earlier of ten years after the date of grant or following termination of service. A total of 518497 thousand service-based awards were outstanding as of September 30, 2018.March 31, 2019.
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 awards 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 659638 thousand market-based awards were outstanding as of September 30, 2018.March 31, 2019.
Performance-Based Options.These option grants generally begin to vest upon the achievement of certain specific financial measures. Generally, the awards begin vesting if the performance criteria are achieved; one-fourth vestvests on each anniversary of the grant date. For certain other financial measures, awards cliff-vest upon the achievement of the specific performance during the period from 20182019 through 2021. 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 have the opportunity to vest in 50% to 200% of the option grants, depending upon performance achieved. If the
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
performance criteria achieved is below a certain threshold, the award is canceled. The options expire on the earlier of ten years after the date of grant or following termination of service. There were 282506 thousand performance-based awards outstanding as of September 30,March 31, 2019.
There were no stock option grants during the three months ended March 31, 2019. Outstanding stock options increased by 228 thousand in February 2019 in connection with the determination of the level of achievement for certain performance-based options
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
granted in 2018.
The Company granted 272 During the three months ended March 31, 2018, 261 thousand stock options (at a weighted average exercise price of $25.06$24.95 per share) and 216 thousand stock options (at a weighted average exercise price of $34.07 per share) during the nine months ended September 30, 2018 and 2017, respectively.were granted.
The fair values of the service-based options and performance-based options wereare determined using the Black-Scholes option pricing model and the fair values of the market-based options were determined using a lattice (binomial) model. The following assumptions were used to determine the fair values as of the grant date:
|
| | | | | | | | | | | | |
| | NineThree months ended September 30,March 31, 2018 | | Nine months ended
September 30, 2017 |
| | Black-Scholes | | Binomial | | Black-Scholes | | Binomial |
| | | | | | | | |
Risk-free interest rate (%) | | 2.66 – 2.982.70 |
| | 1.641.65 – 2.83 |
| | 1.89 – 2.29 |
| | 0.77 – 2.382.77 |
|
Expected stock price volatility (%) | | 70.31 – 71.8671.81 |
| | 71.81 – 71.86 |
| | 61.49 – 71.31 |
| | 66.68 – 71.31 |
|
Expected dividend yield | | — |
| | — |
| | — |
| | — |
|
Expected option life (in years) | | 6.00 – 6.25 |
| | 2.56 – 4.32 |
| | 6.00 – 7.50 |
| | 2.55 – 4.32 |
|
Fair value | | $16.17 – $19.06$17.15 |
| | $14.6715.58 – $18.28 |
| | $13.57 – $24.80 |
| | $11.94 – $24.30 |
|
We determined the expected option life of all service-based stock option grants using the simplified method. 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 weighted average grant date fair value of stock options granted per share, the total intrinsic value of stock options exercised and the grant date fair value of stock options that vested during the periods presented:
| | | | Nine months ended September 30, | | Three months ended March 31, |
(in thousands, except per share amounts) | | 2018 | | 2017 | | 2019 | | 2018 |
| | | | | | | | |
Weighted average grant date fair value of stock options granted per share | | $ | 16.27 |
| | $ | 20.95 |
| | $ | — |
| | $ | 16.20 |
|
Intrinsic value of options exercised | | 4,584 |
| | 2,524 |
| | 10 |
| | 4,320 |
|
Grant date fair value of stock options that vested | | 1,598 |
| | 2,063 |
| | 2,182 |
| | 23 |
|
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 at December 31, 2017 | 1,745,906 |
| | $ | 28.20 |
| | 4.96 | | $ | 10,202 |
|
Granted | 271,876 |
| | 25.06 |
| | | | |
Exercised | (326,737 | ) | | 11.24 |
| | | | |
|
Forfeited | (232,247 | ) | | 32.47 |
| | | | |
|
| | | | | | | |
Outstanding at September 30, 2018 | 1,458,798 |
| | 30.73 |
| | 5.40 | | 10,053 |
|
| | | | | | | |
Exercisable at September 30, 2018 | 886,720 |
| | 27.18 |
| | 3.67 | | 7,364 |
|
During the second quarter of 2018, the Company modified the performance thresholds that are required to be met in order for vesting to occur for 263 thousand stock options granted to 16 employees in the first quarter of 2018. The award modification did not change the inputs into the valuation model or the Company’s assessment of the probability of vesting as of the effective date of the modifications. Consequently, no incremental compensation expense was required as a result of this modification.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
|
| | | | | | | | | | | | |
| Number of options | | Weighted average exercise price | | Weighted average contractual term (in years) | | Aggregate intrinsic value (in thousands) |
| | | | | | | |
Outstanding as of December 31, 2018 | 1,440,566 |
| | $ | 30.78 |
| | 5.04 | | $ | 945 |
|
Performance criteria achieved | 227,849 |
| | 24.98 |
| | | | |
Exercised | (1,500 | ) | | 18.79 |
| | | | |
|
Forfeited | (25,583 | ) | | 61.40 |
| | | | |
|
| | | | | | | |
Outstanding as of March 31, 2019 | 1,641,332 |
| | 29.51 |
| | 5.14 | | 1,339 |
|
| | | | | | | |
Exercisable as of March 31, 2019 | 1,007,222 |
| | 27.10 |
| | 3.41 | | 1,270 |
|
Other Share-Based Awards
The Company’s other share-based and similar types of awards are composed of restricted shares and, beginning in 2018, restricted share units. The restricted shares and restricted share units are composed of a combination of service-based awards and performance-based awards.
Service-Based Awards. These awards generally vest over one to four years with (a) vesting in equal annual installments, (b) vesting of all of the restricted shares and restricted share units at the end of the vesting period or (c) vesting beginning after two years of service. A total of 455631 thousand service-based awards were outstanding as of September 30, 2018.March 31, 2019.
Performance-Based Awards.These awards generally begin to vest upon the achievement of certain specific financial measures. Generally, the awards begin vesting if the performance criteria are achieved; one-third vestvests 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 will be based on the level of achievement, as specified in the award agreements. If the performance
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
criteria achieved is above thresholdcertain financial performance levels and Altisource’s share performance is above certain established criteria, participants have the opportunity to vest in 80%up to 150%225% of the restricted share unit award for certain awards, depending on performance level achieved. If the performance criteria achieved is below a certain threshold, the award is canceled. A total of four140 thousand performance-based awards were outstanding as of September 30, 2018.March 31, 2019.
The Company granted 318359 thousand restricted shares and restricted share units (at a weighted average grant date fair value of $25.51$25.02 per share) during the ninethree months ended September 30, 2018.March 31, 2019.
The following table summarizes the activity related to our restricted shares and restricted share units:
|
| | |
| Number of restricted shares and restricted share units |
| |
Outstanding atas of December 31, 20172018 | 356,509485,806 |
|
Granted | 317,524358,978 |
|
Issued | (99,50031,025 | ) |
Forfeited/canceled | (115,30143,231 | ) |
| |
Outstanding at September 30, 2018as of March 31, 2019 | 459,232770,528 |
|
During the third quarter of 2018, the Company modified the vesting condition to remove the requirement that a certain employee be employed by the Company in order for the restricted shares to vest for 31 thousand restricted shares granted in the fourth quarter of 2017 and the first quarter of 2018. The award modification did not change the inputs into the valuation model or the Company’s assessment of the probability of vesting as of the effective date of the modifications. Consequently, no incremental compensation expense was required as a result of this modification.
NOTE 1516 — REVENUE
Revenue includesWe 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 and sales of short-term investments in real estate. 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. Lenders One is included in revenue and reduced from net income to arrive at net income attributable to Altisource (see Note 1).
Our services are primarily provided to customers located in the United States. The components of revenue were as follows:follows for the three months ended March 31:
|
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | | 2018 | | 2017 | | 2018 | | 2017 |
| | | | | | | | |
Service revenue | | $ | 196,906 |
| | $ | 224,308 |
| | $ | 594,533 |
| | $ | 692,254 |
|
Reimbursable expenses | | 6,815 |
| | 9,866 |
| | 23,970 |
| | 31,786 |
|
Non-controlling interests | | 854 |
| | 805 |
| | 2,066 |
| | 2,107 |
|
| | | | | | | | |
Total | | $ | 204,575 |
| | $ | 234,979 |
| | $ | 620,569 |
| | $ | 726,147 |
|
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
As discussed in Note 1, the Company adopted Topic 606 effective January 1, 2018 using the cumulative effect method. |
| | | | | | | | |
(in thousands) | | 2019 | | 2018 |
| | | | |
Service revenue | | $ | 164,999 |
| | $ | 188,766 |
|
Reimbursable expenses | | 4,496 |
| | 8,147 |
|
Non-controlling interests | | 440 |
| | 525 |
|
| | | | |
Total | | $ | 169,935 |
| | $ | 197,438 |
|
Disaggregation of Revenue
Disaggregation of total revenues by segment and major source is as follows:
|
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2018 |
(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 |
| | | | | | | | |
Mortgage Market: | | | | | | | | |
Servicer Solutions | | $ | 135,395 |
| | $ | 20,565 |
| | $ | 6,530 |
| | $ | 162,490 |
|
Origination Solutions | | 11,223 |
| | 2,160 |
| | 87 |
| | 13,470 |
|
Total Mortgage Market | | 146,618 |
| | 22,725 |
| | 6,617 |
| | 175,960 |
|
| | | | | | | | |
Real Estate Market: | | | | | | | | |
Consumer Real Estate Solutions | | 2,693 |
| | — |
| | — |
| | 2,693 |
|
Real Estate Investor Solutions | | 10,132 |
| | — |
| | 185 |
| | 10,317 |
|
Total Real Estate Market | | 12,825 |
| | — |
| | 185 |
| | 13,010 |
|
| | | | | | | | |
Other Businesses, Corporate and Eliminations | | 14,138 |
| | 1,454 |
| | 13 |
| | 15,605 |
|
Total revenue | | $ | 173,581 |
| | $ | 24,179 |
| | $ | 6,815 |
| | $ | 204,575 |
|
|
| | | | | | | | | | | | | | | | |
| | Nine months ended September 30, 2018 |
(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 |
| | | | | | | | |
Mortgage Market: | | | | | | | | |
Servicer Solutions | | $ | 404,015 |
| | $ | 57,363 |
| | $ | 22,592 |
| | $ | 483,970 |
|
Origination Solutions | | 30,651 |
| | 7,138 |
| | 201 |
| | 37,990 |
|
Total Mortgage Market | | 434,666 |
| | 64,501 |
| | 22,793 |
| | 521,960 |
|
| | | | | | | | |
Real Estate Market: | | | | | | | | |
Consumer Real Estate Solutions | | 6,410 |
| | — |
| | 2 |
| | 6,412 |
|
Real Estate Investor Solutions | | 44,882 |
| | — |
| | 1,141 |
| | 46,023 |
|
Total Real Estate Market | | 51,292 |
| | — |
| | 1,143 |
| | 52,435 |
|
| | | | | | | | |
Other Businesses, Corporate and Eliminations | | 41,785 |
| | 4,355 |
| | 34 |
| | 46,174 |
|
Total revenue | | $ | 527,743 |
| | $ | 68,856 |
| | $ | 23,970 |
| | $ | 620,569 |
|
|
| | | | | | | | | | | | | | | | |
(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 |
| | | | | | | | |
Three months ended March 31, 2019 | | $ | 147,755 |
| | $ | 17,684 |
| | $ | 4,496 |
| | $ | 169,935 |
|
Three months ended March 31, 2018 | | 166,956 |
| | 22,335 |
| | 8,147 |
| | 197,438 |
|
Contract Balances
Our contract assets consist of unbilled accounts receivable (see Note 5). Our contract liabilities consist of current deferred revenue as reported on the accompanying condensed consolidated balance sheets and non-current deferred revenue (see Note 12)13). Revenue recognized that was included in the contract liability at the beginning of the period, including amounts added to the contract liability as part of the cumulative effect of adopting Topic 606, was $6.1$4.9 million and $17.4$5.9 million for the three and nine months ended September 30,March 31, 2019 and 2018, respectively.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
NOTE 1617 — COST OF REVENUE
Cost of revenue principally includes payroll and employee benefits associated with personnel employed in customer service and operations roles, fees paid to external providers related to the provision of services, cost of real estate sold, reimbursable expenses, technology and telecommunications costs as well as depreciation and amortization of operating assets. The components of cost of revenue were as follows:follows for the three months ended March 31:
| | | | Three months ended September 30, | | Nine months ended September 30, | | | | | |
(in thousands) | | 2018 | | 2017 | | 2018 | | 2017 | | 2019 | | 2018 |
| | | | | | | | | | | | |
Compensation and benefits | | $ | 49,707 |
| | $ | 60,332 |
| | $ | 159,342 |
| | $ | 186,090 |
| | $ | 41,368 |
| | $ | 54,866 |
|
Outside fees and services | | 73,096 |
| | 83,670 |
| | 207,073 |
| | 250,883 |
| | 62,581 |
| | 65,098 |
|
Cost of real estate sold | | 1,092 |
| | 4,411 |
| | 17,591 |
| | 16,461 |
| | 2,094 |
| | 3,179 |
|
Technology and telecommunications | | 10,230 |
| | 10,389 |
| | 30,533 |
| | 32,681 |
| | 8,509 |
| | 9,451 |
|
Reimbursable expenses | | 6,815 |
| | 9,866 |
| | 23,970 |
| | 31,786 |
| | 4,496 |
| | 8,147 |
|
Depreciation and amortization | | 6,640 |
| | 6,230 |
| | 19,471 |
| | 20,343 |
| | 5,056 |
| | 6,453 |
|
| | | | | | | | | | | | |
Total | | $ | 147,580 |
| | $ | 174,898 |
| | $ | 457,980 |
| | $ | 538,244 |
| | $ | 124,104 |
| | $ | 147,194 |
|
NOTE 1718 — SELLING, GENERAL AND ADMINISTRATIVE EXPENSES AND OTHER OPERATING EXPENSES
Selling, general and administrative expenses include payroll and employee benefits associated with personnel employed in executive, finance, law, compliance, human resources, vendor management, facilities, risk management, sales and marketing 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:follows for three months ended March 31:
| | | | Three months ended September 30, | | Nine months ended September 30, | | | | | |
(in thousands) | | 2018 | | 2017 | | 2018 | | 2017 | | 2019 | | 2018 |
| | | | | | | | | | | | |
Compensation and benefits | | $ | 11,991 |
| | $ | 15,068 |
| | $ | 37,757 |
| | $ | 43,115 |
| | $ | 11,353 |
| | $ | 13,569 |
|
Amortization of intangible assets | | | 8,647 |
| | 7,147 |
|
Occupancy related costs | | 7,428 |
| | 8,536 |
| | 23,051 |
| | 28,347 |
| | 3,908 |
| | 8,434 |
|
Amortization of intangible assets | | 6,620 |
| | 8,604 |
| | 21,311 |
| | 27,143 |
| |
Marketing costs | | 4,267 |
| | 3,992 |
| | 11,852 |
| | 11,958 |
| | 2,932 |
| | 3,607 |
|
Professional services | | 4,915 |
| | 3,886 |
| | 12,469 |
| | 11,983 |
| | 5,476 |
| | 3,226 |
|
Depreciation and amortization | | 1,054 |
| | 2,286 |
| | 5,272 |
| | 7,068 |
| | 4,313 |
| | 2,268 |
|
Other | | 10,054 |
| | 4,250 |
| | 20,665 |
| | 17,179 |
| | 4,611 |
| | 4,873 |
|
| | | | | | | | | | | | |
Total | | $ | 46,329 |
| | $ | 46,622 |
| | $ | 132,377 |
| | $ | 146,793 |
| | $ | 41,240 |
| | $ | 43,124 |
|
NOTE 1819 — OTHER INCOME (EXPENSE), NET
Other income (expense), net consists of the following:following for the three months ended March 31:
| | | | Three months ended September 30, | | Nine months ended September 30, | | | | | |
(in thousands) | | 2018 | | 2017 | | 2018 | | 2017 | | 2019 | | 2018 |
| | | | | | | | | | | | |
Loss on debt refinancing | | $ | — |
| | $ | — |
| | $ | (4,434 | ) | | $ | — |
| |
Gain on early extinguishment of debt | | — |
| | 1,482 |
| | — |
| | 5,419 |
| |
Interest income | | 224 |
| | 27 |
| | 455 |
| | 169 |
| | $ | 151 |
| | $ | 131 |
|
Other, net | | (70 | ) | | 988 |
| | 1,544 |
| | 2,427 |
| | 223 |
| | 1,141 |
|
| | | | | | | | | | | | |
Total | | $ | 154 |
| | $ | 2,497 |
| | $ | (2,435 | ) | | $ | 8,015 |
| | $ | 374 |
| | $ | 1,272 |
|
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
NOTE 1920 — EARNINGS PER SHARE
Basic earnings per share (“EPS”) is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the assumed conversion of all dilutive securities using the treasury stock method.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
Basic and diluted EPS are calculated as follows:follows for the three months ended March 31:
| | | | Three months ended September 30, | | Nine months ended September 30, | | | | | |
(in thousands, except per share data) | | 2018 | | 2017 | | 2018 | | 2017 | | 2019 | | 2018 |
| | | | | | | | | | | | |
Net income attributable to Altisource | | $ | 8,667 |
| | $ | 6,961 |
| | $ | 6,103 |
| | $ | 22,541 |
| |
Net loss attributable to Altisource | | | $ | (3,184 | ) | | $ | (4,132 | ) |
| | | | | | | | | | | | |
Weighted average common shares outstanding, basic | | 17,033 |
| | 18,023 |
| | 17,184 |
| | 18,337 |
| | 16,292 |
| | 17,378 |
|
Dilutive effect of stock options, restricted shares and restricted share units | | 542 |
| | 406 |
| | 485 |
| | 517 |
| |
| | | | | | | | | | | | |
Weighted average common shares outstanding, diluted | | 17,575 |
| | 18,429 |
| | 17,669 |
| | 18,854 |
| | 16,292 |
| | 17,378 |
|
| | | | | | | | | | | | |
Earnings per share: | | | | | | | | | |
Loss per share: | | | | | |
Basic | | $ | 0.51 |
| | $ | 0.39 |
| | $ | 0.36 |
| | $ | 1.23 |
| | $ | (0.20 | ) | | $ | (0.24 | ) |
Diluted | | $ | 0.49 |
| | $ | 0.38 |
| | $ | 0.35 |
| | $ | 1.20 |
| | $ | (0.20 | ) | | $ | (0.24 | ) |
For the ninethree months ended September 30,March 31, 2019 and 2018, and 2017, 0.3 million options in each period were anti-dilutive and 0.5 million options, respectively (0.1 million options and 0.9 million options for the third quarter of 2018 and 2017, respectively), werehave been excluded from the computation of diluted EPS because they were anti-dilutive since their exercise price was greater than the average market price of our common stock. Also excluded from the computation of diluted EPS for the nine months ended September 30, 2018 and 2017 were 0.5are 0.8 million options, restricted shares and restricted share units and 0.3 million options and restricted shares, respectively (0.5 million options, restricted shares and restricted share units and 0.4 million options and restricted shares for the third quarter ofthree months ended March 31, 2019 and 0.6 million options for the three months ended March 31, 2018, and 2017, respectively), which begin to vest upon the achievement of certain market criteria related to our common stock price, performance criteria and an annualized rate of return to shareholders that have not yet been met. Furthermore, as a result of the net loss attributable to Altisource for the three months ended March 31, 2019 and 2018, 0.3 million and 0.5 million, respectively, of total options, restricted share units and restricted shares were excluded from the computation of diluted EPS, as their impact was anti-dilutive.
NOTE 2021 — RESTRUCTURING CHARGES
In August 2018, Altisource initiated Project Catalyst, a restructuring planproject intended to optimize our operations and reduce costs to better align our cost structure with our anticipated revenues and improve our operating margins. During the three months ended September 30, 2018,March 31, 2019, we incurred $3.4$4.4 million of severance costs and professional services fees related to the restructuring plan.reorganization plan (no comparative amount for the three months ended March 31, 2018). We expect to incur additional severance costs, facility shut-down costs and professional services feesrelated costs through 2019 in connection with this restructuringinternal reorganization and will expense those costs as incurred. Based on our preliminary analysis, we currently anticipate the future costs relating to the restructuringinternal reorganization plan to be in the range of approximately $25$13 million to $35$17 million. We currently anticipate annual run-rate operating expense reductions in the range of approximately $65 million to $90 million following completion of the restructuring plan; however, this range could materially change based on business and/or other factors.
NOTE 2122 — 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
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
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.
As previously disclosed, the Company received a Notice and Opportunity to Respond and Advise (“NORA”) letter on November 10, 2016 from the Consumer Financial Protection Bureau (“CFPB”) indicating that the CFPB was considering a potential enforcement action against Altisource relating to an alleged violation of federal law focused on the REALServicing® platform and certain other technology services provided to Ocwen, including claims related to the features, functioning and support of such technology. The NORA process provides the recipient an opportunity to present its positions to the CFPB before an enforcement action is recommended or commenced. On December 5, 2016, we provided a written response to the NORA letter setting forth the legal, policy and factual reasons why we believe an enforcement action is not warranted. By letter dated April 3, 2018, the CFPB informed the Company that the investigation of the Company has been completed and the staff of the CFPB’s Office of Enforcement currently does not intend to recommend that the CFPB take enforcement action, and further that the Company is relieved of the document-retention obligations pursuant to the civil investigative process.
Sales Taxes
On June 21, 2018, the United States Supreme Court rendered a 5-4 majority decision in South Dakota v. Wayfair, Inc., holding that a state may require a remote seller with no physical presence in the state to collect and remit sales tax on goods and services provided to purchasers in the state, overturning certain existing court precedent. TheDuring the three months ended March 31, 2019, the Company is analyzingcompleted the analysis of its services for potential exposure to sales tax in various jurisdictions in the United States and believes that the Company has a related estimated probable loss of $5.9 million. As a result, theStates. The Company recognized a $5.9$2.1 million loss infor the third quarterthree months ended March 31, 2019 (no comparative amount for the three
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
months ended March 31, 2018) in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations and comprehensive income.loss, in addition to the $6.2 million loss recorded in 2018. The Company began invoicing, collecting and remitting sales tax in applicable jurisdictions in 2019. The Company is also in the process of developing a solution that will enable it to invoice, collect and remit sales tax in the applicable jurisdictions. The Company is also analyzing what rights, if any, it has to seekseeking reimbursement for sales tax payments from clients. Asclients; however, there can be no assurance that the Company completes its evaluationwill be successful in collecting some or all of potentialsuch reimbursements. Future changes in our estimated sales tax exposure the Company may increase its accrual for sales tax exposure and recognize additional losses, which are not currently estimable. These additional losses could result in a material adjustment to our condensed consolidated financial statements which would impact our financial condition and results of operations.
Ocwen Related Matters
As discussed in Note 2, during the three and nine months ended September 30, 2018,March 31, 2019, Ocwen was our largest customer, accounting for 53%58% of our total revenue for the nine months ended September 30, 2018 (56%revenue. Additionally, 7% of our revenue for the third quarter of 2018). Additionally, 6% of our revenue for the ninethree months ended September 30, 2018 (5% of our revenue for the third quarter of 2018)March 31, 2019 was earned on the loan portfolios serviced by Ocwen, when a party other than Ocwen or the MSR owner selected Altisource as the service provider.
Ocwen has disclosed that it is subject to a number of ongoing federal and state regulatory examinations, cease and desist orders, consent orders, inquiries, subpoenas, civil investigative demand,demands, requests for information and other actions and is subject to pending legal proceedings, some of which include claims against Ocwen for substantial monetary damages. For example, on May 15, 2017, Ocwen disclosed that on April 20, 2017, the CFPBConsumer Financial Protection Bureau and the State of Florida filed separate complaints in the United States District Court for the Southern District of Florida against Ocwen alleging violations of Federal consumer financial law and, in the case of Florida, Florida statutes. As another example, on May 15, 2017, Ocwen also disclosed that on April 28, 2017, the Commonwealth of Massachusetts filed a lawsuit against Ocwen in the Superior Court for the Commonwealth of Massachusetts alleging violations of state consumer financial laws relating to Ocwen’s servicing business, including lender-placed insurance and property preservation fees. Ocwen disclosed that the complaints seek to obtain permanent injunctive relief, consumer redress, refunds, restitution, disgorgement, damages, civil penalties, costs and fees and other relief. The foregoing or other matters could result in, and in some cases, have resulted in, adverse regulatory or other actions against Ocwen. Previous regulatory actions against Ocwen resulted in subjecting Ocwen to independent oversight of its operations and placing certain restrictions on its ability to acquire servicing rights.
In addition to the above, Ocwen may become subject to future federal and state regulatory investigations, cease and desist orders, consent orders, inquiries, subpoenas, civil investigative demands, requests for information, other matters or legal proceedings, any of which could also result in adverse regulatory or other actions against Ocwen.
Ocwen has disclosed that NRZ is its largest client. As of December 31, 2018, NRZ owned MSRs or rights to MSRs relating to approximately 57% of loans serviced and subserviced by Ocwen (measured in UPB). In July 2017 and January 2018, Ocwen and NRZ entered into a series of agreements pursuant to which the parties agreed, among other things, to undertake certain actions to facilitate the transfer from Ocwen to NRZ of Ocwen’s legal title to the Subject MSRs and under which Ocwen will subservice mortgage loans underlying the Subject MSRs for an initial term of five years. NRZ can terminate its sub-servicing agreement with Ocwen in exchange for the payment of a termination fee.
The foregoing 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 (including IT and software services), it may be required to seek changes to its existing pricing structure with us, it may lose its non-GSEnon-government-sponsored enterprise (“GSE”) servicing rights or subservicing arrangements or may lose one or more of its state servicing or origination licenses. Additional
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
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 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 lower 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 or all of its remaining non-GSE servicing rights or subservicing arrangements and Altisource fails to be retained as a service provider
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. However, in the event one or more of these events materially negatively impact Altisource, we believe the variable nature of our
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
cost structure would allow us to realign our cost structure in line with remaining revenue. Furthermore, in the event of a significant reduction in the volume of services purchased or loan portfolios serviced by Ocwen (such as a transfer of Ocwen’s remaining servicing rights to a successor servicer), we believe the impact to Altisource could occur over an extended period of time. During this period, we believe that we will continue to generate revenue from all or a portion of Ocwen’s loan portfolios.
Our Servicer Solutions, Origination Solutions, Consumer Real Estate Solutions and Real Estate Investor Solutions businessesWe are focused on diversifying and growing our revenue and customer base and we have a sales and marketing strategy to support theseour businesses. Management believes our plans, together with current liquidity and cash flows from operations, would be sufficient to meet our working capital, capital expenditures, debt service and other cash needs. However, there can be no assurance that our plans will be successful or our operations will be profitable.
Additionally, Ocwen has notified us, disclosedLeases
We lease certain premises and equipment, primarily consisting of office space and information technology equipment. Effective January 1, 2019, we adopted the provisions of Topic 842, resulting in its filingsrecognition of $42.1 million of right-to-use assets in premises and statedequipment, net and $45.5 million of lease obligation liabilities (see Note 1). Certain of our leases include options to renew at our discretion or terminate leases early, and these options are considered in connection with resolving several state administrative actions discussed above, that it plans to transition from REALServicing to another mortgage servicing software platform. Furthermore, Ocwen disclosed in its filings that its acquisition of PHH Corporation is expected to accelerate its transition to a new servicing platform. Altisource has been negotiating with Ocwen the terms of a potential terminationour determination of the REALServicing services in connection with Ocwen’s planned transition to a new servicing platform. Weexpected lease term. Certain of our lease agreements include rental payments adjusted periodically for inflation. Our lease agreements generally do not anticipate that a servicing technology transition would materially impact the other services we providecontain any material residual value guarantees or material restrictive covenants. We sublease certain office space to Ocwen. For the nine months ended September 30, 2018 and 2017, service revenue from REALServicingthird parties. Sublease income was $19.5$0.4 million and $20.1 million, respectively ($7.6 million and $6.7$0.5 million for the third quarterthree months ended March 31, 2019 and 2018, respectively. The depreciable life of 2018right-to-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 2017, respectively).our discount rate assumption is as follows:
|
| | | |
| | As of March 31, 2019 |
| | |
Weighted average remaining lease term (in years) | | 3.36 |
|
Weighted average discount rate | | 7.25 | % |
Our lease activity during the above,period is as follows:
|
| | | | |
(in thousands) | | Three months ended March 31, 2019 |
| | |
Operating lease costs: | | |
Selling, general and administrative expense | | $ | 2,880 |
|
Cost of revenue | | 858 |
|
| | |
Cash used in operating activities for amounts included in the measurement of lease liabilities | | 4,737 |
|
Short-term (less than one year) lease costs | | 1,157 |
|
Maturities of our lease liabilities as of June 30, 2018, NRZ owned the Subject MSRs with underlying UPB of $94.7 billion. As of June 30, 2018, Ocwen serviced and subserviced MSRs with underlying UPB of $167.1 billion. As previously disclosed, in July 2017, Ocwen and NRZ entered into agreements to convert NRZ’s economic rights to the Subject MSRs into fully-owned MSRs in exchange for payments from NRZ to Ocwen when such Subject MSRs were transferred. The transfersMarch 31, 2019 are subject to certain third party consents. Ocwen disclosed that under these agreements, Ocwen would subservice the transferred Subject MSRs for an initial term of five years, and the agreements provided for the conversion of the existing arrangements into a more traditional subservicing arrangement. In January 2018, Ocwen disclosed that it and NRZ entered into new agreements to accelerate the implementation of certain parts of their July 2017 arrangement in order to achieve the intent of the July 2017 agreements sooner while Ocwen continues the process of obtaining the third party consents necessary to transfer the Subject MSRs to NRZ.as follows:
On August 28, 2017, Altisource, through certain of its licensed subsidiaries, entered into the Brokerage Agreement with NRZ which extends through August 2025. Under this agreement and related amendments, Altisource remains the exclusive provider of brokerage services for REO associated with the Subject MSRs when Ocwen transfers such MSRs to NRZ or when NRZ acquires both an additional economic interest in such Subject MSRs and the right to designate the broker for REO properties in such portfolios. The Brokerage Agreement provides that Altisource is the exclusive provider of brokerage services for REO associated with the Subject MSRs, irrespective of the sub-servicer. NRZ’s brokerage subsidiary receives a cooperative brokerage commission on the sale of certain REO properties from these portfolios subject to certain exceptions.On August 28, 2017, Altisource and NRZ also entered into the Services LOI, setting forth the terms pursuant to which Altisource would remain the exclusive service provider of fee-based services for the Subject MSRs through August 2025. The Services LOI was amended most recently to extend the term through November 15, 2018. |
| | | | |
(in thousands) | | Operating lease liabilities |
| | |
2019 | | $ | 13,130 |
|
2020 | | 14,583 |
|
2021 | | 9,593 |
|
2022 | | 5,694 |
|
2023 | | 3,465 |
|
Thereafter | | 1,330 |
|
Total lease payments | | 47,795 |
|
Less interest | | (5,596 | ) |
Present value of lease liabilities | | $ | 42,199 |
|
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
The Brokerage Agreement can be terminated by Altisource if the Services Agreement is not signed by Altisource and NRZ during the term of the Services LOI, as extended. The Brokerage Agreement may otherwise only be terminated upon the occurrence of certain specified events. Termination events include, but are not limited to, a breach of the terms of the Brokerage Agreement (including, without limitation, the failure to meet performance standards and non-compliance with law in a material respect), the failure to maintain licenses which failure materially prevents performance of the contract, regulatory allegations of non-compliance resulting in an adversarial proceeding against NRZ, voluntary or involuntary bankruptcy, appointment of a receiver, disclosure in a Form 10-K or Form 10-Q that there is significant uncertainty about Altisource’s ability to continue as a going concern, failure to maintain a specified level of cash and an unapproved change of control.
We anticipate that revenue from NRZ will increase over time and revenue from Ocwen will decrease. Following the anticipated execution of the Services Agreement, we expect that NRZ will become our largest customer. Had all of the Subject MSRs been transferred to NRZ and the Brokerage Agreement and the Services Agreement with NRZ been in place as of January 1, 2018, we estimate that approximately 48% of our revenue for the nine months ended September 30, 2018 would have been related to NRZ. There can be no assurance that the parties will reach an agreement with respect to the terms of the Services Agreement or that a Services Agreement will be entered into on a timely basis or at all.
Escrow and Trust Balances
We hold customers’ assets in escrow and trust accounts at various financial institutions pending completion of certain real estate activities. We also hold cash in trust accounts at various financial institutions where contractual obligations mandate maintaining dedicated bank accounts for our asset recovery management business’s collections. These amounts are held in escrow and trust accounts for limited periods of time and are not included in the accompanying condensed consolidated balance sheets. Amounts held in escrow and trust accounts were $24.2$25.0 million and $35.1$23.6 million at September 30, 2018as of March 31, 2019 and December 31, 2017,2018, 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.
We report our operations through two reportable segments: Mortgage Market and Real Estate Market. In addition, we report Other Businesses, Corporate and Eliminations separately. The Mortgage Market segment provides loan servicers and originators with marketplaces, services and technologies that span the mortgage lifecycle. The Real Estate Market segment provides real estate consumers and rental property investors with marketplaces and services that span the real estate lifecycle. In addition, the Other Businesses, Corporate and Eliminations segment includes businesses that provide post-charge-off consumer debt collection services primarily to debt originators (e.g., credit card, auto lending and retail credit), customer relationship management services primarily to the utility, insurance and hotel industries and IT infrastructure management services. Other Businesses, Corporate and Eliminations also includes interest expense and costs related to corporate support functions including executive, finance, law, compliance, human resources, vendor management, facilities, risk management, and sales and marketing costs not allocated to the business units as well as eliminations between the 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 September 30, 2018 |
(in thousands) | | Mortgage Market | | Real Estate Market | | Other Businesses, Corporate and Eliminations | | Consolidated Altisource |
| | | | | | | | |
Revenue | | $ | 175,960 |
| | $ | 13,010 |
| | $ | 15,605 |
| | $ | 204,575 |
|
Cost of revenue | | 113,636 |
| | 15,883 |
| | 18,061 |
| | 147,580 |
|
Gross profit (loss) | | 62,324 |
| | (2,873 | ) | | (2,456 | ) | | 56,995 |
|
Operating expenses (income): | | | | | | | | |
Selling, general and administrative expenses | | 21,155 |
| | 5,188 |
| | 19,986 |
| | 46,329 |
|
Gain on sale of business | | — |
| | (13,688 | ) | | — |
| | (13,688 | ) |
Restructuring charges | | 901 |
| | 74 |
| | 2,461 |
| | 3,436 |
|
Income (loss) from operations | | 40,268 |
| | 5,553 |
| | (24,903 | ) | | 20,918 |
|
Total other income (expense), net | | 74 |
| | 22 |
| | (4,885 | ) | | (4,789 | ) |
| | | | | | | | |
Income (loss) before income taxes and non-controlling interests | | $ | 40,342 |
| | $ | 5,575 |
| | $ | (29,788 | ) | | $ | 16,129 |
|
|
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2017 |
(in thousands) | | Mortgage Market | | Real Estate Market | | Other Businesses, Corporate and Eliminations | | Consolidated Altisource |
| | | | | | | | |
Revenue | | $ | 199,262 |
| | $ | 22,121 |
| | $ | 13,596 |
| | $ | 234,979 |
|
Cost of revenue | | 137,466 |
| | 23,497 |
| | 13,935 |
| | 174,898 |
|
Gross profit (loss) | | 61,796 |
| | (1,376 | ) | | (339 | ) | | 60,081 |
|
Selling, general and administrative expenses | | 28,006 |
| | 4,208 |
| | 14,408 |
| | 46,622 |
|
Income (loss) from operations | | 33,790 |
| | (5,584 | ) | | (14,747 | ) | | 13,459 |
|
Total other income (expense), net | | 26 |
| | — |
| | (3,128 | ) | | (3,102 | ) |
| | | | | | | | |
Income (loss) before income taxes and non-controlling interests | | $ | 33,816 |
| | $ | (5,584 | ) | | $ | (17,875 | ) | | $ | 10,357 |
|
|
| | | | | | | | | | | | | | | | |
| | Nine months ended September 30, 2018 |
(in thousands) | | Mortgage Market | | Real Estate Market | | Other Businesses, Corporate and Eliminations | | Consolidated Altisource |
| | | | | | | | |
Revenue | | $ | 521,960 |
| | $ | 52,435 |
| | $ | 46,174 |
| | $ | 620,569 |
|
Cost of revenue | | 340,038 |
| | 62,628 |
| | 55,314 |
| | 457,980 |
|
Gross profit (loss) | | 181,922 |
| | (10,193 | ) | | (9,140 | ) | | 162,589 |
|
Operating expenses (income): | | | | | | | | |
Selling, general and administrative expenses | | 65,133 |
| | 14,486 |
| | 52,758 |
| | 132,377 |
|
Gain on sale of business | | — |
| | (13,688 | ) | | — |
| | (13,688 | ) |
Restructuring charges | | 901 |
| | 74 |
| | 2,461 |
| | 3,436 |
|
Income (loss) from operations | | 115,888 |
| | (11,065 | ) | | (64,359 | ) | | 40,464 |
|
Total other income (expense), net | | 86 |
| | 36 |
| | (26,358 | ) | | (26,236 | ) |
| | | | | | | | |
Income (loss) before income taxes and non-controlling interests | | $ | 115,974 |
| | $ | (11,029 | ) | | $ | (90,717 | ) | | $ | 14,228 |
|
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
|
| | | | | | | | | | | | | | | | |
| | Nine months ended September 30, 2017 |
(in thousands) | | Mortgage Market | | Real Estate Market | | Other Businesses, Corporate and Eliminations | | Consolidated Altisource |
| | | | | | | | |
Revenue | | $ | 614,180 |
| | $ | 67,314 |
| | $ | 44,653 |
| | $ | 726,147 |
|
Cost of revenue | | 421,942 |
| | 72,484 |
| | 43,818 |
| | 538,244 |
|
Gross profit (loss) | | 192,238 |
| | (5,170 | ) | | 835 |
| | 187,903 |
|
Selling, general and administrative expenses | | 86,493 |
| | 14,084 |
| | 46,216 |
| | 146,793 |
|
Income (loss) from operations | | 105,745 |
| | (19,254 | ) | | (45,381 | ) | | 41,110 |
|
Total other income (expense), net | | 138 |
| | — |
| | (8,985 | ) | | (8,847 | ) |
| | | | | | | | |
Income (loss) before income taxes and non-controlling interests | | $ | 105,883 |
| | $ | (19,254 | ) | | $ | (54,366 | ) | | $ | 32,263 |
|
|
| | | | | | | | | | | | | | | | |
(in thousands) | | Mortgage Market | | Real Estate Market | | Other Businesses, Corporate and Eliminations | | Consolidated Altisource |
| | | | | | | | |
Total assets: | | |
| | |
| | |
| | |
|
September 30, 2018 | | $ | 258,814 |
| | $ | 118,549 |
| | $ | 451,902 |
| | $ | 829,265 |
|
December 31, 2017 | | 304,346 |
| | 64,624 |
| | 496,194 |
| | 865,164 |
|
Our services are primarily provided to customers located in the United States. Premises and equipment, net consist of the following, by country:
|
| | | | | | | | |
(in thousands) | | September 30, 2018 | | December 31, 2017 |
| | | | |
United States | | $ | 29,824 |
| | $ | 46,268 |
|
Luxembourg | | 16,065 |
| | 16,688 |
|
India | | 4,273 |
| | 8,136 |
|
Philippines | | 1,792 |
| | 2,038 |
|
Uruguay | | 72 |
| | 143 |
|
| | | | |
Total | | $ | 52,026 |
| | $ | 73,273 |
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis of financial condition and results of operations (“MD&A”) is a supplement to the accompanying interim condensed consolidated financial statements and is intended to provide a reader of our financial statements with a narrative from the perspective of management on our businesses, current developments, financial condition, results of operations and liquidity. Our MD&A should be read in conjunction with our Form 10-K for the year ended December 31, 20172018 filed with the Securities and Exchange Commission (“SEC”) on February 22, 2018.26, 2019.
FORWARD-LOOKING STATEMENTS
Certain statements in thisThis Form 10-Q regarding anticipated financial outcomes, business and market conditions, outlook and other similarcontains forward-looking statements related to Altisource’s future financial and operational performance are “forward-looking statements” made pursuant towithin the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by the use of terminologyrelate to, among other things, future events or our future performance or financial condition. Words such as “anticipate,” “intend,” “expect,” “may,” “could,” “should,” “would,” “plan,” “estimate,” “believe,” “predict,” “potential” or “continue” or the negative of these terms and other comparable terminology. Forward-lookingterminology are intended to identify such forward-looking statements. Such statements are based on expectations as to the future and are not statements of historical fact. Furthermore, forward-looking statements are not guarantees of future performance and involve a number of assumptions, risks and uncertainties that could cause actual results to differ materially. The following are examples of such items and are not intended to be all inclusive:
assumptions related to sources of liquidity and the adequacy of financial resources;
assumptions about our ability to grow our business, including executing on our strategic initiatives;
assumptions about our ability to improve margins and anticipated expense reductions as a result of Project Catalyst;
assumptions regarding the impact of seasonality;
estimates regarding our effective tax rate; and
estimates regarding our reserves and valuations.
Important factors that could cause actual results to differ materially from those suggested by the forward-looking statements include, but are not limited to, the risks discussed in “Risk Factors” in Part II, Item 1A, Risk Factorsof thethis Form 10-Q for the quarterly period ended June 30, 2018 and the “Risk Factors”Risk Factors section of our Form 10-K for the year ended December 31, 20172018 and includeincluding, but not limited to, the following:
our ability to retain Ocwen Financial Corporation (“Ocwen”) as a customer or our ability to receive the anticipated volume of referrals from Ocwen;
our ability to reach agreement withretain New Residential Investment Corp. (individually, together with one or more of its subsidiaries, or one or more of its subsidiaries individually, “NRZ”) onas a customer or our ability to receive the anticipated volume of referrals from NRZ;
our ability to close the Financial Services Agreement orbusiness disposition transaction with Transworld Systems Inc. (“TSI”), including the possibilitytiming and satisfaction of termination ofclosing conditions and delays in obtaining regulatory consents in connection with the Cooperative Brokerage Agreement, as amended, and related letter agreement (collectively, the “Brokerage Agreement”);transaction;
our ability to comply with material agreements if a change of control is deemed to have occurred including, among other things, through the formation of a shareholder group, this may cause a termination event or event of default under certain of our agreements;
our ability to execute on our strategic businesses;
our ability to retain our existing customers, expand relationships and attract new customers;
the level of loan delinquencies and charge-offs;
the level of origination volume;
technology failures;
the outsourcing trends;
our ability to raise debt;
our ability to retain our directors, executive officers and key personnel;
our ability to integrate acquired businesses;
our ability to comply with, and burdens imposed by, governmental regulations and policies and any changes in such regulations and policies; and
significant changes in tax regulations and interpretations in the countries, states and local jurisdictions in which we operate.
We caution the reader not to place undue reliance on these forward-looking statements as they reflect our view only as of the date
of this report. We are under no obligation (and expressly disclaim any obligation) to update or alter any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
OVERVIEW
Our Business
When we refer to “Altisource,” the “Company,” “we,” “us” or “our” we mean Altisource Portfolio Solutions S.A., a Luxembourg société anonyme, or public limited liability company, and its subsidiaries.
We are 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.
OurEffective January 1, 2019, the Company reorganized its internal reporting structure in connection with Project Catalyst, a project initiated in August 2018 to optimize our operations and reduce costs to better align our cost structure with our anticipated revenues and improve our operating margins. The internal reorganization included, among other changes, the replacement of segment presidents with a chief operating officer, who is responsible for products, services and operations for the Company’s Mortgage Market and Real Estate Market businesses, reporting to our Chief Executive Officer (our chief operating decision maker) who manages our businesses, regularly reviews operating results and profitability, allocates resources and evaluates performance on a consolidated basis. Prior to January 1, 2019, the Company reported our operations through two reportable segments are as follows:
segments: Mortgage Market: MarketProvides and Real Estate Market. In addition, we reported Other Businesses, Corporate and Eliminations separately. The prior year presentation has been reclassified to conform to the current year presentation.
We provide loan servicers and originators with marketplaces, services and technologies that span the mortgage lifecycle. Within the Mortgage Market segment, we provide:
Servicer Solutions - the solutions, services and technologies typically used or licensed primarily by residential loan servicers.
|
| | |
• Property preservation and inspection services
• Real estate brokerage and auction services
• Title insurance (agent and related services) and settlement services
• Appraisal management services, valuation data, broker and non-broker valuation services
• Foreclosure trustee services
• Residential and commercial loan servicing technologies
| | • Vendor management, marketplace transaction management and payment management technologies
• Document management platform
• Default services (real estate owned (“REO”), foreclosure, bankruptcy, eviction) technologies
• Mortgage charge-off collections
• Residential and commercial construction inspection and risk mitigation services
|
Origination Solutions - the solutions, services and technologies typically used or licensed by loan originators (or other similar mortgage market participants) in originating, buying and selling residential mortgages.
|
| | |
• Title insurance (agent and related services) and settlement services
• Appraisal management services, valuation data, broker and non-broker valuation services
• Fulfillment services
• Loan origination system
| | • Document management platform
• Certified loan insurance, certification services and mortgage fraud insurance
• Vendor management oversight platform
• Mortgage banker cooperative management
• Mortgage trading platform
|
Real Estate Market: ProvidesWe provide real estate consumers and rental property investors with marketplaces and services that span the real estate lifecycle. Within the Real Estate Market segment, we provide:Our offerings include:
Consumer Real Estate Solutions - the solutions,Field Services
Property preservation and inspection services, including vendor management, marketplace transaction management, payment management technologies and technologies typically used by home buyers and sellers to handle key aspects of buying and selling a residence.vendor management oversight software-as-a-service (“Saas”) platform
|
| | |
• | • RealHubzu® online real estate auction, real estate brokerage and asset management
|
| |
• | Equator®, a SaaS based technology to manage real estate owned (“REO”), short sales, foreclosure, bankruptcy and eviction processes |
Professional Services
Mortgage origination loan fulfillment, certification and certification insurance services and technologies
Title insurance (as an agent), settlement and valuation services
Residential and commercial construction inspection and risk mitigation services
| |
• | Management of Best Partners Mortgage Cooperative, Inc., doing business as Owners.comLenders One® • Title insurance (agent and related services) and settlement services
| | • Mortgage brokerage
• Homeowners insurance (“Lenders One”) mortgage banking cooperative
|
Foreclosure trustee services
Real Estate Investor Solutions - the solutions, services and technologies used by buyers and sellers of single-family investment homes.Earlier Stage Businesses
|
| | |
• | • Buy-renovate-lease-sell
• Property preservation and inspection services
• RealOwners.com® technology-enabled real estate brokerage and auctionprovider of related mortgage brokerage and title services
• Data solutions
| | • Title insurance (agent and related services) and settlement services
• Appraisal management services, valuation data, broker and non-broker valuation services
|
Other Businesses, Corporate and Eliminations: Includes certain ancillary businesses, interest expense and unallocated costs related to corporate support functions. The businesses in this segment include post-charge-off consumer debt collection services, customer relationship management services and information technology (“IT”) infrastructure management services. Interest expense relates to the Company’s senior secured term loan and corporate support functions include executive, finance, law, compliance, human
resources, vendor management, facilities, risk management and sales and marketing costs not allocated to the business units. This segment also includes eliminations of transactions between the reportable segments.
| |
• | Pointillist® customer journey analytics platform |
We classify revenue in three categories: service revenue, revenue from reimbursable expenses and non-controlling interests. In evaluating our performance, we focus on service revenue. Service revenue consists of amounts attributable to our fee-based services and sales of short-term investments in real estate. 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 Best Partners Mortgage Cooperative, Inc., doing business as Lenders One® (“Lenders One”).One. Lenders One is a mortgage cooperative managed, but not owned, by Altisource. Lenders One is included in revenue and reduced from net income to arrive at net income attributable to Altisource.
Strategy and Growth Businesses
We are focused on becoming one of the premier providers of mortgage and real estate marketplaces and related services to a broad and diversified customer base. Within the mortgage and real estate market segments,Through our suite of offerings described above, we facilitate transactions and provide products,
solutions and services related to home sales, home purchases, home rentals, home maintenance, mortgage originations and mortgage servicing.
Each Our suite of our strategic businesses providesofferings provide Altisource the potential to grow and diversify our customer and revenue base. We believe these businesseswe operate in very large markets and directly leverage our core competencies and distinct competitive advantages. A further description of our four strategic businesses follows.
Servicer Solutions:
Through this business,our offerings that support residential loan servicers, we provide a suite of services and technologies intended to meet thetheir growing and evolving and growing needs of loan servicers.needs. We are focused on growing referrals from our existing customer base, expanding the service and proprietary technology offerings to our customer base and attracting new customers to our offerings. We have a customer base that includes Ocwen, a government-sponsored enterprise (“GSE”), NRZ, several large bank and non-bank servicers and asset managers. We believe we are one of only a few providers with a broad suite of servicer solutions, nationwide coverage and demonstrated scalability. Further, we believe we are well positioned to gain market share as delinquency rates rise and as existing customers and prospects consolidate to larger, full-service providers and outsource services that have historically been performed in-house.
Origination Solutions:
Through this business, weWe also provide services to loan originators (or other similar mortgage market participants) in originating, buying and selling residential mortgages. We provide a suite of services and technologies to meet the evolving and growing needs of lenders, mortgage purchasers and securitizers. We are focused on growingattempting to grow referrals from our existing customer base expanding the service and proprietary technology offerings to our customer base, and attractingattract new customers to our offerings. We have a customer base that includes the Lenders One cooperative mortgage bankers the Mortgage Builder® loan origination system customers and mid-size and larger bank and non-bank loan originators. We believe our suite of services and technologies positionpositions us to grow our relationships with our existing customer base by providing additional products, services and solutions to these customers. Further, we believe we are well positioned to attract new customers as prospects consolidate to larger, full-service providers and outsource services that have historically been performed in-house.
Consumer Real Estate Solutions:
We are also continuing to develop our earlier stage businesses, including Owners.com and Pointillist. Through this business,our Owners.com brokerage, we provide real estate buyers and sellers with a technology enabledtechnology-enabled real estate brokerage and the integrated services to support them in buying and selling a home. Our offerings include local real estate agent services, and loan brokerage, as well asand closing and title services. Pointillist, which was developed by Altisource through our consumer analytics capabilities, is a potentially disruptive SaaS-based platform that provides unique customer journey analytics at scale and enables customers to engage through our intelligent platform. We are focused on continuing to develop this businessthese businesses by capitalizing on Altisource’s experience in online real estate marketing, and loan origination services as well as on more recently developed agile execution competencies.
Real Estate Investor Solutions:
Through this business, we provide a suite of services and technologies to support buyers and sellers of single-family investment homes, including our purchase, renovation, leasing and sale of short-term investments in real estate. We are focused on growing referrals from our existing customer base, expanding the service and proprietary technology offerings to our customer base, and attracting new customers to our offerings. We have a customer base that includes Front Yard Residential Corporation (“RESI”) and other institutional and smaller single-family rental investors. The single-family rental market is large, geographically distributed and has fragmented ownership. We believe our acquisition, renovation, property management, leasing and disposition platform provides a strong value proposition for institutional and retail investors and positions us well for growth.
There can be no assurance that growth from some or all of our strategic businesses will be successful or our operations will be profitable.analytics.
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, which replaced2017. Under the previous share repurchase program. Weprogram, 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 September 30, 2018,March 31, 2019, approximately 4.23.4 million shares of common stock remain available for repurchase under the program. We purchased 0.8 millionThere were no purchases of shares of common stock at an average price of $27.48 per share during the ninethree months ended September 30, 2018 and 1.1March 31, 2019. We purchased 0.4 million shares at an average price of $22.48$27.67 per share during the ninethree months ended September 30, 2017 (21 thousand shares at an average price of $30.93 per share for the third quarter of 2018 and 0.3 million shares at an average price of $23.48 per share for the third quarter of 2017).March 31, 2018. Luxembourg law limits share repurchases to the balance of Altisource Portfolio Solutions S.A. (unconsolidated parent company) retained earnings, less the costvalue of shares previously repurchased. As of September 30, 2018,March 31, 2019, we can repurchase up to approximately $141$107 million of our common stock under Luxembourg law. The credit agreement (“Our Credit Agreement”) with Morgan Stanley Senior Funding, Inc.Agreement also limits the amount we can spend on share repurchases, which was approximately $477$459 million as of September 30, 2018,March 31, 2019, and may prevent repurchases in certain circumstances.
Ocwen Related Matters
During the three and nine months ended September 30, 2018,March 31, 2019, Ocwen was our largest customer, accounting for 53%58% of our total revenue for the nine months ended September 30, 2018 (56%revenue. Additionally, 7% of our revenue for the third quarter of 2018). Additionally, 6% of our revenue for the ninethree months ended September 30, 2018 (5% of our revenue for the third quarter of 2018)March 31, 2019 was earned on the loan portfolios serviced by Ocwen, when a party other than Ocwen or the mortgage servicing rights (“MSRs”) owner selected Altisource as the service provider.
Ocwen has disclosed that it is subject to a number of ongoing federal and state regulatory examinations, cease and desist orders, consent orders, inquiries, subpoenas, civil investigative demand,demands, requests for information and other actions and is subject to pending legal proceedings, some of which include claims against Ocwen for substantial monetary damages. For example, on May 15, 2017, Ocwen disclosed that on April 20, 2017, the Consumer Financial Protection Bureau (“CFPB”) and the State of Florida filed separate complaints in the United States District Court for the Southern District of Florida against Ocwen alleging violations of Federal consumer financial law and, in the case of Florida, Florida statutes. As another example, on May 15, 2017, Ocwen also disclosed that on April 28, 2017, the Commonwealth of Massachusetts filed a lawsuit against Ocwen in the Superior Court for the Commonwealth of Massachusetts alleging violations of state consumer financial laws relating to Ocwen’s servicing business, including lender-placed insurance and property preservation fees. Ocwen disclosed that the complaints seek to obtain permanent injunctive relief, consumer redress, refunds, restitution, disgorgement, damages, civil penalties, costs and fees and other relief. The foregoing or other matters could result in, and in some cases, have resulted in, adverse regulatory or other actions against Ocwen. Previous regulatory actions against Ocwen resulted in subjecting Ocwen to independent oversight of its operations and placing certain restrictions on its ability to acquire servicing rights.
In addition to the above, Ocwen may become subject to future federal and state regulatory investigations, cease and desist orders, consent orders, inquiries, subpoenas, civil investigative demands, requests for information, other matters or legal proceedings, any of which could also result in adverse regulatory or other actions against Ocwen.
Ocwen has disclosed that NRZ is its largest client. As of December 31, 2018, NRZ owned MSRs or rights to MSRs relating to approximately 57% of loans serviced and subserviced by Ocwen (measured in unpaid principal balances) (the “Subject MSRs”). In July 2017 and January 2018, Ocwen and NRZ entered into a series of agreements pursuant to which the parties agreed, among other things, to undertake certain actions to facilitate the transfer from Ocwen to NRZ of Ocwen’s legal title to the Subject MSRs and under which Ocwen will subservice mortgage loans underlying the Subject MSRs for an initial term of five years. NRZ can terminate its sub-servicing agreement with Ocwen in exchange for the payment of a termination fee.
The foregoing 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 (including IT and software services), it may be required to seek changes to its existing pricing structure with us, it may lose its non-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 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 lower 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 or all of its remaining non-GSE servicing rights or subservicing arrangements and Altisource fails to be retained as a service provider
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. However, in the event one or more of these events materially negatively impact Altisource, we believe the variable nature of our cost structure would allow us to realign our cost structure in line with remaining revenue. Furthermore, in the event of a significant reduction in the volume of services purchased or loan portfolios serviced by Ocwen (such as a transfer of Ocwen’s remaining servicing rights to a successor servicer), we believe the impact to Altisource could occur over an extended period of time. During this period, we believe that we will continue to generate revenue from all or a portion of Ocwen’s loan portfolios.
Our Servicer Solutions, Origination Solutions, Consumer Real Estate Solutions and Real Estate Investor Solutions businessesWe are focused on diversifying and growing our revenue and customer base and we have a sales and marketing strategy to support theseour businesses. Management believes our plans, together with current liquidity and cash flows from operations, would be sufficient to meet our working capital, capital expenditures, debt service and other cash needs. However, there can be no assurance that our plans will be successful or our operations will be profitable.
Additionally, Ocwen has notified us, disclosed in its filings and stated in connection with resolving several state administrative actions discussed above, that it plans to transition from REALServicing to another mortgage servicing software platform. Furthermore, Ocwen disclosed in its filings that its acquisition of PHH Corporation is expected to accelerate its transition to a new servicing platform. Altisource has been negotiating with Ocwen the terms of a potential termination of the REALServicing services in connection with Ocwen’s planned transition to a new servicing platform. We do not anticipate that a servicing technology transition would materially impact the other services we provide to Ocwen. For the nine months ended September 30, 2018 and 2017, service revenue from REALServicing was $19.5 million and $20.1 million, respectively ($7.6 million and $6.7 million for the third quarter of 2018 and 2017, respectively).
In addition to the above, as of June 30, 2018, NRZ owned Ocwen-serviced MSRs and rights to MSRs (the “Subject MSRs”) with underlying unpaid principal balances (“UPB”) of $94.7 billion. As of June 30, 2018, Ocwen serviced and subserviced MSRs with underlying UPB of $167.1 billion. As previously disclosed, in July 2017, Ocwen and NRZ entered into agreements to convert NRZ’s economic rights to the Subject MSRs into fully-owned MSRs in exchange for payments from NRZ to Ocwen when such Subject MSRs were transferred. The transfers are subject to certain third party consents. Ocwen disclosed that under these agreements, Ocwen would subservice the transferred Subject MSRs for an initial term of five years, and the agreements provided for the conversion of the existing arrangements into a more traditional subservicing arrangement. In January 2018, Ocwen disclosed that it and NRZ entered into new agreements to accelerate the implementation of certain parts of their July 2017 arrangement in order to achieve the intent of the July 2017 agreements sooner while Ocwen continues the process of obtaining the third party consents necessary to transfer the Subject MSRs to NRZ.
On August 28, 2017, Altisource, through certain of its licensed subsidiaries, entered into the Brokerage Agreement with NRZ which extends through August 2025. Under this agreement and related amendments, Altisource remains the exclusive provider of brokerage services for REO associated with the Subject MSRs when Ocwen transfers such MSRs to NRZ or when NRZ acquires both an additional economic interest in such Subject MSRs and the right to designate the broker for REO properties in such portfolios. The Brokerage Agreement provides that Altisource is the exclusive provider of brokerage services for REO associated with the Subject MSRs, irrespective of the sub-servicer. NRZ’s brokerage subsidiary receives a cooperative brokerage commission on the sale of certain REO properties from these portfolios subject to certain exceptions.
On August 28, 2017, Altisource and NRZ also entered into a non-binding Letter of Intent, as amended, to enter into a Services Agreement (the “Services LOI”), setting forth the terms pursuant to which Altisource would remain the exclusive service provider of fee-based services for the Subject MSRs through August 2025. The Services LOI was amended most recently to extend the term through November 15, 2018.
The Brokerage Agreement can be terminated by Altisource if the Services Agreement is not signed by Altisource and NRZ during the term of the Services LOI, as extended. The Brokerage Agreement may otherwise only be terminated upon the occurrence of certain specified events. Termination events include, but are not limited to, a breach of the terms of the Brokerage Agreement (including, without limitation, the failure to meet performance standards and non-compliance with law in a material respect), the failure to maintain licenses which failure materially prevents performance of the contract, regulatory allegations of non-compliance resulting in an adversarial proceeding against NRZ, voluntary or involuntary bankruptcy, appointment of a receiver, disclosure in a Form 10-K or Form 10-Q that there is significant uncertainty about Altisource’s ability to continue as a going concern, failure to maintain a specified level of cash and an unapproved change of control.
We anticipate that revenue from NRZ will increase over time and revenue from Ocwen will decrease. Following the anticipated execution of the Services Agreement, we expect that NRZ will become our largest customer. Had all of the Subject MSRs been transferred to NRZ and the Brokerage Agreement and the Services Agreement with NRZ were in place as of January 1, 2018, we estimate that approximately 48% of our revenue for the nine months ended September 30, 2018 would have been related to NRZ. There can be no assurance that the parties will reach an agreement with respect to the terms of the Services Agreement or that a Services Agreement will be entered into on a timely basis or at all.
Factors Affecting Comparability
The following items may impact the comparability of our results:
On March 28, 2019, the Company entered into a definitive agreement to sell its Financial Services business to TSI for $44.0 million, consisting of an up-front payment of $40.0 million, subject to a working capital adjustment upon closing of the sale, and an additional $4.0 million to be paid on the one year anniversary of the sale closing. The average numbersale is subject to closing conditions, including the receipt of loans serviced by Ocwenregulatory consents. As a result of this pending sale, assets and liabilities subject to the sale have been reported as assets and liabilities held for sale on REALServicing (including those MSRs owned by NRZ and subserviced by Ocwen) was approximately 1.1the accompanying condensed consolidated balance sheets. The Company currently estimates it will recognize a pretax gain of more than $20.0 million forfrom the nine months ended September 30, 2018 comparedsale, which is anticipated to 1.3 million forclose before the nine months ended September 30, 2017, a decreaseend of 13% (1.1 million for the third quarter 2019, and intends to use the $40.0 million up-front payment, subject to a working capital adjustment, to repay a portion of 2018its senior secured term loan.
Effective January 1, 2019, the Company implemented a new accounting standard on leases, which required the recognition of operating leases by companies as lease obligation liabilities on their balance sheets and 1.2 million foralso required the third quarterrecognition of 2017, a decrease of 13%). The average number of delinquent non-GSE loans serviced by Ocwen on REALServicing (including those MSRs owned by NRZright-of-use assets, resulting in higher depreciation and subserviced by Ocwen) was approximately 156 thousand for the nine months ended September 30, 2018 compared to 182 thousand for the nine months ended September 30, 2017, a decrease of 14% (144 thousand for the third quarter of 2018amortization expense and 178 thousand for the third quarter of 2017, a decrease of 19%).
In August 2018, we sold our rental property management business to RESI for total transaction proceeds of $18.0 million, $15.0 million of which was received on the closing date of August 8, 2018interest expense and $3.0 million of which will be received on the earlier of a RESI change of control or August 8, 2023. We recognized a $13.7 million pretax gain on the sale of this business during the third quarter of 2018 in the condensed consolidated statements of operationslower occupancy related costs (see Notes 1 and comprehensive income in connection with this transaction. See Note 322 to the condensed consolidated financial statements.statements for additional information regarding this accounting change). Adoption of this new standard resulted in the recognition of $42.1 million of right-to-use assets in premises and equipment, net, $45.5 million of lease obligation liabilities ($16.7 million in other current liabilities and $28.8 million in other non-current liabilities) and reduced accrued rent and lease incentives of $3.4 million in accounts payable and accrued liabilities and other non-current liabilities on the accompanying condensed consolidated balance sheets. Consequently, occupancy related costs were lower by $4.3 million for the three months ended March 31, 2019 and depreciation and amortization expense and interest expense increased by $3.7 million and $0.8 million, respectively.
In August 2018, weAltisource initiated Project Catalyst, a restructuring planproject intended to optimize ourits operations and reduce costs to better align ourits cost structure with ourits anticipated revenues and improve ourits operating margins. During the three months ended September 30, 2018, weMarch 31, 2019, Altisource incurred $3.4$4.4 million of severance costs and professional services fees related to the restructuringreorganization plan (no comparative amounts in 2017)amount for the three months ended March 31, 2018). We expectAltisource expects to incur additional severance costs, facility shut-down costs and professional services feesrelated costs through 2019 in connection with this restructuringinternal reorganization and will expense those costs as incurred. Based on our preliminarythe Company’s analysis, weit currently anticipateanticipates the future costs relating to the restructuringinternal reorganization plan to be in the range of approximately $25$13 million to $35$17 million. We currently anticipate annual run-rate operating expense reductions
During the three months ended March 31, 2019 and 2018, the Company recognized an unrealized gain of $2.2 million and an unrealized loss of $(7.5) million, respectively, on its investment in Front Yard Residential Corporation (“RESI”) common shares in other income (expense), net in the rangeaccompanying condensed consolidated statements of approximately $65 million to $90 million following completionoperations and comprehensive loss from a change in the market value of the restructuring plan; however, this range could materially change based on business and/or other factors.RESI common shares.
On June 21, 2018, the United States Supreme Court rendered a 5-4 majority decision in South Dakota v. Wayfair, Inc., holding that a state may require a remote seller with no physical presence in the state to collect and remit sales tax on goods and services provided to purchasers in the state, overturning certain existing court precedent. TheDuring the three months ended March 31, 2019, the Company is analyzingcompleted the analysis of its services for potential exposure to sales tax in various jurisdictions in the United States and believes that the Company has a related estimated probable loss of $5.9 million. As a result, theStates. The Company recognized a $5.9$2.1 million loss infor the third quarter of 2018three months ended March 31, 2019 (no comparative amount for the three months ended March 31, 2018) in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations and comprehensive income.loss, in addition to the $6.2 million loss recorded in 2018. The Company began invoicing, collecting and remitting sales tax in applicable jurisdictions in 2019. The Company is also in the process of developing a solution that will enable it to invoice, collect and remit sales tax in the applicable jurisdictions. The Company is also analyzing what rights, if any, it has to seekseeking reimbursement for sales tax payments from clients. Asclients; however, there can be no assurance that the Company completes its evaluationwill be successful in collecting some or all of potentialsuch reimbursements. Future changes in our estimated sales tax exposure the Company may increase its accrual for sales tax exposure and recognize additional losses, which are not currently estimable. These additional losses could result in a material adjustment to our condensed consolidated financial statements which would impact our financial condition and results of operations.
In the third quarter of 2018, we recorded an additional expense of $0.5 million related to the fourth quarter 2016 litigation settlement loss.
On April 3, 2018, Altisource and its wholly-owned subsidiary, Altisource S.à r.l., entered into the Credit Agreement, pursuant to which, among other things, Altisource borrowed $412.0 million in the form of Term B Loans. Proceeds from the Term B Loans were used to repay the Company’s prior senior secured term loan. The comparative average interest rates under the Credit Agreement for the Term B Loans and the prior credit agreement were 5.91%6.8% and 4.58%5.1% for the ninethree months ended September 30,March 31, 2019 and 2018, and 2017, respectively (6.33% and 4.73%respectively. The increase in interest expense from the higher average interest rate was partially offset by a lower average outstanding principal debt balance for the third quarter of 2018 and 2017, respectively). In connection with the refinancing, we recognized a loss of $4.4 million from the write-off of the unamortized debt issuance costs and debt discount for the ninethree months ended September 30, 2018 (no comparative amount in 2017). See Note 11 to the condensed consolidated financial statements.
Effective January 1, 2018, the Company adopted Accounting Standards Update No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and MeasurementMarch 31, 2019 as a result of Financial Assets and Financial Liabilities, which requires
debt principal repayments of $74.8 million during 2018.
certain equity investments to be measured at fair value with changes in fair value recognized in net income. Previously, changes in the fair value of the Company’s available for sale securities were included in comprehensive income. For the nine months ended September 30, 2018, we recognized an unrealized loss from our investment in RESI common shares of $4.2 million (unrealized gain of $1.8 million for the third quarter of 2018). During the nine months ended September 30, 2017, comprehensive income included an unrealized gain from our investment in RESI common shares of $0.2 million, net of a $0.1 million income tax provision (unrealized loss of $5.5 million, net of a $2.1 million income tax benefit for the third quarter of 2017). See Note 1 to the condensed consolidated financial statements for additional information on the adoption of the new accounting standard on investments in equity securities.
During the nine months ended September 30, 2017, we repurchased portions of our senior secured term loan with an aggregate par value of $50.1 million at a weighted average discount of 12.2%, recognizing a net gain of $5.4 million on the early extinguishment of debt (repurchased aggregate par value of $24.1 million at a weighted average discount of 7.5%, recognizing a net gain of $1.5 million on the early extinguishment of debt for the third quarter of 2017). There were no similar repurchases that resulted in a gain or loss on the early extinguishment of debt in 2018.
The effective income tax rate increased to 42.6% for the nine months ended September 30, 2018 from 23.6% for the nine months ended September 30, 2017 (increased to 41.0% for the third quarter of 2018 from 25.0% for the third quarter of 2017). The effective income tax rate increases for the nine months ended September 30, 2018 and third quarter of 2018 were primarily due to adjustments of $1.6 million to certain foreign income tax reserves (and related interest) in the third quarter of 2018 and changes in the expected mix of taxable income across the jurisdictions in which we operate.
CONSOLIDATED RESULTS OF OPERATIONS
Summary Consolidated Results
The following is a discussion of our consolidated results of operations for the periods indicated. For a more detailed discussion of the factors that affected the results of our business segments in these periods, see “Segment Results of Operations” below.
The following table sets forth information regarding our consolidated results of operations:operations for the three months ended March 31:
| | | | Three months ended September 30, | | Nine months ended September 30, | | | | | | | |
(in thousands, except per share data) | | 2018 | | 2017 | | % Increase (decrease) | | 2018 | | 2017 | | % Increase (decrease) | | 2019 | | 2018 | | % Increase (decrease) |
| | | | | | | | | | | | | | | | | | |
Service revenue | | | | | | | | |
| | |
| | |
| | $ | 164,999 |
| | $ | 188,766 |
| | (13 | ) |
Mortgage Market | | $ | 168,489 |
| | $ | 189,615 |
| | (11 | ) | | $ | 497,101 |
| | $ | 583,002 |
| | (15 | ) | |
Real Estate Market | | 12,825 |
| | 21,113 |
| | (39 | ) | | 51,292 |
| | 64,649 |
| | (21 | ) | |
Other Businesses, Corporate and Eliminations | | 15,592 |
| | 13,580 |
| | 15 |
| | 46,140 |
| | 44,603 |
| | 3 |
| |
Total service revenue | | 196,906 |
| | 224,308 |
| | (12 | ) | | 594,533 |
| | 692,254 |
| | (14 | ) | |
Reimbursable expenses | | 6,815 |
| | 9,866 |
| | (31 | ) | | 23,970 |
| | 31,786 |
| | (25 | ) | | 4,496 |
| | 8,147 |
| | (45 | ) |
Non-controlling interests | | 854 |
| | 805 |
| | 6 |
| | 2,066 |
| | 2,107 |
| | (2 | ) | | 440 |
| | 525 |
| | (16 | ) |
Total revenue | | 204,575 |
| | 234,979 |
| | (13 | ) | | 620,569 |
| | 726,147 |
| | (15 | ) | | 169,935 |
| | 197,438 |
| | (14 | ) |
Cost of revenue | | 147,580 |
| | 174,898 |
| | (16 | ) | | 457,980 |
| | 538,244 |
| | (15 | ) | | 124,104 |
| | 147,194 |
| | (16 | ) |
Gross profit | | 56,995 |
| | 60,081 |
| | (5 | ) | | 162,589 |
| | 187,903 |
| | (13 | ) | | 45,831 |
| | 50,244 |
| | (9 | ) |
Operating expenses (income): | | | | | | | | | | | | | |
Operating expenses: | | | | | | | |
Selling, general and administrative expenses | | 46,329 |
| | 46,622 |
| | (1 | ) | | 132,377 |
| | 146,793 |
| | (10 | ) | | 41,240 |
| | 43,124 |
| | (4 | ) |
Gain on sale of business | | (13,688 | ) | | — |
| | N/M |
| | (13,688 | ) | | — |
| | N/M |
| |
Restructuring charges | | 3,436 |
| | — |
| | N/M |
| | 3,436 |
| | — |
| | N/M |
| | 4,420 |
| | — |
| | N/M |
|
Income from operations | | 20,918 |
| | 13,459 |
| | 55 |
| | 40,464 |
| | 41,110 |
| | (2 | ) | | 171 |
| | 7,120 |
| | (98 | ) |
Other income (expense), net: | | | | | | | | | | | | | |
Other income (expense), net | | | | | | | |
Interest expense | | (6,725 | ) | | (5,599 | ) | | 20 |
| | (19,615 | ) | | (16,862 | ) | | 16 |
| | (6,749 | ) | | (5,863 | ) | | 15 |
|
Unrealized gain (loss) on investments in equity securities | | 1,782 |
| | — |
| | N/M |
| | (4,186 | ) | | — |
| | N/M |
| |
Unrealized gain (loss) on investment in equity securities | | | 2,238 |
| | (7,501 | ) | | 130 |
|
Other income (expense), net | | 154 |
| | 2,497 |
| | (94 | ) | | (2,435 | ) | | 8,015 |
| | (130 | ) | | 374 |
| | 1,272 |
| | (71 | ) |
Total other income (expense), net | | (4,789 | ) | | (3,102 | ) | | 54 |
| | (26,236 | ) | | (8,847 | ) | | 197 |
| | (4,137 | ) | | (12,092 | ) | | (66 | ) |
| | | | | | | | | | | | | | | | | | |
Income before income taxes and non-controlling interests | | 16,129 |
| | 10,357 |
| | 56 |
| | 14,228 |
| | 32,263 |
| | (56 | ) | |
Income tax provision | | (6,608 | ) | | (2,591 | ) | | 155 |
| | (6,059 | ) | | (7,615 | ) | | (20 | ) | |
Loss before income taxes and non-controlling interests | | | (3,966 | ) | | (4,972 | ) | | (20 | ) |
Income tax benefit | | | 1,222 |
| | 1,365 |
| | (10 | ) |
| | | | | | | | | | | | | | | | | | |
Net income | | 9,521 |
| | 7,766 |
| | 23 |
| | 8,169 |
| | 24,648 |
| | (67 | ) | |
Net loss | | | (2,744 | ) | | (3,607 | ) | | (24 | ) |
Net income attributable to non-controlling interests | | (854 | ) | | (805 | ) | | 6 |
| | (2,066 | ) | | (2,107 | ) | | (2 | ) | | (440 | ) | | (525 | ) | | (16 | ) |
| | | | | | | | | | | | | | | | | | |
Net income attributable to Altisource | | $ | 8,667 |
| | $ | 6,961 |
| | 25 |
| | $ | 6,103 |
| | $ | 22,541 |
| | (73 | ) | |
Net loss attributable to Altisource | | | $ | (3,184 | ) | | $ | (4,132 | ) | | (23 | ) |
| | | | | | | | | | | | | | | | | | |
Margins: | | | | | | | | |
| | |
| | |
| | |
| | |
| | |
|
Gross profit/service revenue | | 29 | % | | 27 | % | | | | 27 | % | | 27 | % | | |
| | 28 | % | | 27 | % | | |
|
Income from operations/service revenue | | 11 | % | | 6 | % | | | | 7 | % | | 6 | % | | |
| | — | % | | 4 | % | | |
|
| | | | | | | | | | | | | | | | | | |
Earnings per share: | | | | | | | | | | | | | |
Loss per share: | | | | | | | |
Basic | | $ | 0.51 |
| | $ | 0.39 |
| | 31 |
| | $ | 0.36 |
| | $ | 1.23 |
| | (71 | ) | | $ | (0.20 | ) | | $ | (0.24 | ) | | (17 | ) |
Diluted | | $ | 0.49 |
| | $ | 0.38 |
| | 29 |
| | $ | 0.35 |
| | $ | 1.20 |
| | (71 | ) | | $ | (0.20 | ) | | $ | (0.24 | ) | | (17 | ) |
| | | | | | | |
Weighted average shares outstanding: | | | | | | | |
Basic | | | 16,292 |
| | 17,378 |
| | (6 | ) |
Diluted | | | 16,292 |
| | 17,378 |
| | (6 | ) |
N/M — not meaningful.
Revenue
Revenue by line of business was as follows for the three months ended March 31:
|
| | | | | | | | | | | |
(in thousands) | | 2019 | | 2018 | | % Increase (decrease) |
| | | | | | |
Service revenue: | | | | | | |
Field Services | | $ | 70,094 |
| | $ | 67,246 |
| | 4 |
|
Marketplace | | 36,967 |
| | 50,251 |
| | (26 | ) |
Professional Services | | 26,413 |
| | 31,930 |
| | (17 | ) |
Earlier Stage Businesses | | 1,867 |
| | 1,478 |
| | 26 |
|
Other | | 29,658 |
| | 37,861 |
| | (22 | ) |
Total service revenue | | 164,999 |
| | 188,766 |
| | (13 | ) |
| | | | | | |
Reimbursable expenses: | | | | | | |
Field Services | | 2,596 |
| | 5,677 |
| | (54 | ) |
Marketplace | | 691 |
| | 1,146 |
| | (40 | ) |
Professional Services | | 1,036 |
| | 1,310 |
| | (21 | ) |
Other | | 173 |
| | 14 |
| | N/M |
|
Total reimbursable expenses | | 4,496 |
| | 8,147 |
| | (45 | ) |
| | | | | | |
Non-controlling interests: | | | | | | |
Professional Services | | 440 |
| | 525 |
| | (16 | ) |
| | | | | | |
Total revenue | | $ | 169,935 |
| | $ | 197,438 |
| | (14 | ) |
N/M — not meaningful.
We recognized service revenue of $594.5$165.0 million for the ninethree months ended September 30, 2018,March 31, 2019, a 14%13% decrease compared to the ninethree months ended September 30, 2017 ($196.9March 31, 2018. Field Services, Marketplace and Professional Services were negatively impacted by the reduction in the size of Ocwen’s portfolio and number of delinquent loans, RESI’s smaller portfolio of non-performing loans and REO, as RESI continued to sell off its portfolio and focus on directly acquiring, renovating and managing rental homes, and higher brokerage commission earned from the NRZ portfolio during the three months ended March 31, 2018 related to REO properties that transferred to NRZ from Ocwen that were already listed on Hubzu. This transitional service revenue ended in 2018. These decreases in service revenue were partially offset by service revenue growth in Field Services driven by growth in referrals of certain higher fee property preservation services. In addition, service revenue growth from Earlier Stage Businesses was driven by increases in transaction volumes at Owners.com and customer wins at Pointillist. Service revenue in Other decreased from lower rental property management service revenue from the sale of this business to RESI in August 2018, lower construction management transactions with RESI and lower revenue in the buy-renovate-lease-sell business from fewer home sales, partially offset by service revenue growth from our Financial Services businesses.
We recognized reimbursable expense revenue of $4.5 million for the third quarter of 2018,three months ended March 31, 2019, a 12%45% decrease compared to the third
quarter of 2017).three months ended March 31, 2018. The decreasesdecrease in servicereimbursable expense revenue in the Mortgage Market segment werewas primarily a result of thea reduction in the size of Ocwen’s portfolio and number of delinquent loans in its portfolio resulting from loan repayments, loan modifications, short sales, REO sales and other forms of resolution. The decreasesresolution, as discussed in service revenue in the Real Estate Market segment were primarily driven by RESI’s smaller portfolio of non-performing loans and REO, partially offset by increases in the Consumer Real Estate Solutions business and, for the nine months ended September 30, 2018, growth in the buy-renovate-lease-sell and renovation management businesses.
We recognized reimbursable expense revenue of $24.0 million for the nine months ended September 30, 2018, a 25% decrease compared to the nine months ended September 30, 2017 ($6.8 million for the third quarter of 2018, a 31% decrease compared to the third quarter of 2017). The decreases in reimbursable expense revenue in the Mortgage Market segment were primarily a result of the reduction in the size of Ocwen’s portfolio and number of delinquent loans in its portfolio resulting from loan repayments, loan modifications, short sales, REO sales and other forms of resolution. The decrease in reimbursable expense revenue in the Real Estate Market segment was primarily from RESI’s smaller portfolio of non-performing loans and REO businesses.above.
Certain of our revenues are impacted by seasonality. More specifically, revenues from property sales, loan originations and certain property preservation servicesField Services typically tend to be at their lowest level during the fall and winter months and at their highest level during the spring and summer months. In addition, revenue in the asset recovery management business typically tends to be higher in the first quarter, as borrowers may utilize tax refunds and bonuses to pay debts, and generally declines throughout the rest of the year.
Cost of Revenue and Gross Profit
Cost of revenue principally includes payroll and employee benefits associated with personnel employed in customer service and operations roles, fees paid to external providers related to the provision of services, cost of real estate sold, reimbursable expenses, technology and telecommunications costs and depreciation and amortization of operating assets.
Cost of revenue consisted of the following:following for the three months ended March 31:
| | | | Three months ended September 30, | | Nine months ended September 30, | | | | | | | |
(in thousands) | | 2018 | | 2017 | | % Increase (decrease) | | 2018 | | 2017 | | % Increase (decrease) | | 2019 | | 2018 | | % Increase (decrease) |
| | | | | | | | | | | | | | | | | | |
Compensation and benefits | | $ | 49,707 |
| | $ | 60,332 |
| | (18 | ) | | $ | 159,342 |
| | $ | 186,090 |
| | (14 | ) | | $ | 41,368 |
| | $ | 54,866 |
| | (25 | ) |
Outside fees and services | | 73,096 |
| | 83,670 |
| | (13 | ) | | 207,073 |
| | 250,883 |
| | (17 | ) | | 62,581 |
| | 65,098 |
| | (4 | ) |
Cost of real estate sold | | 1,092 |
| | 4,411 |
| | (75 | ) | | 17,591 |
| | 16,461 |
| | 7 |
| | 2,094 |
| | 3,179 |
| | (34 | ) |
Technology and telecommunications | | 10,230 |
| | 10,389 |
| | (2 | ) | | 30,533 |
| | 32,681 |
| | (7 | ) | | 8,509 |
| | 9,451 |
| | (10 | ) |
Reimbursable expenses | | 6,815 |
| | 9,866 |
| | (31 | ) | | 23,970 |
| | 31,786 |
| | (25 | ) | | 4,496 |
| | 8,147 |
| | (45 | ) |
Depreciation and amortization | | 6,640 |
| | 6,230 |
| | 7 |
| | 19,471 |
| | 20,343 |
| | (4 | ) | | 5,056 |
| | 6,453 |
| | (22 | ) |
| | | | | | | | | | | | | | | | | | |
Cost of revenue | | $ | 147,580 |
| | $ | 174,898 |
| | (16 | ) | | $ | 457,980 |
| | $ | 538,244 |
| | (15 | ) | | $ | 124,104 |
| | $ | 147,194 |
| | (16 | ) |
CostWe recognized cost of revenue for the nine months ended September 30, 2018 of $458.0 million decreased 15% compared to the nine months ended September 30, 2017 ($147.6$124.1 million for the third quarter of 2018,three months ended March 31, 2019, a 16% decrease compared to the third quarter of 2017).three months ended March 31, 2018. The decreases in cost of revenue weredecrease was primarily driven by lower service revenue in the Mortgage Market and Real Estate Market segments and related cost reduction initiatives. The decreases ininitiatives and benefits of Project Catalyst and lower outside fees and services in the Mortgage Market segment were driven by lower property preservation and inspection orders from theas a result of a reduction in the size of Ocwen’s portfolio, as discussed in the revenue section above. The decline in compensation and benefits in certain of our businesses also resulted from reducedlowering headcount in anticipation ofconsistent with the revenue decline from the Ocwen and RESI portfolios and from the implementation of efficiency initiatives.portfolios. The decrease in reimbursable expenses was consistent with the decrease in reimbursable expensesexpense revenue discussed in the revenue section above.
Gross profit decreased to $162.6$45.8 million, representing 28% of service revenue, for the three months ended March 31, 2019 compared to $50.2 million, representing 27% of service revenue, for the ninethree months ended September 30, 2018 compared to $187.9 million, representing 27% of service revenue, for the nine months ended September 30, 2017 (decreased to $57.0 million, representing 29% of service revenue, for the third quarter of 2018 compared to $60.1 million, representing 27% of service revenue, for the third quarter of 2017).March 31, 2018. Gross profit as a percentage of service revenue for the ninethree months ended September 30, 2018 was flatMarch 31, 2019 increased compared to the ninethree months ended September 30, 2017,March 31, 2018, as the revenue declines were generally offset by lowera result of our Project Catalyst cost of revenue, as discussed above. Gross profitreduction initiatives. The increase in gross margin as a percentage of service revenue for the third quarterwas partially offset by revenue mix changes with a higher percentage of 2018 increased compared to the third quarter of 2017, as decreases in outside fees and services and compensation and benefits due to reduced headcount, particularly in connection with increased efficiency initiatives implemented in the third quarter of 2018, more than offset the reduction in service revenue.
revenue from our lower margin Field Services business.
Selling, General and Administrative Expenses
Selling, general and administration expenses (“SG&A”) include payroll for personnel employed in executive, finance, law, compliance, human resources, vendor management, facilities, risk management, sales and marketing roles. This category also includes professional services fees, occupancy costs, marketing costs, depreciation and amortization of non-operating assets and other expenses.
SG&A expenses consisted of the following:following for the three months ended March 31:
| | | | Three months ended September 30, | | Nine months ended September 30, | | | | | | | |
(in thousands) | | 2018 | | 2017 | | % Increase (decrease) | | 2018 | | 2017 | | % Increase (decrease) | | 2019 | | 2018 | | % Increase (decrease) |
| | | | | | | | | | | | | | | | | | |
Compensation and benefits | | $ | 11,991 |
| | $ | 15,068 |
| | (20 | ) | | $ | 37,757 |
| | $ | 43,115 |
| | (12 | ) | | $ | 11,353 |
| | $ | 13,569 |
| | (16 | ) |
Amortization of intangible assets | | | 8,647 |
| | 7,147 |
| | 21 |
|
Occupancy related costs | | 7,428 |
| | 8,536 |
| | (13 | ) | | 23,051 |
| | 28,347 |
| | (19 | ) | | 3,908 |
| | 8,434 |
| | (54 | ) |
Amortization of intangible assets | | 6,620 |
| | 8,604 |
| | (23 | ) | | 21,311 |
| | 27,143 |
| | (21 | ) | |
Marketing costs | | 4,267 |
| | 3,992 |
| | 7 |
| | 11,852 |
| | 11,958 |
| | (1 | ) | | 2,932 |
| | 3,607 |
| | (19 | ) |
Professional services | | 4,915 |
| | 3,886 |
| | 26 |
| | 12,469 |
| | 11,983 |
| | 4 |
| | 5,476 |
| | 3,226 |
| | 70 |
|
Depreciation and amortization | | 1,054 |
| | 2,286 |
| | (54 | ) | | 5,272 |
| | 7,068 |
| | (25 | ) | | 4,313 |
| | 2,268 |
| | 90 |
|
Other | | 10,054 |
| | 4,250 |
| | 137 |
| | 20,665 |
| | 17,179 |
| | 20 |
| | 4,611 |
| | 4,873 |
| | (5 | ) |
| | | | | | | | | | | | | | | | | | |
Selling, general and administrative expenses | | $ | 46,329 |
| | $ | 46,622 |
| | (1 | ) | | $ | 132,377 |
| | $ | 146,793 |
| | (10 | ) | | $ | 41,240 |
| | $ | 43,124 |
| | (4 | ) |
SG&A for the ninethree months ended September 30, 2018March 31, 2019 of $132.4$41.2 million decreased 10%by 4% compared to the ninethree months ended September 30, 2017 ($46.3 million for the third quarter of 2018, a 1%March 31, 2018. The decrease compared to the third quarter of 2017). The decreases in SG&A werewas primarily driven by lower compensation and benefits primarily in the Mortgage Market segment, as we reduced headcount fromas a result of our Project Catalyst cost reduction initiatives. Occupancy related costs were lower primarily as a result of the January 1, 2019 implementation of efficiency initiatives. In addition,a new accounting standard on operating leases. The new standard required the recognition of operating leases by companies as lease obligation liabilities on their balance sheet and also required the recognition of right-of-use assets, resulting in higher depreciation and amortization expense and interest expense and lower occupancy related costs. Consequently, depreciation and amortization expense related to the right-to-use assets increased for the three months ended March 31, 2019 (see Notes 1 and 22 to the condensed consolidated financial statements for additional information regarding this accounting change). These decreases were partially offset by an increase in SG&A were due to lowerprofessional services, from increased legal and professional services costs in connection with certain legal and regulatory matters and an increase in amortization of intangible assets due to lower revenue generated by the Homeward Residential, Inc. (“Homeward”) and Residential Capital, LLC (“ResCap”) portfolios (revenue-based amortization)based on changes in the Mortgage Market segment, consistent with the reduction in the sizeestimated remaining lives of Ocwen’s portfolio discussed in the revenue section above. Decreases in SG&A were also due to lower occupancy costs, driven by initiatives to reduce our facilities footprint in 2017 and 2018, and for the nine months ended September 30, 2018, due to a decrease in other from unfavorable loss accrual adjustments of $2.7 million recorded in the second quarter of 2017 (no comparative amounts in 2018). The increases in other for the nine months ended September 30, 2018 and the third quarter of 2018 were driven by the accrual of a $5.9 million contingent loss accrual for sales tax exposure in the United States recognized in the third quarter of 2018.certain intangible assets.
Gain on Sale of Business
In August 2018, we sold our rental property management business to RESI for total transaction proceeds of $18.0 million, $15.0 million of which was received on the closing date of August 8, 2018 and $3.0 million of which will be received on the earlier of a RESI change of control or August 8, 2023. We recognized a $13.7 million pretax gain on sale of this business for the nine months ended September 30, 2018 and the third quarter of 2018 in connection with this transaction (no comparative amounts in 2017).
Other Operating Expenses - Restructuring Charges
In August 2018, weAltisource initiated Project Catalyst, a restructuring planproject intended to optimize our operations and reduce costs to better align our cost structure with our anticipated revenues and improve our operating margins. During the three months ended September 30, 2018,March 31, 2019, we incurred $3.4$4.4 million of severance costs and professional services fees related to the restructuring plan (no comparative amounts in 2017).reorganization plan. We expect to incur additional severance costs, facility shut-down costs and professional services feesrelated costs through 2019 in connection with this restructuringinternal reorganization and will expense those costs as incurred. Based on our preliminary analysis, we currently anticipate the future costs relating to the restructuringinternal reorganization plan to be in the range of approximately $25$13 million to $35$17 million. We currently anticipate annual run-rate operating expense reductions in the range of approximately $65 million to $90 million following completion of the restructuring plan; however, this range could materially change based on business and/or other factors.
Income from Operations
Income from operations decreased to $40.5$0.2 million, representing 7%less than 1% of service revenue, for the ninethree months ended September 30, 2018March 31, 2019, compared to $41.1$7.1 million, representing 6%4% of service revenue, for the ninethree months ended September 30, 2017 (increased to $20.9 million, representing 11% of service revenue, for the third quarter of 2018 compared to $13.5 million, representing 6% of service revenue, for the third quarter of 2017). Operating incomeMarch 31, 2018. Income from operations as a percentage of service revenue increased, primarily due
decreased in 2019 compared to 2018, as SG&A and other operating expenses did not decrease at the gain on sale of business, partially offset bysame rate as service revenue and from the restructuring costs as discussed above. In addition, operating income as a percentage of service revenue for the third quarter of 2018 increased compared to the third quarter of 2017 from increased gross margins, as decreases in outside fees and services and compensation and benefits in connection with the implementation of efficiency initiatives more than offset the reduction in service revenue,incurred during 2019, as discussed above.
Other Income (Expense), net
Other income (expense), net principally includes interest expense, unrealized gain (loss) on our investment in RESI common shares and other non-operating gains and losses. Effective January 1, 2018,
Other expense, net for the three months ended March 31, 2019 of $(4.1) million decreased by 66% compared to $(12.1) million for the three months ended March 31, 2018. The decrease in other income (expense), net includesexpense in 2019 was primarily driven by a $2.2 million unrealized gains and (losses)gain on our investment in RESI (see Factors Affecting Comparability above).
Other income (expense), net for the nine months ended September 30, 2018 of $(26.2) millioncommon shares compared to $(8.8)a $(7.5) million for the nine months ended September 30, 2017 ($(4.8) million for the third quarter of 2018 and $(3.1) million for the third quarter of 2017).loss in 2018. The decrease was partially offset by an increase in other expenses, net for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 was primarilyinterest expense due to the $5.4 million net gain on the early extinguishment of debt in the nine months ended September 30, 2017, and, in 2018, a $(4.4) million loss on debt refinancing, $(4.2) million unrealized loss on our investment in RESI and higher average interest expense from a higher interest raterates on the Credit Agreement comparedand from imputed interest expense on leases related to the implementation of a new accounting standard effective January 1, 2019, as discussed in SG&A above. The comparative average interest rates under the Credit Agreement for the Term B Loans and the prior senior secured term loan.credit agreement were 6.8% and 5.1% for the three months ended March 31, 2019 and 2018, respectively. The increase in other expenses, net for the third quarter of 2018 was primarily due to the $1.5 million net gain on the early extinguishment of debt in the third quarter of 2017 and higher interest expense as discussed above,from the higher average interest rate was partially offset by an unrealized gaina lower average outstanding principal debt balance for the three months ended March 31, 2019 as a result of $1.8debt principal repayments of $74.8 million on our investment in RESI in the third quarter ofduring 2018.
Income Tax Provision
TheWe recognized an income tax provision for the nine months ended September 30, 2018benefit of $6.1$1.2 million decreased 20% compared to the nine months ended September 30, 2017 ($6.6and $1.4 million for the third quarter ofyears ended March 31, 2019 and 2018, a 155% increase compared to the third quarter of 2017). Therespectively, and our effective income tax rate increased to 42.6%rates for the ninethree months ended September 30,March 31, 2019 and 2018 from 23.6% for the nine months ended September 30, 2017 (increased to 41.0% for the third quarter of 2018 from 25.0% for the third quarter of 2017).were 30.8% and 27.5%, respectively. The Company’s effective income tax rates differ from the Luxembourg statutory income tax rate increases for the nine months ended September 30, 2018 and third quarter 2018 were primarilyof 26.0% due to adjustments of $1.6 million to certain foreign income tax reserves (and related interest) in the third quarter of 2018 and changes in the expected mix of taxable income across theand losses with varying tax rates in multiple taxing jurisdictions in which we operate.
SEGMENT RESULTS OF OPERATIONS
The following section provides a discussion of pretax results of operations of our business segments. Transactions between segments are accounted for as third party arrangements for purposes of presenting segment results of operations.
Financial information for our segments was as follows:
|
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2018 |
(in thousands) | | Mortgage Market | | Real Estate Market | | Other Businesses, Corporate and Eliminations | | Consolidated Altisource |
| | | | | | | | |
Revenue | | | | | | | | |
Service revenue | | $ | 168,489 |
| | $ | 12,825 |
| | $ | 15,592 |
| | $ | 196,906 |
|
Reimbursable expenses | | 6,617 |
| | 185 |
| | 13 |
| | 6,815 |
|
Non-controlling interests | | 854 |
| | — |
| | — |
| | 854 |
|
| | 175,960 |
| | 13,010 |
| | 15,605 |
| | 204,575 |
|
Cost of revenue | | 113,636 |
| | 15,883 |
| | 18,061 |
| | 147,580 |
|
Gross profit (loss) | | 62,324 |
| | (2,873 | ) | | (2,456 | ) | | 56,995 |
|
Operating expenses (income): | | | | | | | | |
Selling, general and administrative expenses | | 21,155 |
| | 5,188 |
| | 19,986 |
| | 46,329 |
|
Gain on sale of business | | — |
| | (13,688 | ) | | — |
| | (13,688 | ) |
Restructuring charges | | 901 |
| | 74 |
| | 2,461 |
| | 3,436 |
|
Income (loss) from operations | | 40,268 |
| | 5,553 |
| | (24,903 | ) | | 20,918 |
|
Total other income (expense), net | | 74 |
| | 22 |
| | (4,885 | ) | �� | (4,789 | ) |
| | | | | | | | |
Income (loss) before income taxes and non-controlling interests | | $ | 40,342 |
| | $ | 5,575 |
| | $ | (29,788 | ) | | $ | 16,129 |
|
| | | | | | | | |
Margins: | |
| |
| |
| |
|
Gross profit (loss)/service revenue | | 37 | % | | (22 | )% | | (16 | )% | | 29 | % |
Income (loss) from operations/service revenue | | 24 | % | | 43 | % | | (160 | )% | | 11 | % |
|
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2017 |
(in thousands) | | Mortgage Market | | Real Estate Market | | Other Businesses, Corporate and Eliminations | | Consolidated Altisource |
| | | | | | | | |
Revenue | | | | | | | | |
Service revenue | | $ | 189,615 |
| | $ | 21,113 |
| | $ | 13,580 |
| | $ | 224,308 |
|
Reimbursable expenses | | 8,842 |
| | 1,008 |
| | 16 |
| | 9,866 |
|
Non-controlling interests | | 805 |
| | — |
| | — |
| | 805 |
|
| | 199,262 |
| | 22,121 |
| | 13,596 |
| | 234,979 |
|
Cost of revenue | | 137,466 |
| | 23,497 |
| | 13,935 |
| | 174,898 |
|
Gross profit (loss) | | 61,796 |
| | (1,376 | ) | | (339 | ) | | 60,081 |
|
Selling, general and administrative expenses | | 28,006 |
| | 4,208 |
| | 14,408 |
| | 46,622 |
|
Income (loss) from operations | | 33,790 |
| | (5,584 | ) | | (14,747 | ) | | 13,459 |
|
Total other income (expense), net | | 26 |
| | — |
| | (3,128 | ) | | (3,102 | ) |
| | | | | | | | |
Income (loss) before income taxes and non-controlling interests | | $ | 33,816 |
| | $ | (5,584 | ) | | $ | (17,875 | ) | | $ | 10,357 |
|
| | | | | | | | |
Margins: | | |
| | |
| | |
| | |
|
Gross profit (loss)/service revenue | | 33 | % | | (7 | )% | | (2 | )% | | 27 | % |
Income (loss) from operations/service revenue | | 18 | % | | (26 | )% | | (109 | )% | | 6 | % |
|
| | | | | | | | | | | | | | | | |
| | Nine months ended September 30, 2018 |
(in thousands) | | Mortgage Market | | Real Estate Market | | Other Businesses, Corporate and Eliminations | | Consolidated Altisource |
| | | | | | | | |
Revenue | | |
| | |
| | |
| | |
|
Service revenue | | $ | 497,101 |
| | $ | 51,292 |
| | $ | 46,140 |
| | $ | 594,533 |
|
Reimbursable expenses | | 22,793 |
| | 1,143 |
| | 34 |
| | 23,970 |
|
Non-controlling interests | | 2,066 |
| | — |
| | — |
| | 2,066 |
|
| | 521,960 |
| | 52,435 |
| | 46,174 |
| | 620,569 |
|
Cost of revenue | | 340,038 |
| | 62,628 |
| | 55,314 |
| | 457,980 |
|
Gross profit (loss) | | 181,922 |
| | (10,193 | ) | | (9,140 | ) | | 162,589 |
|
Operating expenses (income): | | | | | | | | |
Selling, general and administrative expenses | | 65,133 |
| | 14,486 |
| | 52,758 |
| | 132,377 |
|
Gain on sale of business | | — |
| | (13,688 | ) | | — |
| | (13,688 | ) |
Restructuring charges | | 901 |
| | 74 |
| | 2,461 |
| | 3,436 |
|
Income (loss) from operations | | 115,888 |
| | (11,065 | ) | | (64,359 | ) | | 40,464 |
|
Total other income (expense), net | | 86 |
| | 36 |
| | (26,358 | ) | | (26,236 | ) |
| | | | | | | | |
Income (loss) before income taxes and non-controlling interests | | $ | 115,974 |
| | $ | (11,029 | ) | | $ | (90,717 | ) | | $ | 14,228 |
|
| | | | | | | | |
Margins: | | |
| | |
| | |
| | |
|
Gross profit (loss)/service revenue | | 37 | % | | (20 | )% | | (20 | )% | | 27 | % |
Income (loss) from operations/service revenue | | 23 | % | | (22 | )% | | (139 | )% | | 7 | % |
|
| | | | | | | | | | | | | | | | |
| | Nine months ended September 30, 2017 |
(in thousands) | | Mortgage Market | | Real Estate Market | | Other Businesses, Corporate and Eliminations | | Consolidated Altisource |
| | | | | | | | |
Revenue | | |
| | |
| | |
| | |
|
Service revenue | | $ | 583,002 |
| | $ | 64,649 |
| | $ | 44,603 |
| | $ | 692,254 |
|
Reimbursable expenses | | 29,071 |
| | 2,665 |
| | 50 |
| | 31,786 |
|
Non-controlling interests | | 2,107 |
| | — |
| | — |
| | 2,107 |
|
| | 614,180 |
| | 67,314 |
| | 44,653 |
| | 726,147 |
|
Cost of revenue | | 421,942 |
| | 72,484 |
| | 43,818 |
| | 538,244 |
|
Gross profit (loss) | | 192,238 |
| | (5,170 | ) | | 835 |
| | 187,903 |
|
Selling, general and administrative expenses | | 86,493 |
| | 14,084 |
| | 46,216 |
| | 146,793 |
|
Income (loss) from operations | | 105,745 |
| | (19,254 | ) | | (45,381 | ) | | 41,110 |
|
Total other income (expense), net | | 138 |
| | — |
| | (8,985 | ) | | (8,847 | ) |
| | | | | | | | |
Income (loss) before income taxes and non-controlling interests | | $ | 105,883 |
| | $ | (19,254 | ) | | $ | (54,366 | ) | | $ | 32,263 |
|
| | | | | | | | |
Margins: | | |
| | |
| | |
| | |
|
Gross profit (loss)/service revenue | | 33 | % | | (8 | )% | | 2 | % | | 27 | % |
Income (loss) from operations/service revenue | | 18 | % | | (30 | )% | | (102 | )% | | 6 | % |
Mortgage Market
Revenue
Revenue by business unit was as follows:
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | | 2018 | | 2017 | | % Increase (decrease) | | 2018 | | 2017 | | % Increase (decrease) |
| | | | | | | | | | | | |
Service revenue: | | |
| | | | | | |
| | | | |
|
Servicer Solutions | | $ | 155,960 |
| | $ | 176,258 |
| | (12 | ) | | $ | 461,378 |
| | $ | 545,447 |
| | (15 | ) |
Origination Solutions | | 12,529 |
| | 13,357 |
| | (6 | ) | | 35,723 |
| | 37,555 |
| | (5 | ) |
Total service revenue | | 168,489 |
| | 189,615 |
| | (11 | ) | | 497,101 |
| | 583,002 |
| | (15 | ) |
| | | | | | | | | | | | |
Reimbursable expenses: | | | | | | | | | | | | |
Servicer Solutions | | 6,530 |
| | 8,803 |
| | (26 | ) | | 22,592 |
| | 28,854 |
| | (22 | ) |
Origination Solutions | | 87 |
| | 39 |
| | 123 |
| | 201 |
| | 217 |
| | (7 | ) |
Total reimbursable expenses | | 6,617 |
| | 8,842 |
| | (25 | ) | | 22,793 |
| | 29,071 |
| | (22 | ) |
| | | | | | | | | | | | |
Non-controlling interests | | 854 |
| | 805 |
| | 6 |
| | 2,066 |
| | 2,107 |
| | (2 | ) |
| | | | | | | | | | | | |
Total revenue | | $ | 175,960 |
| | $ | 199,262 |
| | (12 | ) | | $ | 521,960 |
| | $ | 614,180 |
| | (15 | ) |
We recognized service revenue of $497.1 million for the nine months ended September 30, 2018, a 15% decrease compared to the nine months ended September 30, 2017 ($168.5 million for the third quarter of 2018, an 11% decrease compared to the third quarter of 2017). We also recognized reimbursable expense revenue of $22.8 million for the nine months ended September 30, 2018, a 22% decrease compared to the nine months ended September 30, 2017 ($6.6 million for the third quarter of 2018, a 25% decrease compared to the third quarter of 2017). The decreases in service revenue and reimbursable expense revenue were primarily a result of the reduction in the size of Ocwen’s portfolio and number of delinquent loans in its portfolio resulting from loan repayments, loan modifications, short sales, REO sales and other forms of resolution in the Servicer Solutions business.
Certain of our Mortgage Market businesses are impacted by seasonality. Revenues from property sales, loan originations and certain property preservation services are generally lowest during the fall and winter months and highest during the spring and summer months.
Cost of Revenue and Gross Profit
Cost of revenue consisted of the following:
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | | 2018 | | 2017 | | % Increase (decrease) | | 2018 | | 2017 | | % Increase (decrease) |
| | | | | | | | | | | | |
Compensation and benefits | | $ | 31,300 |
| | $ | 41,475 |
| | (25 | ) | | $ | 99,925 |
| | $ | 126,153 |
| | (21 | ) |
Outside fees and services | | 64,836 |
| | 74,902 |
| | (13 | ) | | 184,629 |
| | 228,982 |
| | (19 | ) |
Reimbursable expenses | | 6,617 |
| | 8,842 |
| | (25 | ) | | 22,793 |
| | 29,071 |
| | (22 | ) |
Technology and telecommunications | | 6,123 |
| | 7,708 |
| | (21 | ) | | 18,813 |
| | 23,589 |
| | (20 | ) |
Depreciation and amortization | | 4,760 |
| | 4,539 |
| | 5 |
| | 13,878 |
| | 14,147 |
| | (2 | ) |
| | | | | | | | | | | | |
Cost of revenue | | $ | 113,636 |
| | $ | 137,466 |
| | (17 | ) | | $ | 340,038 |
| | $ | 421,942 |
| | (19 | ) |
Cost of revenue for the nine months ended September 30, 2018 of $340.0 million decreased by 19% compared to the nine months ended September 30, 2017 ($113.6 million for the third quarter of 2018, a 17% decrease compared to the third quarter of 2017). The decreases in cost of revenue were primarily driven by lower service revenue and the implementation of efficiency initiatives. The decreases in outside fees and services were primarily due to lower property preservation and inspection orders from the reduction in the size of Ocwen’s portfolio, as discussed in the revenue section above. The decreases in compensation and benefits were primarily due to reduced headcount in anticipation of the revenue decline from the Ocwen portfolio and from the implementation of efficiency initiatives. In addition, decreases in compensation and benefits and the decreases in technology and telecommunications costs were driven by the redeployment of certain technology resources to our Other Businesses, Corporate
and Eliminations for the development of enterprise-wide technology initiatives. The decreases in reimbursable expenses were consistent with the decreases in reimbursable expenses revenue discussed in the revenue section above.
Gross profit decreased to $181.9 million, representing 37% of service revenue, for the nine months ended September 30, 2018 compared to $192.2 million, representing 33% of service revenue, for the nine months ended September 30, 2017 (increased to $62.3 million, representing 37% of service revenue for the third quarter of 2018, compared to $61.8 million, representing 33% of service revenue for the third quarter of 2017). Gross profit as a percentage of service revenue increased primarily due to service revenue mix from fewer lower margin property preservation referrals related to the reduction in the size of Ocwen’s portfolio, the implementation of efficiency initiatives and the redeployment of certain technology resources to Other Businesses, Corporate and Eliminations for the development of enterprise-wide technology initiatives, as discussed above. Our margins can vary substantially depending upon service revenue mix.
Selling, General and Administrative Expenses
SG&A expenses consisted of the following:
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | | 2018 | | 2017 | | % Increase (decrease) | | 2018 | | 2017 | | % Increase (decrease) |
| | | | | | | | | | | | |
Compensation and benefits | | $ | 4,007 |
| | $ | 6,292 |
| | (36 | ) | | $ | 11,976 |
| | $ | 17,393 |
| | (31 | ) |
Occupancy related costs | | 4,122 |
| | 5,648 |
| | (27 | ) | | 13,300 |
| | 17,687 |
| | (25 | ) |
Amortization of intangible assets | | 6,020 |
| | 7,975 |
| | (25 | ) | | 19,157 |
| | 25,119 |
| | (24 | ) |
Professional services | | 2,227 |
| | 2,319 |
| | (4 | ) | | 5,498 |
| | 7,018 |
| | (22 | ) |
Marketing costs | | 1,728 |
| | 2,170 |
| | (20 | ) | | 5,059 |
| | 6,405 |
| | (21 | ) |
Depreciation and amortization | | 595 |
| | 1,012 |
| | (41 | ) | | 2,169 |
| | 2,881 |
| | (25 | ) |
Other | | 2,456 |
| | 2,590 |
| | (5 | ) | | 7,974 |
| | 9,990 |
| | (20 | ) |
| | | | | | | | | | | | |
Selling, general and administrative expenses | | $ | 21,155 |
| | $ | 28,006 |
| | (24 | ) | | $ | 65,133 |
| | $ | 86,493 |
| | (25 | ) |
SG&A for the nine months ended September 30, 2018 of $65.1 million decreased by 25% compared to the nine months ended September 30, 2017 ($21.2 million for the third quarter of 2018, a 24% decrease compared to the third quarter of 2017). Decreases in SG&A were reported across all cost categories, driven by lower amortization of intangible assets from lower revenue generated by the Homeward and ResCap portfolios (revenue-based amortization) and lower compensation and benefits due to lower cost allocations primarily due to declining revenues, as discussed in the revenue section above, and the implementation of efficiency initiatives. In addition, lower occupancy costs were driven by initiatives to reduce our facilities footprint in 2017 and 2018.
Restructuring Charges
Restructuring charges of $0.9 million for the nine months ended September 30, 2018 and the third quarter of 2018 consist of severance costs related to the restructuring plan we began implementing in the third quarter of 2018 (no comparative amounts in 2017).
Income from Operations
Income from operations increased to $115.9 million, representing 23% of service revenue, for the nine months ended September 30, 2018 compared to $105.7 million, representing 18% of service revenue, for the nine months ended September 30, 2017 (increased to $40.3 million, representing 24% of service revenue for the third quarter of 2018, compared to $33.8 million, representing 18% of service revenue for the third quarter of 2017). The increases in operating income as a percentage of service revenue were primarily the result of higher gross profit margins driven by significantly reduced compensation and benefits, outside fees and services and technology and telecommunication costs and lower SG&A in all cost categories, as discussed above.
Real Estate Market
Revenue
Revenue by business unit was as follows:
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | | 2018 | | 2017 | | % Increase (decrease) | | 2018 | | 2017 | | % Increase (decrease) |
| | | | | | | | | | | | |
Service revenue: | | |
| | | | | | |
| | | | |
|
Consumer Real Estate Solutions | | $ | 2,693 |
| | $ | 1,441 |
| | 87 |
| | $ | 6,410 |
| | $ | 3,440 |
| | 86 |
|
Real Estate Investor Solutions | | 10,132 |
| | 19,672 |
| | (48 | ) | | 44,882 |
| | 61,209 |
| | (27 | ) |
Total service revenue | | 12,825 |
| | 21,113 |
| | (39 | ) | | 51,292 |
| | 64,649 |
| | (21 | ) |
| | | | | | | | | | | | |
Reimbursable expenses: | | | | | | | | | | | | |
Consumer Real Estate Solutions | | — |
| | — |
| | — |
| | 2 |
| | — |
| | N/M |
|
Real Estate Investor Solutions | | 185 |
| | 1,008 |
| | (82 | ) | | 1,141 |
| | 2,665 |
| | (57 | ) |
Total reimbursable expenses | | 185 |
| | 1,008 |
| | (82 | ) | | 1,143 |
| | 2,665 |
| | (57 | ) |
| | | | | | | | | | | | |
Total revenue | | $ | 13,010 |
| | $ | 22,121 |
| | (41 | ) | | $ | 52,435 |
| | $ | 67,314 |
| | (22 | ) |
N/M — not meaningful.
We recognized service revenue of $51.3 million for the nine months ended September 30, 2018, a 21% decrease compared to the nine months ended September 30, 2017 ($12.8 million for the third quarter of 2018, a 39% decrease compared to the third quarter of 2017). The decreases in service revenue were primarily driven by a decline in revenues in the Real Estate Investor Solutions business from RESI’s smaller portfolio of non-performing loans and REO, as RESI continues to sell off this portfolio and focus on directly acquiring, renovating and managing rental homes. These decreases were partially offset by increases in the Consumer Real Estate Solutions business from higher transaction volumes and unit revenue in 2018. Additionally, for the nine months ended September 30, 2018, these decreases were also partially offset by growth in the buy-renovate-lease-sell and renovation management businesses in Real Estate Investor Solutions.
Certain of our Real Estate Market businesses are impacted by seasonality. Revenues from property sales and certain property preservation services are generally lowest during the fall and winter months and highest during the spring and summer months.
Cost of Revenue and Gross Loss
Cost of revenue consisted of the following:
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | | 2018 | | 2017 | | % Increase (decrease) | | 2018 | | 2017 | | % Increase (decrease) |
| | | | | | | | | | | | |
Compensation and benefits | | $ | 5,962 |
| | $ | 8,777 |
| | (32 | ) | | $ | 20,494 |
| | $ | 28,167 |
| | (27 | ) |
Outside fees and services | | 7,367 |
| | 7,865 |
| | (6 | ) | | 20,027 |
| | 19,249 |
| | 4 |
|
Cost of real estate sold | | 1,092 |
| | 4,411 |
| | (75 | ) | | 17,591 |
| | 16,461 |
| | 7 |
|
Reimbursable expenses | | 185 |
| | 1,008 |
| | (82 | ) | | 1,143 |
| | 2,665 |
| | (57 | ) |
Technology and telecommunications | | 1,072 |
| | 1,203 |
| | (11 | ) | | 2,782 |
| | 4,659 |
| | (40 | ) |
Depreciation and amortization | | 205 |
| | 233 |
| | (12 | ) | | 591 |
| | 1,283 |
| | (54 | ) |
| | | | | | | | | | | | |
Cost of revenue | | $ | 15,883 |
| | $ | 23,497 |
| | (32 | ) | | $ | 62,628 |
| | $ | 72,484 |
| | (14 | ) |
Cost of revenue for the nine months ended September 30, 2018 of $62.6 million decreased by 14% compared to the nine months ended September 30, 2017 ($15.9 million for the third quarter of 2018, a 32% decrease compared to the third quarter of 2017). The decreases in cost of revenue were primarily driven by lower compensation and benefits, which declined in certain of the Real Estate Investor Solutions businesses as we reduced headcount in anticipation of the decreases in revenue volumes from RESI’s portfolio discussed in the revenue section above, and decreases in technology and telecommunications expense due to the reduction in headcount and transaction volumes.
Gross loss increased to $(10.2) million, representing (20)% of service revenue, for the nine months ended September 30, 2018, compared to $(5.2) million, representing (8)% of service revenue, for the nine months ended September 30, 2017 (loss of $(2.9) million, representing (22)% of service revenue for the third quarter of 2018, compared to a loss of $(1.4) million, representing (7)% of service revenue for the third quarter of 2017). Gross loss as a percent of service revenue increased primarily as a result of service revenue mix from fewer higher margin REO sales. In addition, gross loss as a percent of service revenue for the nine months ended September 30, 2018 increased from higher revenues in the lower margin buy-renovate-lease-sell program. Our margins can vary substantially depending upon service revenue mix.
Selling, General and Administrative Expenses
SG&A expenses consisted of the following:
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | | 2018 | | 2017 | | % Increase (decrease) | | 2018 | | 2017 | | % Increase (decrease) |
| | | | | | | | | | | | |
Compensation and benefits | | $ | 900 |
| | $ | 732 |
| | 23 |
| | $ | 2,517 |
| | $ | 2,469 |
| | 2 |
|
Occupancy related costs | | 382 |
| | 631 |
| | (39 | ) | | 1,394 |
| | 2,353 |
| | (41 | ) |
Amortization of intangible assets | | 183 |
| | 211 |
| | (13 | ) | | 902 |
| | 633 |
| | 42 |
|
Professional services | | 741 |
| | 339 |
| | 119 |
| | 1,111 |
| | 974 |
| | 14 |
|
Marketing costs | | 2,462 |
| | 1,786 |
| | 38 |
| | 6,557 |
| | 5,390 |
| | 22 |
|
Depreciation and amortization | | 121 |
| | 180 |
| | (33 | ) | | 380 |
| | 561 |
| | (32 | ) |
Other | | 399 |
| | 329 |
| | 21 |
| | 1,625 |
| | 1,704 |
| | (5 | ) |
| | | | | | | | | | | | |
Selling, general and administrative expenses | | $ | 5,188 |
| | $ | 4,208 |
| | 23 |
| | $ | 14,486 |
| | $ | 14,084 |
| | 3 |
|
SG&A for the nine months ended September 30, 2018 of $14.5 million increased by 3% compared to the nine months ended September 30, 2017 ($5.2 million for the third quarter of 2018, a 23% increase compared to the third quarter of 2017). The increases in SG&A were primarily driven by higher marketing costs in Consumer Real Estate Solutions to support our anticipated growth of this business, partially offset by lower occupancy related costs, due to lower facility costs from initiatives to reduce our facilities footprint.
Gain on Sale of Business
In August 2018, we sold our rental property management business to RESI for total transaction proceeds of $18.0 million, $15.0 million of which was received on the closing date of August 8, 2018 and $3.0 million of which will be received on the earlier of a RESI change of control or August 8, 2023. We recognized a $13.7 million pretax gain on sale of this business for the nine months ended September 30, 2018 and the third quarter of 2018 in connection with this transaction (no comparative amounts in 2017).
Restructuring Charges
Restructuring charges of $0.1 million for the nine months ended September 30, 2018 and the third quarter of 2018 consist of severance costs related to the restructuring plan we began implementing in the third quarter of 2018 (no comparative amounts in 2017).
Income (Loss) from Operations
Loss from operations decreased to $(11.1) million for the nine months ended September 30, 2018 compared to a loss from operations of $(19.3) million for the nine months ended September 30, 2017 (income from operations of $5.6 million for the third quarter of 2018 compared to loss from operations of $(5.6) million for the third quarter of 2017). The decreases in loss from operations were primarily the result of the gain on sale of the business, partially offset by lower gross profit margins and increases in SG&A, as discussed above.
Other Businesses, Corporate and Eliminations
Revenue
Revenue by business unit was as follows:
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | | 2018 | | 2017 | | % Increase (decrease) | | 2018 | | 2017 | | % Increase (decrease) |
| | | | | | | | | | | | |
Service revenue: | | |
| | | | | | |
| | | | |
|
Customer relationship management | | $ | 7,389 |
| | $ | 6,822 |
| | 8 |
| | $ | 21,028 |
| | $ | 21,682 |
| | (3 | ) |
Asset recovery management | | 6,750 |
| | 5,743 |
| | 18 |
| | 20,758 |
| | 17,940 |
| | 16 |
|
IT infrastructure services | | 1,453 |
| | 1,015 |
| | 43 |
| | 4,354 |
| | 4,981 |
| | (13 | ) |
Total service revenue | | 15,592 |
| | 13,580 |
| | 15 |
| | 46,140 |
| | 44,603 |
| | 3 |
|
| | | | | | | | | | | | |
Reimbursable expenses: | | | | | | | | | | | | |
Asset recovery management | | 13 |
| | 16 |
| | (19 | ) | | 34 |
| | 50 |
| | (32 | ) |
Total reimbursable expenses | | 13 |
| | 16 |
| | (19 | ) | | 34 |
| | 50 |
| | (32 | ) |
| | | | | | | | | | | | |
Total revenue | | $ | 15,605 |
| | $ | 13,596 |
| | 15 |
| | $ | 46,174 |
| | $ | 44,653 |
| | 3 |
|
We recognized service revenue of $46.1 million for the nine months ended September 30, 2018, a 3% increase compared to the nine months ended September 30, 2017 ($15.6 million for the third quarter of 2018, a 15% increase compared to the third quarter of 2017). The increases in service revenue were primarily due to an increase in asset recovery management service revenue from growth in referral volumes.
Certain of our other businesses are impacted by seasonality. Revenue in the asset recovery management business tends to be higher in the first quarter, as borrowers may utilize tax refunds and bonuses to pay debts, and generally declines throughout the remainder of the year.
Cost of Revenue and Gross Profit (Loss)
Cost of revenue consisted of the following:
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | | 2018 | | 2017 | | % Increase (decrease) | | 2018 | | 2017 | | % Increase (decrease) |
| | | | | | | | | | | | |
Compensation and benefits | | $ | 12,445 |
| | $ | 10,080 |
| | 23 |
| | $ | 38,923 |
| | $ | 31,770 |
| | 23 |
|
Outside fees and services | | 893 |
| | 903 |
| | (1 | ) | | 2,417 |
| | 2,652 |
| | (9 | ) |
Reimbursable expenses | | 13 |
| | 16 |
| | (19 | ) | | 34 |
| | 50 |
| | (32 | ) |
Technology and telecommunications | | 3,035 |
| | 1,478 |
| | 105 |
| | 8,938 |
| | 4,433 |
| | 102 |
|
Depreciation and amortization | | 1,675 |
| | 1,458 |
| | 15 |
| | 5,002 |
| | 4,913 |
| | 2 |
|
| | | | | | | | | | | | |
Cost of revenue | | $ | 18,061 |
| | $ | 13,935 |
| | 30 |
| | $ | 55,314 |
| | $ | 43,818 |
| | 26 |
|
Cost of revenue for the nine months ended September 30, 2018 of $55.3 million increased by 26% compared to the nine months ended September 30, 2017 ($18.1 million for the third quarter of 2018, a 30% increase compared to the third quarter of 2017). The increases in cost of revenue were primarily due to increases in compensation and benefits and technology and telecommunications costs, driven by the redeployment of certain technology resources from the Mortgage Market segment to Other Businesses, Corporate and Eliminations for the development of enterprise-wide technology initiatives.
Gross profit decreased to a gross loss of $(9.1) million, representing (20)% of service revenue, for the nine months ended September 30, 2018, compared to a gross profit of $0.8 million, representing 2% of service revenue, for the nine months ended September 30, 2017 (loss of $(2.5) million, representing (16)% of service revenue for the third quarter of 2018, compared to a loss of $(0.3) million, representing (2)% of service revenue for the third quarter of 2017). Gross profit (loss) as a percentage of service revenue decreased due to the increase in cost of revenue, principally driven by the redeployment of certain technology resources from the Mortgage Market segment for the development of enterprise-wide technology initiatives, which increased Other Businesses, Corporate and Eliminations cost of revenue and decreased cost of revenue in the Mortgage Market segment, as described above.
Selling, General and Administrative Expenses
SG&A in Other Businesses, Corporate and Eliminations include SG&A of the customer relationship management, asset recovery management and IT infrastructure services businesses. It also includes costs related to corporate support functions not allocated to the Mortgage Market and Real Estate Market segments.
Other Businesses, Corporate and Eliminations also include eliminations of transactions between the reportable segments.
SG&A consisted of the following:
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | | 2018 | | 2017 | | % Increase (decrease) | | 2018 | | 2017 | | % Increase (decrease) |
| | | | | | | | | | | | |
Compensation and benefits | | $ | 7,084 |
| | $ | 8,044 |
| | (12 | ) | | $ | 23,264 |
| | $ | 23,253 |
| | — |
|
Occupancy related costs | | 2,924 |
| | 2,257 |
| | 30 |
| | 8,357 |
| | 8,307 |
| | 1 |
|
Amortization of intangible assets | | 417 |
| | 418 |
| | — |
| | 1,252 |
| | 1,391 |
| | (10 | ) |
Professional services | | 1,947 |
| | 1,228 |
| | 59 |
| | 5,860 |
| | 3,991 |
| | 47 |
|
Marketing costs | | 77 |
| | 36 |
| | 114 |
| | 236 |
| | 163 |
| | 45 |
|
Depreciation and amortization | | 338 |
| | 1,094 |
| | (69 | ) | | 2,723 |
| | 3,626 |
| | (25 | ) |
Other | | 7,199 |
| | 1,331 |
| | N/M |
| | 11,066 |
| | 5,485 |
| | 102 |
|
| | | | | | | | | | | | |
Selling, general and administrative expenses | | $ | 19,986 |
| | $ | 14,408 |
| | 39 |
| | $ | 52,758 |
| | $ | 46,216 |
| | 14 |
|
N/M — not meaningful.
SG&A for the nine months ended September 30, 2018 of $52.8 million increased by 14% compared to the nine months ended September 30, 2017 ($20.0 million for the third quarter of 2018, a 39% increase compared to the third quarter of 2017). The increases in other for the nine months ended September 30, 2018 and the third quarter of 2018 were driven by the accrual of a $5.9 million contingent loss accrual for sales tax exposure in the United States recognized in the third quarter of 2018. In addition, SG&A included increases in professional services, due to increased legal and professional services costs in connection with certain legal and regulatory matters. For the nine months ended September 30, 2018, the increase was partially offset by unfavorable loss accrual adjustments of $2.7 million recorded in the second quarter of 2017 (no comparative amounts in 2018).
Restructuring Charges
Restructuring charges of $2.5 million for the nine months ended September 30, 2018 and the third quarter of 2018 consist of severance costs and professional services fees related to the restructuring plan we began implementing in the third quarter of 2018 (no comparative amounts in 2017).
Loss from Operations
Loss from operations increased to $(64.4) million for the nine months ended September 30, 2018 compared to $(45.4) million for the nine months ended September 30, 2017 ($(24.9) million for the third quarter of 2018 compared to $(14.7) million for the third quarter of 2017). The increases in operating losses were primarily driven by the decrease in gross profit from the shifting of technology resources from the Mortgage Market segment to support corporate initiatives, increases in SG&A, primarily due to increased unfavorable accrual adjustments in 2018, and restructuring charges, as discussed above.
Other Income (Expense), Net
Other income (expense), net principally includes interest expense and other non-operating gains and losses. Effective January 1, 2018, other income (expense), net includes unrealized gains and (losses) on our investment in RESI (see Factors Affecting Comparability above).
Other income (expense), net for the nine months ended September 30, 2018 of $(26.4) million compares to $(9.0) million for the nine months ended September 30, 2017 ($(4.9) million for the third quarter of 2018 and $(3.1) million for the third quarter of 2017). The increase in other expenses, net for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 was primarily due to the $5.4 million net gain on the early extinguishment of debt in the nine months ended September 30, 2017, and, in 2018, a $(4.4) million loss on debt refinancing, $(4.2) million unrealized loss on our investment in RESI and higher interest expense from a higher interest rate on the Credit Agreement compared to the prior senior secured term loan. The increase in other expense, net for the third quarter of 2018 was primarily due to the $1.5 million net gain on the early extinguishment of debt in the third quarter of 2017 and higher interest expense, as discussed above, partially offset by an unrealized gain of $1.8 million on our investment in RESI.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Our primary source of liquidity is cash flow from operations.operations and cash on hand. We seek to deploy cash generated in a disciplined manner. Principally, we intend to use cash to develop and grow complementary services and businesses that we believe will generate attractive margins in line with our core capabilities and strategy. We use cash for scheduled repayments of our long-term debt, capital investments and seek to use cash from time to time to repurchase shares of our common stock and repurchase portions ofreduce our debt. In addition, we consider and evaluate business acquisitions that may ariseand dispositions from time to time that are aligned with our strategy.
During the nine months ended September 30, 2018, we used net proceeds from the Term B Loans and operating cash to repay the prior senior secured term loan and repaid $28.9 million of borrowings ($15.0 million in the third quarter of 2018). During the third quarter of 2018, the Company used the proceeds received from the sale of the rental property management business to RESI to repay $15.0 million of the Term B Loans. This repayment is applied to contractual amortization in the direct order of maturity. During the nine months ended September 30, 2018, we used $21.8 million to repurchase shares of our common stock ($0.7 million for the third quarter of 2018).
Credit Agreement
On April 3, 2018, Altisource entered into the Credit Agreement pursuant to which 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 and the revolving credit facility matures in April 2023.
Proceeds from the Term B Loans were used to repay the Company’s prior senior secured term loan, which had an outstanding balance of $412.1 million as of April 3, 2018. As of September 30, 2018, $388.8March 31, 2019, $338.8 million of the Term B Loans were outstanding. There were no borrowings outstanding under the revolving credit facility as of September 30, 2018.March 31, 2019.
TheThere are no mandatory repayments of the Term B Loans due until March 2020, when $9.2 million is due to be repaid. Thereafter, the Term B Loans must be repaid in consecutive quarterly principal installments with remaining amounts due as of September 30, 2018 of $1.5$3.1 million, in the fourth quarter of 2018, $41.2 million in 2019, $25.7 million in 2020 and $12.4 million annually thereafter, with the balance due at maturity. 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 the leverage ratio is greater than 3.00 to 1.00, as calculated in accordance with the provisions of the Credit Agreement (the percentage increases if the leverage ratio exceeds 3.50 to 1.00). Certain mandatory prepayments reduce future contractual amortization payments by an amount equal to the mandatory prepayment. No mandatory prepayments were owed for the three months ended September 30, 2018.
The interest rate on the Term B Loans as of September 30, 2018March 31, 2019 was 6.39%6.6%.
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. The lenders have no obligation to provide any incremental indebtedness.
The Credit Agreement includes covenants that restrict or limit, among other things, our ability, subject to certain exceptions and baskets, to incur additional debt, pay dividends and repurchase shares of our common stock. In the event we require additional liquidity, our ability to obtain it may be limited by the Credit Agreement.
Cash Flows
The following table presents our cash flows for the ninethree months ended September 30:March 31:
| | (in thousands) | | 2018 | | 2017 | | % Increase (decrease) | | 2019 | | 2018 | | % Increase (decrease) |
| | | |
|
| | | | | |
|
| | |
Net income adjusted for non-cash items | | $ | 59,012 |
| | $ | 83,771 |
| | (30 | ) | |
Net loss adjusted for non-cash items | | | $ | 17,046 |
| | $ | 21,566 |
| | (21 | ) |
Changes in operating assets and liabilities | | (15,362 | ) | | (36,642 | ) | | 58 |
| | (23,701 | ) | | (30,135 | ) | | 21 |
|
Cash flows provided by operating activities | | 43,650 |
| | 47,129 |
| | (7 | ) | |
Cash flows provided by (used in) investing activities | | 10,793 |
| | (7,485 | ) | | 244 |
| |
Cash flows used in financing activities | | (54,698 | ) | | (74,742 | ) | | 27 |
| |
Net cash used in operating activities | | | (6,655 | ) | | (8,569 | ) | | (22 | ) |
Net cash used in investing activities | | | (790 | ) | | (1,258 | ) | | 37 |
|
Net cash used in financing activities | | | (1,177 | ) | | (10,031 | ) | | 88 |
|
Net decrease in cash, cash equivalents and restricted cash | | (255 | ) | | (35,098 | ) | | 99 |
| | (8,622 | ) | | (19,858 | ) | | 57 |
|
Cash, cash equivalents and restricted cash at the beginning of the period | | 108,843 |
| | 153,421 |
| | (29 | ) | | 64,046 |
| | 108,843 |
| | (41 | ) |
| | | |
|
| | | | | |
|
| | |
Cash, cash equivalents and restricted cash at the end of the period | | $ | 108,588 |
| | $ | 118,323 |
| | (8 | ) | | $ | 55,424 |
| | $ | 88,985 |
| | (38 | ) |
Cash Flows from Operating Activities
Cash flows from operating activities generally consist of the cash effects of transactions and events that enter into the determination of net income. For the ninethree months ended September 30, 2018,March 31, 2019, cash flows provided byused in operating activities were $43.7$(6.7) million, or approximately $0.07$(0.04) for every dollar of service revenue, compared to cash flows provided byused in operating activities of $47.1$(8.6) million, or approximately $0.07$(0.05) for every dollar of service revenue, for the ninethree months ended September 30, 2017 ($0.10 for every dollar of service revenue forMarch 31, 2018. During the third quarter of 2018 and $0.15 for every dollar of service revenue forthree months ended March 31, 2019, the third quarter of 2017). The decrease in cash flows fromused in operations for the nine months ended September 30, 2018, compared to the ninethree months ended September 30, 2017,March 31, 2018 was primarily due to lower net income, adjusted for non-cash items, of $24.8 million, a decrease of 30% compared to the nine months ended September 30, 2017, partially offset by a reduction in cash used for changes in operating assets and liabilities. The decreaseliabilities of $6.4 million, partially offset by a $4.5 million unfavorable change in net income,loss, adjusted for non-cash items was primarily driven by lower gross profit in 2018 as a result of decreasing service revenues, which were partially offset a by corresponding reductions in expenses.items. The decrease in cash used for changes in operating assets and liabilities was principally driven by the $28.0lower use of cash for short-term investments in real estate, partially offset by $6.9 million net payment in the prior year period of an accrued litigation settlement and the timing of payments of accounts payable forsales tax accruals during the ninethree months ended September 30, 2018,March 31, 2019 (no comparative amount during the three months ended March 31, 2018). The decrease in net loss, adjusted for non-cash items, was primarily driven by lower gross profit during the three months ended March 31, 2019 from lower service revenue and the Project Catalyst restructuring charges, partially offset by decreases in expenses as a lower decrease in accounts receivable forresult of the nine months ended September 30, 2018 due to service revenue mix and the timing of collections.
Project Catalyst cost reduction initiatives. Operating cash flows can be negatively impacted because of the nature of some of our services and the mix of services provided. Certain services are performed immediately following or shortly after the referral, but the collection of the receivable does not occur until a specific event occurs (e.g., the foreclosure is complete, the REO asset is sold, etc.). In addition, annual incentive compensation bonuses are typically paid during the first quarter of each year.Furthermore, lower margin services generate lower income and cash flows from operations. Consequently, our cash flows from operations may not be comparable fromnegatively impacted when comparing one interim period to another.
Cash Flows from Investing Activities
Cash flows from investing activities for the ninethree months ended September 30,March 31, 2019 and 2018 consisted of $15.0additions to premises and equipment. Cash flows used in investing activities were $(0.8) million in proceeds fromand $(1.3) million for the sale of the rental property management business to RESI in the third quarter ofthree months ended March 31,
2019 and 2018, and $4.2 million of cash usedrespectively, for additions to premises and equipment ($7.5 million for the nine months ended September 30, 2017), primarily related to investments in the development of certain software applications, IT infrastructure and facility improvements.
Cash Flows from Financing Activities
Cash flows from financing activities for the ninethree months ended September 30,March 31, 2019 and 2018 and 2017 primarily consisted of cash flowsincluded activities associated with repayments of long-term debt, issuances, repayments, repurchases and debt issuance costs. In addition, financing activities includeproceeds from stock option exercises, the purchase of treasury shares, proceeds from stock option exercises, distributions to non-controlling interests and the paymentpayments of tax withholdings on issuance of restricted sharesshare units and stock option exercises.restricted shares. Cash flows from financing activities were $(1.2) million and $(10.0) million for the three months ended March 31, 2019 and 2018, respectively. During the ninethree months ended September 30,March 31, 2019 and 2018, we used net cash of $34.0distributed $0.6 million and $0.7 million to refinance and reduce our debt, including debt issuance costs and repayments and repurchases of long term debt compared to $48.6 million of repurchases and repayments of long-term debt for the nine months ended September 30, 2017.non-controlling interests, respectively. In addition, during the ninethree months ended September 30, 2018, we used $21.8 million to repurchase our common stock ($25.0 million for the nine months ended September 30, 2017), received proceeds from stock option exercises of $3.6 million ($2.1 million for the nine months ended September 30, 2017), and distributed $1.9 million ($2.1 million for the nine months ended September 30, 2017) to non-controlling interests. Also during the nine months ended September 30, 2018,March 31, 2019, we made payments of $0.6 million ($1.1 million for the nine months ended September 30, 2017), to satisfy employee tax withholding
obligations on the issuance of restricted share units and restricted shares and stock option exercises.(no comparative amount during the three months ended March 31, 2018). These payments were made to tax authorities, at the employees’ direction, to satisfy the employees’ tax obligations rather than issuing a portion of vested restricted share units and restricted shares to employees. In addition, during the three months ended March 31, 2018, we used $10.0 million to repurchase shares of our common stock (no comparative amount during the three months ended March 31, 2019), received proceeds from stock option exercises of $2.6 million (compared to less than $0.1 million during the three months ended March 31, 2019), made repayments of long-term debt of $1.5 million (no comparative amount during the three months ended March 31, 2019) and incurred debt issuance costs of $0.5 million (no comparative amount during the three months ended March 31, 2019).
Liquidity Requirements after September 30, 2018March 31, 2019
Our primary future liquidity obligations primarily pertain to long-term debt repayments and interest expense under the Credit Agreement (see Liquidity section above), lease payments and distributions to Lenders One members. During the next 12 months, we expect to make mandatory repayments of $34.4 million and pay $24.1$22.4 million of interest expense (assuming the current interest rate) under the Credit Agreement, make lease payments of $17.2 million and distribute approximately $2.5 million to the Lenders One members representing non-controlling interests.
We believe that our existing cash and cash equivalents balances, our anticipated cash flows from operations and availability under our revolving credit facility will be sufficient to meet our liquidity needs, including to fund required debt and interest payments and additions to premises and equipment, for the next 12 months.
Contractual Obligations, Commitments and Contingencies
For the ninethree months ended September 30, 2018,March 31, 2019, there were no significant changes to our contractual obligations from those identified in our Form 10-K for the fiscal year ended December 31, 20172018 and this Form 10-Q, other than those that occur in the normal course of business. See Note 2122 to the condensed consolidated financial statements.
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND RECENT ACCOUNTING PRONOUNCEMENT
We prepare our interim condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. In applying many of these accounting principles, we need to make assumptions, estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses in our condensed consolidated financial statements. We base our estimates and judgments on historical experience and other assumptions that we believe are reasonable under the circumstances. These assumptions, estimates and judgments, however, are often subjective. Actual results may be negatively affected based on changing circumstances. If actual amounts are ultimately different from our estimates, the revisions are included in our results of operations for the period in which the actual amounts become known.
See Note 1 to the condensed consolidated financial statements for the Company’s critical accounting policy for revenue recognition. Our other critical accounting policies are described in the MD&A section of our Form 10-K for the year ended December 31, 20172018 filed with the SEC on February 22, 2018. With the exception of the changes to our revenue recognition policy referenced above, there26, 2019. There have been no material changes to our critical accounting policies during the ninethree months ended September 30, 2018.March 31, 2019.
Recently Adopted and Future Adoption of New Accounting Pronouncements
See Note 1 to the condensed consolidated financial statements for a discussion of recently issued accounting pronouncements, including pronouncements that were adopted in the current period.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market Risk
Our financial market risk consists primarily of interest rate and foreign currency exchange rate risk.
Interest Rate Risk
As of September 30, 2018,March 31, 2019, the interest rate charged on the new Term B Loan was 6.39%6.6%. The interest rate wasis calculated based on the Adjusted Eurodollar Rate (as defined in the Credit Agreement)senior secured term loan agreement) with a minimum floor of 1.00% plus 4.00%.
Based on the principal amount outstanding at September 30, 2018,as of March 31, 2019, a one percentage point increase or decrease in the Eurodollar Raterate would have increased or decreasedincrease our annual interest expense by approximately $3.9$3.4 million, based on the September 30, 2018March 31, 2019 Adjusted Eurodollar Rate. There would be a $3.4 million decrease in our annual interest expense if there was a one percentage point decrease in the Eurodollar Rate.
Currency Exchange Risk
We are exposed to currency risk from potential changes in currency values of our non-United States dollar denominated expenses, assets, liabilities and cash flows. Our most significant currency exposure relates to the Indian rupee. Based on expenses incurred in Indian rupees during the third quarter of 2018,three months ended March 31, 2019, a one percentage point increase or decrease in value of the Indian rupee in relation to the United States dollar would increase or decrease our annual expenses by approximately $0.9$0.7 million.
Item 4. Controls and Procedures
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a) | Evaluation of Disclosure Controls and Procedures |
Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As of September 30, 2018,March 31, 2019, an evaluation was conducted under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based on this evaluation, such officers have concluded that our disclosure controls and procedures were effective as of September 30, 2018.March 31, 2019.
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b) | Internal Control over Financial Reporting |
There were no changes in our internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the quarter ended September 30, 2018,March 31, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
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.
As previously disclosed, the Company received a Notice and Opportunity to Respond and Advise (“NORA”) letter on November 10, 2016 from the CFPB indicating that the CFPB was considering a potential enforcement action against Altisource relating to an alleged violation of federal law focused on REALServicing and certain other technology services provided to Ocwen, including claims related to the features, functioning and support of such technology. The NORA process provides the recipient an opportunity to present its positions to the CFPB before an enforcement action is recommended or commenced. On December 5, 2016, we provided a written response to the NORA letter setting forth the legal, policy and factual reasons why we believe an enforcement action is not warranted. By letter dated April 3, 2018, the CFPB informed the Company that the investigation of the Company has been completed and the staff of the CFPB’s Office of Enforcement currently does not intend to recommend that the CFPB take enforcement action, and further that the Company is relieved of the document-retention obligations pursuant to the civil investigative process.
Item 1A. Risk Factors
As of the date of this filing, there have been no material changes in our risk factors from those disclosed in Part I, Item 1A, of our Form 10-K for the year ended December 31, 20172018 filed with the SEC on February 22, 2018,26, 2019, except as discussedfollows:
We may not be able to close the Financial Services business disposition transaction with Transworld Systems Inc. (“TSI”), during 2019 or at all because, among other things, we or TSI may not be able to satisfy the closing conditions or there could be a delay in obtaining regulatory and other third party consents in connection with the transaction
On March 28, 2019, Altisource entered into a definitive agreement to sell its Financial Services business to TSI for $44.0 million, consisting of an up-front payment of $40.0 million, subject to a working capital adjustment upon closing of the sale, and an additional $4.0 million to be paid on the one year anniversary of the sale closing. The sale is subject to closing conditions including the receipt of regulatory consents. We may be unable to satisfy the closing conditions, or the closing may be delayed due to difficulties in obtaining regulatory and other third party consents in connection with the transaction. In addition, we may incur unanticipated expenditures relating to or liabilities arising from delays in closing the transaction or ultimately not being able to close the transaction. An inability to close the transaction in a timely manner or at all could have a material adverse impact on our Form 10‑Q for the quarterly period ended June 30, 2018 at Part II, Item 1A.financial condition and results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table presents information related to our repurchasesThere were no purchases of our equity securitiesshares of common stock during the three months ended September 30, 2018:March 31, 2019. On May 15, 2018, our shareholders approved the renewal and replacement of the share repurchase program originally approved by the shareholders on May 17, 2017, which replaced the previous share repurchase program and authorizes us to purchase up to 4.3 million shares of our common stock in the open market, subject to certain parameters, for a period of five years from the date of approval. The maximum number of shares that may be purchased under the repurchase program is 3.4 million shares of the Company’s common stock. In addition to the share repurchase program, during the three months ended March 31, 2019, 23,969 common shares were withheld from employees to satisfy tax withholding obligations that arose from the vesting of restricted shares.
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Period | | Total number of shares purchased(1) | | Weighted average price paid per share | | Total number of shares purchased as part of publicly announced plans or programs(2) | | Maximum number of shares that may yet be purchased under the plans or programs(2) |
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Common stock: | | | | | | | | |
July 1 – 31, 2018 | | 21,007 |
| | $ | 30.93 |
| | 21,007 |
| | 4,156,739 |
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August 1 – 31, 2018 | | — |
| | — |
| | — |
| | 4,156,739 |
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September 1 – 30, 2018 | | — |
| | — |
| | — |
| | 4,156,739 |
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| | | | | | | | |
| | 21,007 |
| | $ | 30.93 |
| | 21,007 |
| | 4,156,739 |
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(1)
| In addition to the repurchases included in the table above, 5,991 common shares were withheld from employees to satisfy tax withholding obligations that arose from the vesting of restricted shares. |
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(2)
| On May 15, 2018, our shareholders approved the renewal of the share repurchase program originally approved by the shareholders on May 17, 2017, which replaced the previous share repurchase program and authorizes us to purchase up to 4.3 million shares of our common stock in the open market, subject to certain parameters. |
Item 6. Exhibits
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101 * | | Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2018March 31, 2019 is formatted in XBRL interactive data files: (i) Condensed Consolidated Balance Sheets at September 30, 2018as of March 31, 2019 and December 31, 2017;2018; (ii) Condensed Consolidated Statements of Operations and Comprehensive IncomeLoss for the three and nine months ended September 30, 2018March 31, 2019 and 2017;2018; (iii) Condensed Consolidated Statements of Equity for the ninethree months ended September 30, 2018March 31, 2019 and 2017;2018; (iv) Condensed Consolidated Statements of Cash Flows for the ninethree months ended September 30, 2018March 31, 2019 and 2017;2018; and (v) Notes to Condensed Consolidated Financial Statements. |
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* | | Filed herewith. |
** | | Portions of this exhibit have been redacted because (a) it is (i) not material and (ii) would be competitively harmful if publicly disclosed or (b) it is personally identifiable information, the disclosure of which would be an unwarranted invasion of personal privacy. |
† | | Denotes a management contract or compensatory arrangement. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | | ALTISOURCE PORTFOLIO SOLUTIONS S.A. |
| | | (Registrant) |
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Date: | OctoberApril 25, 20182019 | | By: | /s/ Michelle D. Esterman |
| | | | Michelle D. Esterman |
| | | | Chief Financial Officer |
| | | | (On behalf of the Registrant and as its Principal Financial Officer and Principal Accounting Officer) |