10-Q
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015

OR
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)
 
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 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 or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act):
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company 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 October 20, 2015, there were 19,298,492 outstanding shares of the registrant’s shares of beneficial interest (excluding 6,114,256 shares held as treasury stock).
 


Table of Contents

Table of Contents

ALTISOURCE PORTFOLIO SOLUTIONS S.A.

FORM 10-Q
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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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,
2015
 
December 31,
2014
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
150,147

 
$
161,361

Accounts receivable, net
128,897

 
112,183

Prepaid expenses and other current assets
21,708

 
23,567

Deferred tax assets, net
4,987

 
4,987

Total current assets
305,739

 
302,098

 
 
 
 
Premises and equipment, net
122,416

 
127,759

Goodwill
121,091

 
90,851

Intangible assets, net
217,251

 
245,246

Other assets
20,556

 
22,267

 
 
 
 
Total assets
$
787,053

 
$
788,221

 
 
 
 
LIABILITIES AND EQUITY
Current liabilities:
 
 
 
Accounts payable and accrued expenses
$
86,439

 
$
111,766

Current portion of long-term debt
5,945

 
5,945

Deferred revenue
9,421

 
9,829

Other current liabilities
15,414

 
13,227

Total current liabilities
117,219

 
140,767

 
 
 
 
Long-term debt, less current portion
551,691

 
582,669

Deferred tax liabilities, net
2,748

 
2,694

Other non-current liabilities
17,899

 
20,648

 
 
 
 
Commitments, contingencies and regulatory matters (Note 20)


 


 
 
 
 
Equity:
 
 
 
Common stock ($1.00 par value; 25,413 shares authorized and issued and 19,051 outstanding as of September 30, 2015; 25,413 shares authorized and issued and 20,279 outstanding as of December 31, 2014)
25,413

 
25,413

Additional paid-in capital
94,767

 
91,509

Retained earnings
430,995

 
367,967

Treasury stock, at cost (6,362 shares as of September 30, 2015 and 5,134 shares as of December 31, 2014)
(455,041
)
 
(444,495
)
Altisource equity
96,134

 
40,394

 
 
 
 
Non-controlling interests
1,362

 
1,049

Total equity
97,496

 
41,443

 
 
 
 
Total liabilities and equity
$
787,053

 
$
788,221


See accompanying notes to condensed consolidated financial statements.

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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
 
Three months ended 
 September 30,
 
Nine months ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Revenue
$
272,776

 
$
287,688

 
$
781,579

 
$
823,029

Cost of revenue
173,850

 
188,724

 
514,835

 
520,528

 
 
 
 
 
 
 
 
Gross profit
98,926

 
98,964

 
266,744

 
302,501

Selling, general and administrative expenses
51,338

 
46,748

 
147,719

 
139,303

 
 
 
 
 
 
 
 
Income from operations
47,588

 
52,216

 
119,025

 
163,198

Other income (expense), net:
 
 
 
 
 
 
 
Interest expense
(7,041
)
 
(6,480
)
 
(21,396
)
 
(16,040
)
Loss on sale of HLSS equity securities, net of dividends received

 

 
(1,854
)
 

Other income (expense), net
653

 
131

 
1,477

 
135

Total other income (expense), net
(6,388
)
 
(6,349
)
 
(21,773
)
 
(15,905
)
 
 
 
 
 
 
 
 
Income before income taxes and non-controlling interests
41,200

 
45,867

 
97,252

 
147,293

Income tax provision
(3,303
)
 
(2,752
)
 
(8,101
)
 
(9,300
)
 
 
 
 
 
 
 
 
Net income
37,897

 
43,115

 
89,151

 
137,993

Net income attributable to non-controlling interests
(851
)
 
(828
)
 
(2,457
)
 
(1,974
)
 
 
 
 
 
 
 
 
Net income attributable to Altisource
$
37,046

 
$
42,287

 
$
86,694

 
$
136,019

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
1.94

 
$
1.96

 
$
4.42

 
$
6.16

Diluted
$
1.82

 
$
1.79

 
$
4.19

 
$
5.63

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
19,091

 
21,626

 
19,608

 
22,071

Diluted
20,411

 
23,640

 
20,688

 
24,152

 
 
 
 
 
 
 
 
Transactions with related parties included above:
 
 
 
 
 
 
 
Revenue
See Note 3

 
$
178,151

 
See Note 3

 
$
502,736

Cost of revenue
See Note 3

 
11,062

 
See Note 3

 
27,904

Selling, general and administrative expenses
See Note 3

 
267

 
See Note 3

 
(464
)
 
See accompanying notes to condensed consolidated financial statements.

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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(in thousands)
 
Altisource Equity
 
Non-controlling
interests
 
 
 
Common stock
 
Additional
paid-in 
capital
 
Retained
earnings
 
Treasury 
stock,
at cost
 
 
Total
 
Shares
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2013
25,413

 
$
25,413

 
$
89,273

 
$
239,561

 
$
(197,548
)
 
$
1,042

 
$
157,741

Net income

 

 

 
136,019

 

 
1,974

 
137,993

Distributions to non-controlling interest holders

 

 

 

 

 
(1,813
)
 
(1,813
)
Share-based compensation expense

 

 
1,638

 

 

 

 
1,638

Exercise of stock options

 

 

 
(5,628
)
 
8,151

 

 
2,523

Repurchase of shares

 

 

 

 
(208,820
)
 

 
(208,820
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2014
25,413

 
$
25,413

 
$
90,911

 
$
369,952

 
$
(398,217
)
 
$
1,203

 
$
89,262

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2014
25,413

 
$
25,413

 
$
91,509

 
$
367,967

 
$
(444,495
)
 
$
1,049

 
$
41,443

Net income

 

 

 
86,694

 

 
2,457

 
89,151

Distributions to non-controlling interest holders

 

 

 

 

 
(2,144
)
 
(2,144
)
Share-based compensation expense

 

 
3,258

 

 

 

 
3,258

Exercise of stock options

 

 

 
(2,054
)
 
2,386

 

 
332

Issuance of restricted shares for CastleLine acquisition

 

 

 
(21,612
)
 
36,039

 

 
14,427

Repurchase of shares

 

 

 

 
(48,971
)
 

 
(48,971
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2015
25,413

 
$
25,413

 
$
94,767

 
$
430,995

 
$
(455,041
)
 
$
1,362

 
$
97,496

 
See accompanying notes to condensed consolidated financial statements.

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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Nine months ended 
 September 30,
 
2015
 
2014
Cash flows from operating activities:
 

 
 

Net income
$
89,151

 
$
137,993

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
27,637

 
21,086

Amortization of intangible assets
27,995

 
29,290

Goodwill impairment

 
37,473

Loss on sale of HLSS equity securities, net of dividends received
1,854

 

Change in the fair value of acquisition related contingent consideration
(7,302
)
 
(37,924
)
Share-based compensation expense
3,258

 
1,638

Bad debt expense
3,477

 
4,667

Gain on early extinguishment of debt
(1,986
)
 

Amortization of debt discount
379

 
191

Amortization of debt issuance costs
1,045

 
799

Deferred income taxes
54

 
464

Loss on disposal of fixed assets
50

 
98

Changes in operating assets and liabilities:
 

 
 

Accounts receivable
(19,681
)
 
(58,725
)
Prepaid expenses and other current assets
2,001

 
(6,525
)
Other assets
2,085

 
(1,656
)
Accounts payable and accrued expenses
(20,876
)
 
14,968

Other current and non-current liabilities
10

 
(18,141
)
Net cash provided by operating activities
109,151

 
125,696

 
 
 
 
Cash flows from investing activities:
 

 
 

Additions to premises and equipment
(27,670
)
 
(48,119
)
Acquisition of businesses, net of cash acquired
(11,193
)
 
(14,931
)
Purchase of HLSS equity securities
(29,966
)
 

Proceeds received from sale of and dividends from HLSS equity securities
28,112

 

Other investing activities
722

 
(294
)
Net cash used in investing activities
(39,995
)
 
(63,344
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Proceeds from issuance of long-term debt

 
198,000

Repurchases and repayment of long-term debt
(29,087
)
 
(3,474
)
Debt issuance costs

 
(2,608
)
Proceeds from stock option exercises
332

 
2,523

Purchase of treasury stock
(48,971
)
 
(208,820
)
Distributions to non-controlling interests
(2,144
)
 
(1,813
)
Other financing activities
(500
)
 

Net cash used in financing activities
(80,370
)
 
(16,192
)
 
 
 
 
Net (decrease) increase in cash and cash equivalents
(11,214
)
 
46,160

Cash and cash equivalents at the beginning of the period
161,361

 
130,429

 
 
 
 
Cash and cash equivalents at the end of the period
$
150,147

 
$
176,589

 
 
 
 
Supplemental cash flow information:
 

 
 

Interest paid
$
19,770

 
$
15,049

Income taxes paid, net
6,638

 
12,112

 
 
 
 
Non-cash investing and financing activities:
 

 
 

Acquisition of businesses with restricted shares
$
14,427

 
$

(Decrease) increase in payables for purchases of premises and equipment
(5,326
)
 
482

Decrease in acquisition of businesses from subsequent working capital true-ups

 
(3,711
)
See accompanying notes to condensed consolidated financial statements.

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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 a premier marketplace and transaction solutions provider for the real estate, mortgage and consumer debt industries. Altisource’s proprietary business processes, vendor and electronic payment management software and behavioral science-based analytics improve outcomes for marketplace participants.
 
We are incorporated under the laws of Luxembourg and are publicly traded on the NASDAQ Global Select Market under the symbol “ASPS.” 
We conduct our operations through three reportable segments: Mortgage Services, Financial Services and Technology Services.  In addition, we report our corporate related expenditures and eliminations separately (see Note 21 for a description of our business segments).

Basis of 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 notes 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 and inter-segment transactions and accounts have been eliminated in consolidation. Certain prior year amounts reported by the Mortgage Services and Technology Services segments have been reclassified to conform with the current year presentation.

The Mortgage Partnership of America, L.L.C. (“MPA”), a wholly-owned subsidiary of Altisource, serves as the manager of Best Partners Mortgage Cooperative, Inc., doing business as the Lenders One® mortgage cooperative (“Lenders One”). MPA provides services to Lenders One under a management agreement that ends on December 31, 2025. The management agreement between MPA and Lenders One, pursuant to which MPA is the management company of Lenders One, 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 Lenders One’s economic performance and the right to receive benefits from Lenders One. As a result, Lenders One is presented in the accompanying condensed consolidated financial statements on a consolidated basis with the interests of the members reflected as non-controlling interests. As of September 30, 2015, Lenders One had total assets of $4.2 million and total liabilities of $2.9 million.  As of December 31, 2014, Lenders One had total assets of $7.7 million and total liabilities of $6.7 million.

In September 2014, Best Partners Mortgage Brokers Cooperative, Inc. was launched, doing business as the Wholesale One Mortgage Cooperative (“Wholesale One”), for the wholesale mortgage industry. Wholesale One assists mortgage brokers and wholesale lenders with tools to improve their businesses. In April 2015, Best Partners Residential Investor Cooperative, Inc. was launched, doing business as the Residential Investor Onecooperative (“Residential Investor One”). Residential Investor One was formed to deliver savings and efficiencies to individual and institutional residential real estate investors. MPA provides services to both Wholesale One and Residential Investor One under management agreements that end on July 8, 2039 (with automatic renewals for three successive five year periods) and March 12, 2040 (with automatic renewals for three successive five year periods), respectively. Such management agreements between MPA and the respective cooperative, together with the membership agreements that each of the members signs with the respective cooperative upon joining, represent variable interests in variable interest entities. MPA is the primary beneficiary of Wholesale One and Residential Investor One as it has the power to direct the activities that most significantly impact the economic performance of Wholesale One and Residential Investor One and the right to receive benefits from Wholesale One and Residential Investor One. As a result, Wholesale One and Residential Investor One are presented in the accompanying condensed consolidated financial statements on a consolidated basis with the interests of the

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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)



members reflected as non-controlling interests. As of September 30, 2015, Wholesale One and Residential Investor One each had less than $0.1 million in total assets and less than $0.1 million in total liabilities.

These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in our Form 10-K for the year ended December 31, 2014, filed with the SEC on March 2, 2015, which contains a summary of our significant accounting policies. Certain footnote detail in the Form 10-K is omitted from the information included herein.  

Fair Value Measurements
 
Fair value is defined as an exit price, representing the amount that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The three-tier hierarchy for inputs used in measuring fair value, which prioritizes the inputs used in the methodologies of measuring fair value for assets and liabilities, is as follows:

Level 1 Quoted prices in active markets for identical assets and liabilities
Level 2 Observable inputs other than quoted prices included in Level 1
Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of assets or liabilities.

Financial assets and financial liabilities are classified based on the lowest level of input that is significant to the fair value measurements. Our assessment of the significance of a particular input to the fair value measurements requires judgment, and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy.

Future Adoption of New Accounting Pronouncements

In May 2014, Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606). This standard establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The core principle of the new standard is an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, in response to stakeholders’ requests to defer the effective date of ASU 2014-09 and in consideration of feedback received through extensive outreach with preparers, practitioners and users of financial statements, the FASB deferred the effective date for all entities by one year. This new standard will be effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted, although not prior to annual reporting periods beginning after December 15, 2016. The Company is currently evaluating the impact this new guidance may have on its results of operations and financial position.

In February 2015, FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. This standard addresses the consolidation of certain legal entities relative to current requirements under GAAP of a reporting entity to consolidate another legal entity in situations in which the reporting entity’s contractual rights do not give it the ability to act primarily on its own behalf, the reporting entity does not hold a majority of the legal entity’s voting rights or the reporting entity is not exposed to a majority of the legal entity’s economic benefits or obligations. This standard will be effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the standard in an interim period, any adjustments should be reflected as of the beginning of the year that includes that interim period. The Company is currently evaluating the impact this new guidance may have on its results of operations and financial position.

In April 2015, FASB issued ASU No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. This standard changes the presentation of debt issuance costs in financial statements. Under the ASU, an entity presents such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. This standard will be effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. Early adoption is permitted for financial statements that have not been previously issued. The Company does not expect the adoption of this standard to have a material impact on its results of operations or financial position.

In September 2015, FASB issued ASU No. 2015-16, Business Combination (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments.  This standard requires that adjustments to provisional amounts that are identified during measurement period are recognized in the reporting period in which the adjustment amounts are determined rather than recognizing the adjustments retrospectively.  The standard also requires that the acquirer records, in the same period’s financial statements, the

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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)



effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date.  This standard will be effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period.  Early adoption is permitted for financial statements that have not been previously issued.  The Company does not expect the adoption of this standard to have a material impact on its results of operations or financial position.

NOTE 2 — CUSTOMER CONCENTRATION

Ocwen Financial Corporation together with its subsidiaries (“Ocwen”) is our largest customer. Ocwen purchases certain mortgage services and technology services from us under the terms of master services agreements and amendments to master services agreements (collectively, the “Service Agreements”) with terms extending through August 2025. Certain of the Service Agreements, among other things, contain a “most favored nation” provision and the parties to the Service Agreements have the right to renegotiate pricing. The 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 portfolios. In addition, Ocwen purchases certain origination services from Altisource under an agreement that extends through January 2017. We settle amounts with Ocwen on a daily, weekly or monthly basis depending upon the nature of the service and when the service is provided.

Revenue from Ocwen primarily consists of revenue earned directly from Ocwen and revenue earned from the loans serviced by Ocwen when Ocwen designates us as the service provider. Revenue from Ocwen as a percentage of segment and consolidated revenue was as follows:
 
Three months ended 
 September 30,
 
Nine months ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Mortgage Services
64
%
 
65
%
 
63
%
 
66
%
Financial Services
16
%
 
31
%
 
20
%
 
28
%
Technology Services
51
%
 
42
%
 
52
%
 
40
%
Consolidated revenue
60
%
 
60
%
 
59
%
 
60
%

For the nine months ended September 30, 2015 and 2014, we generated revenue from Ocwen of $464.8 million and $491.6 million, respectively ($163.8 million and $171.8 million for the third quarter of 2015 and 2014, respectively). Services provided to Ocwen during such periods and reported in the Mortgage Services segment included real estate asset management and sales, residential property valuation, trustee management services, property inspection, property preservation and insurance services. Services provided to Ocwen and reported in the Financial Services segment included charge-off mortgage collections. Services provided to Ocwen and reported in the Technology Services segment included information technology infrastructure management and software applications including our software platforms. As of September 30, 2015, accounts receivable from Ocwen totaled $49.7 million, $34.2 million of which is billed and $15.5 million of which is unbilled (See Note 7).

We earn additional revenue related to the portfolios serviced by Ocwen when a party other than Ocwen selects Altisource as the service provider. For the nine months ended September 30, 2015 and 2014, we recognized revenue of $164.7 million and $202.6 million, respectively ($56.7 million and $69.5 million for the third quarter of 2015 and 2014, respectively), related to the portfolios serviced by Ocwen when a party other than Ocwen selected Altisource as the service provider. These amounts are not included in arriving at revenue from Ocwen as a percentage of revenue in the table above.

NOTE 3 — TRANSACTIONS WITH RELATED PARTIES
 
Through January 16, 2015, William C. Erbey served as our Chairman as well as the Executive Chairman of Ocwen and Chairman of each of Home Loan Servicing Solutions, Ltd. (“HLSS”), Altisource Residential Corporation (“Residential”) and Altisource Asset Management Corporation (“AAMC”). Effective January 16, 2015, Mr. Erbey stepped down as the Executive Chairman of Ocwen and Chairman of each of Altisource, HLSS, Residential and AAMC and is no longer a member of the Board of Directors for any of these companies. Consequently, these companies are no longer related parties of Altisource, as defined by FASB Accounting Standards Codification (“ASC”) Topic 850, Related Party Disclosures. The disclosures in this note are limited to the periods that each of Ocwen, HLSS, Residential and AAMC were related parties of Altisource and are not necessarily reflective of current activities with these former related parties.
 



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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)



Ocwen
 
Revenue
For the nine months ended September 30, 2014 and the third quarter of 2014, we generated revenue from Ocwen of $491.6 million and $171.8 million, respectively. For the period from January 1, 2015 through January 16, 2015, we estimate that we generated revenue from Ocwen of $22.9 million. Services provided to Ocwen during such periods included real estate asset management and sales, residential property valuation, trustee management services, property inspection and preservation, insurance services, charge-off mortgage collections, information technology infrastructure management and software applications including our software platforms. As of December 31, 2014, accounts receivable from Ocwen totaled $37.4 million, $22.8 million of which is billed and $14.6 million of which is unbilled (see Note 7).

We record revenue we earn from Ocwen under the Service Agreements at rates we believe to be comparable market rates as we believe they are consistent with the fees we charge to other customers and/or fees charged by our competitors for comparable services.

Cost of Revenue and Selling, General and Administrative Expenses

At times, we have used Ocwen’s contractors and/or employees to support Altisource related services. Ocwen generally bills us for these contractors and/or employees based on their fully-allocated cost. Additionally, through March 31, 2015, we purchased certain data relating to Ocwen’s servicing portfolio in connection with a Data Access and Services Agreement. Based upon our previously provided notice, the Data Access and Services Agreement was terminated effective March 31, 2015. For the nine months ended September 30, 2014 and third quarter of 2014, Ocwen billed us $27.9 million and $11.1 million, respectively, for these items. For the period from January 1, 2015 through January 16, 2015, we estimate that we incurred $1.9 million of expenses related to these items. These amounts are reflected as a component of cost of revenue in the condensed consolidated statements of operations.

We provide certain other services to Ocwen and Ocwen provides certain other services to us in connection with Support Services Agreements. These services included such areas as human resources, vendor management, vendor oversight, corporate services, facilities related services, quality assurance, quantitative analytics, tax and treasury. Billings for these services were generally based on the fully-allocated cost of providing the service based on an estimate of the time and expense of providing the service or estimates thereof. For the nine months ended September 30, 2014 and the third quarter of 2014, we billed Ocwen $3.4 million and $1.2 million, respectively, for these items. For the nine months ended September 30, 2014 and the third quarter of 2014, Ocwen billed us $4.3 million and $1.9 million, respectively, for these items. Of the January 2015 billings to Ocwen, we estimate that $0.1 million relates to the period from January 1, 2015 through January 16, 2015. Of the January 2015 billings from Ocwen, we estimate that $0.3 million relates to the period from January 1, 2015 through January 16, 2015. These amounts are reflected as a component of selling, general and administrative expenses in the condensed consolidated statements of operations.

As of December 31, 2014, accounts payable and accrued expenses payable to Ocwen totaled $11.6 million (see Note 12).

HLSS

Prior to April 2015, HLSS was a publicly traded company whose primary objective was the acquisition of mortgage servicing rights and related servicing advances, loans held for investment and other residential mortgage related assets. We provided HLSS certain finance, human resources, tax and facilities services and sold information technology services to HLSS under a support services agreement. For the nine months ended September 30, 2014 and third quarter of 2014, we billed HLSS $0.7 million and $0.2 million, respectively. For the period from January 1, 2015 through January 16, 2015, our billings to HLSS were immaterial. These amounts are reflected as a reduction of selling, general and administrative expenses in the condensed consolidated statements of operations. As of December 31, 2014, accounts receivable from HLSS was $0.1 million (see Note 7).

Residential and AAMC
 
Residential and AAMC were separated from Altisource on December 21, 2012, their equity was distributed to our shareholders on December 24, 2012 and they are each separate publicly traded companies. Residential is focused on acquiring and managing single family rental properties throughout the United States. Residential has historically acquired its rental properties primarily through the acquisition of sub-performing and non-performing mortgage loan portfolios. However, given evolving market conditions, commencing in the second quarter of 2015, Residential expanded its acquisition strategy to opportunistically acquire portfolios of single family rental properties. Residential also commenced a program to begin purchasing real estate owned (“REO”)

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Notes to Condensed Consolidated Financial Statements (Continued)



properties on a one-by-one basis sourcing listed properties from the Multiple Listing Service and alternative listing sources. AAMC’s primary business is to provide portfolio management and corporate governance services to investment vehicles that own real estate assets. Currently, AAMC’s primary client is Residential.

For purposes of governing certain ongoing relationships between Altisource, Residential and AAMC, we entered into certain agreements with Residential and AAMC. We have agreements, which extend through 2027, to provide Residential with renovation management, lease management, property management and REO asset management services. In addition, we have agreements with Residential and AAMC pursuant to which we may provide services such as finance, human resources, facilities, technology and insurance risk management. Further, we have separate agreements for certain services related to income tax matters, trademark licenses and technology products and services.

For the nine months ended September 30, 2014 and the third quarter of 2014, we generated revenue from Residential of $8.9 million and $4.2 million, respectively, under these services agreements. For the period from January 1, 2015 through January 16, 2015, we estimate that we generated revenue from Residential of $1.0 million. These amounts are reflected in revenue in the condensed consolidated statements of operations. This excludes revenue from services we provide to Residential’s loans serviced by Ocwen or other loan servicers where we are retained by Ocwen or Residential’s other loan servicers. The revenue associated with Residential’s loans serviced by Ocwen is included in Ocwen related party revenue for the nine months ended September 30, 2014 and the third quarter of 2014. As of December 31, 2014, accounts receivable from Residential was $11.3 million (see Note 7).

For the nine months ended September 30, 2014, we billed AAMC $2.9 million under these services agreements, $2.2 million of which is reflected in revenue and $0.7 million of which is reflected as a component of selling, general and administrative expenses in the condensed consolidated statements of operations. For the third quarter of 2014, we billed AAMC $2.3 million under these services agreements, $2.1 million of which is reflected in revenue and $0.2 million of which is reflected as a component of selling, general and administrative expenses in the condensed consolidated statements of operations. For the period from January 1, 2015 through January 16, 2015, our billings to AAMC were immaterial. As of December 31, 2014, accounts receivable from AAMC was $0.1 million (see Note 7).

NOTE 4 — ACQUISITIONS

CastleLine Acquisition

On July 17, 2015, we acquired CastleLine Holdings, LLC and its subsidiaries (“CastleLine”), a specialty risk management and insurance services firm. CastleLine provides financial products and services to parties involved in the origination, underwriting, purchase and securitization of residential mortgages. The purchase consideration was composed of $12.3 million of cash upon closing, $10.5 million of cash payable over four years from the acquisition date and 495 thousand shares of restricted common stock of the Company with a value of $14.4 million as of the closing date. Of the cash payable following acquisition, $3.8 million is contingent on certain future employment conditions of certain of the sellers, and therefore excluded from the purchase price. The CastleLine acquisition is not material in relation to the Company’s results of operations or financial position.

The preliminary allocation of the purchase price is as follows:
(in thousands)
 
 
 
 
 
Cash
 
$
1,088

Accounts receivable, net
 
510

Prepaid expenses
 
66

Restricted cash
 
2,501

Goodwill
 
30,240

 
 
34,405

Accounts payable and accrued expenses
 
(962
)
 
 
 
Purchase price
 
$
33,443



Mortgage Builder Acquisition

On September 12, 2014, we acquired certain assets and assumed certain liabilities of Mortgage Builder Software, Inc. (“Mortgage Builder”) pursuant to a Purchase and Sale Agreement dated July 18, 2014 (the “Purchase and Sale Agreement”). Mortgage Builder

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Notes to Condensed Consolidated Financial Statements (Continued)



is a provider of residential mortgage loan origination and servicing software systems. Pursuant to the terms of the Purchase and Sale Agreement, we paid $15.7 million at closing in cash (net of closing working capital adjustments). Additionally, the Purchase and Sale Agreement provides for the payment of up to $7.0 million in potential additional consideration (the “MB Earn-Out”) based on Adjusted Revenue (as defined in the Purchase and Sale Agreement) in the three consecutive 12-month periods following closing. At closing, we estimated the fair value of the MB Earn-Out to be $1.6 million determined based on the present value of future estimated MB Earn-Out payments. After the acquisition date, the allocation of the purchase price was adjusted based upon information that subsequently became available relating to acquisition date working capital, resulting in an obligation of the sellers to pay the Company $0.2 million. The Mortgage Builder acquisition and the adjustment to the preliminary allocation of the purchase price are not material in relation to the Company’s results of operations or financial position.

The final adjusted allocation of the purchase price is as follows:
(in thousands)
 
 
 
 
 
Cash
 
$
668

Accounts receivable, net
 
1,102

Prepaid expenses
 
38

Premises and equipment, net
 
553

Software
 
1,509

Trademarks and trade names
 
209

Customer relationship
 
4,824

Goodwill
 
9,135

 
 
18,038

Accounts payable and accrued expenses
 
(950
)
 
 
 
Purchase price
 
$
17,088


Owners Acquisition

On November 21, 2014, we acquired certain assets and assumed certain liabilities of Owners Advantage, LLC (“Owners”). Owners is a self-directed online real estate marketplace. We paid $19.8 million at closing in cash and agreed to pay additional contingent consideration of up to an additional $7.0 million over two years following the closing (“Owners Earn Out”), based on Adjusted Revenue (as defined in the purchase agreement). At closing, we estimated the fair value of the Owners Earn Out to be $1.9 million determined based on the present value of future estimated Owners Earn Out payments. The Owners acquisition is not material in relation to the Company’s results of operations or financial position.

The preliminary allocation of the purchase price is as follows:
(in thousands)
 
 
 
 
 
Accounts receivable, net
 
$
41

Prepaid expenses
 
32

Software
 
501

Trademarks and trade names
 
1,431

Goodwill
 
19,775

 
 
21,780

Accounts payable
 
(41
)
 
 
 
Purchase price
 
$
21,739


See Note 22 for information about acquisitions subsequent to September 30, 2015.

NOTE 5 — FAIR VALUE

Fair Value Measurements on a Recurring Basis

In accordance with FASB ASC Topic 805, Business Combinations, the liability for contingent consideration is reflected at fair value and adjusted each reporting period with the change in fair value recognized in earnings. Liabilities for acquisition related contingent consideration were recorded in connection with the acquisitions of Equator, LLC (“Equator”) in 2013, Mortgage Builder and Owners in 2014 and CastleLine in 2015. As of September 30, 2015 and December 31, 2014, the fair value of acquisition

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Notes to Condensed Consolidated Financial Statements (Continued)



related contingent consideration was $3.8 million and $11.6 million, respectively (see Note 14). We measure the liabilities for acquisition related contingent consideration using Level 3 inputs as they are determined based on the present value of future estimated payments, which include sensitivities pertaining to discount rates and financial projections. There were no transfers between different levels during the periods presented.

During the second quarter of 2015, we reached an agreement with the former owners of Equator to extinguish any liability for Equator related contingent consideration (“Equator Earn Out”) in exchange for $0.5 million. In connection with this settlement, we reduced the liability for the Equator Earn Out to $0 and recognized a $7.6 million increase in earnings. This transaction is reflected as a reduction in selling, general and administrative expenses in the condensed consolidated statements of operations (see Note 17).

During the second quarter of 2014, the fair value of the Equator Earn Out was reduced by $37.9 million with a corresponding increase in earnings based on management’s revised estimates that expected earnings of Equator were lower than projected at the time of acquisition. The reduction in fair value is reflected as a reduction of selling, general and administrative expenses in the condensed consolidated statements of operations (see Note 17).

Fair Value of Financial Instruments

The following table presents the carrying amount and estimated fair value of financial instruments held by the Company at September 30, 2015 and December 31, 2014 that are not carried at fair value. The fair values are estimated using market information and what the Company believes to be appropriate valuation methodologies under GAAP:

 
 
September 30, 2015
 
December 31, 2014
(in thousands)
 
Carrying amount
 
Fair value
 
Carrying amount
 
Fair value
 
 
 
 
Level 1
 
Level 2
 
Level 3
 
 
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
150,147

 
$
150,147

 
$

 
$

 
$
161,361

 
$
161,361

 
$

 
$

Restricted cash
 
4,801

 
4,801

 

 

 
3,022

 
3,022

 

 

Long-term debt
 
560,084

 

 
498,475

 

 
591,543

 

 
467,319

 


Our financial assets and liabilities primarily include cash and cash equivalents, restricted cash and long-term debt. Cash and cash equivalents and restricted cash are carried at amounts that approximate their fair value due to the short-term nature of these instruments and were measured using Level 1 inputs. The fair value of our long-term debt 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.

NOTE 6 — AVAILABLE FOR SALE SECURITIES - INVESTMENT IN HLSS

From March 10, 2015 to March 17, 2015, we purchased 1.6 million shares of HLSS common stock in the open market for $30.0 million (1,613,125 shares at an average price per share of $18.58). This investment was classified as available for sale. Unrealized gains and losses on available for sale securities are reflected in other comprehensive income, unless there is an impairment that is other than temporary. In the event that a decline in market value is other than temporary, we record a charge to earnings and a new cost basis in the investment is established.

On April 6, 2015, HLSS completed the sale of substantially all of its assets to New Residential Investment Corp. (“NRZ”) and adopted a plan of complete liquidation and dissolution. During April 2015, we received liquidating dividends and other dividends from HLSS totaling $20.4 million. Between April 22, 2015 and April 29, 2015, we sold all of our 1.6 million shares of HLSS common stock in the open market for $7.7 million (1,613,125 shares at an average price per share of $4.75). As a result of these transactions, we recognized a net loss of $1.9 million for the nine months ended September 30, 2015 (no comparative amount for the nine months ended September 30, 2014) in connection with our investment in HLSS.



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Notes to Condensed Consolidated Financial Statements (Continued)



NOTE 7 — ACCOUNTS RECEIVABLE, NET
 
Accounts receivable, net consists of the following:
(in thousands)
 
September 30,
2015
 
December 31,
2014
 
 
 
 
 
Billed
 
$
93,113

 
$
73,532

Unbilled
 
57,487

 
61,326

 
 
150,600

 
134,858

Less: allowance for doubtful accounts
 
(21,703
)
 
(22,675
)
 
 
 
 
 
Total
 
$
128,897

 
$
112,183


Unbilled receivables consist primarily of certain asset management and default management services for which we generally recognize revenues over the service delivery period but bill following completion of the service. We also include in unbilled receivables amounts that are earned during a month and billed in the following month.

NOTE 8 — PREPAID EXPENSES AND OTHER CURRENT ASSETS
 
Prepaid expenses and other current assets consist of the following:
(in thousands)
 
September 30,
2015
 
December 31,
2014
 
 
 
 
 
Maintenance agreements, current portion
 
$
6,395

 
$
6,367

Income taxes receivable
 
4,959

 
5,258

Prepaid expenses
 
4,959

 
6,989

Other current assets
 
5,395

 
4,953

 
 
 
 
 
Total
 
$
21,708

 
$
23,567


NOTE 9 — PREMISES AND EQUIPMENT, NET
 
Premises and equipment, net consist of the following:
(in thousands)
 
September 30,
2015
 
December 31,
2014
 
 
 
 
 
Computer hardware and software
 
$
175,144

 
$
140,799

Office equipment and other
 
20,037

 
36,032

Furniture and fixtures
 
13,921

 
12,231

Leasehold improvements
 
35,978

 
34,069

 
 
245,080

 
223,131

Less: accumulated depreciation and amortization
 
(122,664
)
 
(95,372
)
 
 
 
 
 
Total
 
$
122,416

 
$
127,759


Depreciation and amortization expense amounted to $27.6 million and $21.1 million for the nine months ended September 30, 2015 and 2014, respectively ($9.2 million and $7.7 million for the third quarter of 2015 and 2014, 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.


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Notes to Condensed Consolidated Financial Statements (Continued)



NOTE 10 — GOODWILL AND INTANGIBLE ASSETS, NET
 
Goodwill
 
The following is a summary of goodwill by segment:
(in thousands)
 
Mortgage
Services
 
Financial
Services
 
Technology
Services
 
Total
 
 
 
 
 
 
 
 
 
Balance, December 31, 2014
 
$
32,733

 
$
2,378

 
$
55,740

 
$
90,851

Acquisition of CastleLine
 
30,240

 

 

 
30,240

 
 
 
 
 
 
 
 
 
Balance, September 30, 2015
 
$
62,973

 
$
2,378

 
$
55,740

 
$
121,091


During the second quarter of 2014, management evaluated and determined that the Equator goodwill should be tested for impairment as a result of the decline in the fair value of the Equator Earn Out (see Note 5). Consequently, we initiated a quantitative two-step goodwill impairment test by comparing the carrying value of the net assets of Equator to its fair value based on a discounted cash flow analysis. Based on our assessment, we determined that the fair value of Equator was less than its carrying value and goodwill was impaired. Consequently, we recorded an impairment loss of $37.5 million in the second quarter of 2014, which is reflected as a component of selling, general and administrative expenses in the condensed consolidated statements of operations for the nine months ended September 30, 2014 (see Note 17).

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,
2015
 
December 31,
2014
 
September 30,
2015
 
December 31,
2014
 
September 30,
2015
 
December 31,
2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Definite lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trademarks and trade names
 
13
 
$
13,889

 
$
13,889

 
$
(6,240
)
 
$
(5,016
)
 
$
7,649

 
$
8,873

Customer related intangible assets
 
10
 
289,308

 
289,308

 
(105,041
)
 
(79,606
)
 
184,267

 
209,702

Operating agreement
 
20
 
35,000

 
35,000

 
(9,917
)
 
(8,604
)
 
25,083

 
26,396

Intellectual property
 
10
 
300

 
300

 
(48
)
 
(25
)
 
252

 
275

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
 
 
$
338,497

 
$
338,497

 
$
(121,246
)
 
$
(93,251
)
 
$
217,251

 
$
245,246

 
Amortization expense for definite lived intangible assets was $28.0 million and $29.3 million for the nine months ended September 30, 2015 and 2014, respectively ($10.1 million and $9.7 million for the third quarter of 2015 and 2014, respectively). Expected annual definite lived intangible asset amortization for 2015 through 2019 is $39.2 million, $34.4 million, $27.9 million, $24.6 million and $22.3 million, respectively.
 

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Notes to Condensed Consolidated Financial Statements (Continued)



NOTE 11 — OTHER ASSETS
 
Other assets consist of the following:
(in thousands)
 
September 30,
2015
 
December 31,
2014
 
 
 
 
 
Security deposits, net
 
$
5,707

 
$
7,277

Debt issuance costs, net
 
6,769

 
8,099

Maintenance agreements, non-current portion
 
2,276

 
3,324

Restricted cash
 
4,801

 
3,022

Other
 
1,003

 
545

 
 
 
 
 
Total
 
$
20,556

 
$
22,267


NOTE 12 — ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
 
Accounts payable and accrued expenses consist of the following:
(in thousands)
 
September 30,
2015
 
December 31,
2014
 
 
 
 
 
Accounts payable
 
$
8,535

 
$
28,280

Income taxes payable
 
8,413

 
7,643

Accrued expenses - general
 
26,600

 
31,693

Accrued salaries and benefits
 
42,891

 
44,150

 
 
 
 
 
Total
 
$
86,439

 
$
111,766


Other current liabilities consist of the following:
(in thousands)
 
September 30,
2015
 
December 31,
2014
 
 
 
 
 
Unfunded cash account balances
 
$
4,163

 
$
4,788

Other
 
11,251

 
8,439

 
 
 
 
 
Total
 
$
15,414

 
$
13,227


NOTE 13 — LONG-TERM DEBT
 
Long-term debt consists of the following:
(in thousands)
 
September 30,
2015
 
December 31,
2014
 
 
 
 
 
Senior secured term loan
 
$
560,084

 
$
591,543

Less: unamortized discount, net
 
(2,448
)
 
(2,929
)
Net long-term debt
 
557,636

 
588,614

Less: current portion
 
(5,945
)
 
(5,945
)
 
 
 
 
 
Long-term debt, less current portion
 
$
551,691

 
$
582,669


On November 27, 2012, Altisource Solutions S.à r.l., a wholly-owned subsidiary of the Company, entered into a senior secured term loan agreement with Bank of America, N.A., as administrative agent, and certain lenders. The Company and certain wholly-owned subsidiaries are guarantors of the term loan (collectively, the “Guarantors”). We subsequently amended the senior secured term loan agreement to increase the principal amount of the senior secured term loan and, among other changes, re-establish the $200.0 million incremental term loan facility accordion, lower the interest rate, extend the maturity date by approximately one year and increase the maximum amount of Restricted Junior Payments (as defined in the senior secured term loan agreement; other capitalized terms, unless defined herein, are defined in the senior secured term loan agreement).



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After giving effect to the third amendment entered into on August 1, 2014, the term loan must be repaid in equal consecutive quarterly principal installments of $1.5 million, which commenced on September 30, 2014, with the balance due at maturity. All amounts outstanding under the senior secured term loan agreement will become due on the earlier of (i) December 9, 2020 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 or as otherwise provided in the loan agreement upon the occurrence of any event of default under the senior secured term loan agreement.
 
In addition to the scheduled principal payments, subject to certain exceptions, the term loan is subject to mandatory prepayment upon issuances of debt, 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 senior secured term loan agreement.  No mandatory prepayments were owed for the nine months ended September 30, 2015

In June 2015, the Company repurchased a portion of its senior secured term loan with a par value of $16.0 million at a 9% discount, recognizing a net gain of $1.1 million on the early extinguishment of a portion of the debt. In September 2015, the Company repurchased a portion of its senior secured term loan with a par value of $11.0 million at an 11% discount, recognizing a net gain of $0.9 million on the early extinguishment of a portion of the debt. These net gains are included in other income (expense), net in the condensed consolidated statements of operations (See Note 18).
 
The term loan bears interest at rates based upon, at our option, the Adjusted Eurodollar Rate or the Base RateAdjusted Eurodollar Rate loans bear interest at a rate per annum equal to the sum of (i) the greater of (x) the Adjusted Eurodollar Rate for the applicable interest period and (y) 1.00% plus (ii) a 3.50% margin.  Base Rate 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) a 2.50% margin. The interest rate at September 30, 2015 was 4.50%.
 
Term loan payments are guaranteed by the Guarantors and are secured by a pledge of all equity interests of certain subsidiaries as well as a lien on substantially all of the assets of Altisource Solutions S.à r.l. and the Guarantors, subject to certain exceptions.
 
The senior secured term loan agreement includes covenants that restrict or limit, among other things, our ability to: create liens and encumbrances; incur additional indebtedness; sell, transfer or dispose of assets; make Restricted Junior Payments including share repurchases, dividends and repayment of junior indebtedness; change lines of business; 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.
 
The senior secured term loan 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 senior secured term loan agreement within five days of becoming due, (ii) material incorrectness of representations and warranties when made, (iii) breach of covenants, (iv) failure to pay principal or interest on any other debt that equals or exceeds $40.0 million when due, (v) default on any other debt that equals or exceeds $40.0 million that causes, or gives the holder or holders of such debt the ability to cause, an acceleration of such debt, (vi) occurrence of a Change of Control, (vii) bankruptcy and insolvency events, (viii) entry by a court of one or more judgments against us in an amount in excess of $40.0 million that remain unbonded, undischarged or unstayed for a certain number of days after the entry thereof, (ix) the occurrence of certain ERISA events and (x) the failure of certain Loan Documents to be in full force and effect.  If any event of default occurs and is not cured within applicable grace periods set forth in the senior secured term loan agreement or waived, all loans and other obligations could become due and immediately payable and the facility could be terminated.

At September 30, 2015, debt issuance costs were $6.8 million, net of $3.5 million of accumulated amortization.  At December 31, 2014, debt issuance costs were $8.1 million, net of $2.2 million of accumulated amortization. Debt issuance costs are included in other assets in the accompanying condensed consolidated balance sheets.
 
Interest expense on the term loans, including amortization of debt issuance costs and the net debt discount, totaled $21.4 million and $16.0 million for the nine months ended September 30, 2015 and 2014, respectively ($7.0 million and $6.5 million for the third quarter of 2015 and 2014, respectively).


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Notes to Condensed Consolidated Financial Statements (Continued)



NOTE 14 — OTHER NON-CURRENT LIABILITIES
 
Other non-current liabilities consist of the following:
(in thousands)
 
September 30,
2015
 
December 31,
2014
 
 
 
 
 
Acquisition related contingent consideration
 
$
2,881

 
$
11,616

Other non-current liabilities
 
15,018

 
9,032

 
 
 
 
 
Total
 
$
17,899

 
$
20,648


NOTE 15 — SHAREHOLDERS’ EQUITY AND SHARE-BASED COMPENSATION
 
Stock Repurchase Plan

On May 20, 2015, our shareholders approved a new stock repurchase program, which replaced the previous stock repurchase program. Under the new program, we are authorized to purchase up to 3.0 million shares of our common stock, based on a limit of 15% 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.  This is in addition to amounts previously purchased under the prior programs.  We purchased 1.8 million shares of our common stock at an average price of $27.90 per share during the nine months ended September 30, 2015 and 2.0 million shares at an average price of $104.88 per share during the nine months ended September 30, 2014 (0.2 million shares at an average price of $26.88 per share for the third quarter of 2015 and 1.3 million shares at an average price of $102.45 per share for the third quarter of 2014). As of September 30, 2015, approximately 1.8 million shares of common stock remain available for repurchase under the new program. Our senior secured term loan limits the amount we can spend on share repurchases and may prevent repurchases in certain circumstances. As of September 30, 2015, approximately $320 million was available to repurchase our common stock under our senior secured term loan.
 
Share-Based Compensation
 
We issue share-based awards in the form of stock options and certain other equity-based awards for certain employees and officers.  We recorded share-based compensation expense of $3.3 million and $1.6 million for the nine months ended September 30, 2015 and 2014, respectively ($1.9 million and $0.5 million for the third quarter of 2015 and 2014, respectively). As of September 30, 2015, estimated unrecognized compensation costs related to share-based awards amounted to $12.3 million, which we expect to recognize over a weighted average remaining requisite service period of approximately 2.67 years.

Stock Options
 
Stock option grants are composed of a combination of service-based and market-based options.
 
Service-Based Options.  These options are granted at fair value on the date of grant. The options generally vest over three or four years with equal annual cliff-vesting and expire on the earlier of ten years after the date of grant or following termination of service. A total of 1.3 million service-based awards were outstanding at September 30, 2015.
 
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 internally as “ordinary performance” grants, 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 internally as “extraordinary performance” grants, 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. The vesting schedule for all market-based awards is 25% upon achievement of the criteria and thereafter the remaining 75% in three equal annual installments. A total of 2.0 million market-based awards were outstanding at September 30, 2015.

The Company granted 0.7 million stock options (at a weighted average exercise price of $23.19 per share) and 0.1 million stock options (at a weighted average exercise price of $92.91 per share) during the nine months ended September 30, 2015 and September 30, 2014, respectively.


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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)



The fair value of the service-based options was determined using the Black-Scholes option pricing model and the fair value of the market-based options was determined using a lattice (binomial) model. The following assumptions were used to determine the fair value as of the grant date:
 
 
Nine months ended 
 September 30, 2015
 
Nine months ended 
 September 30, 2014
 
 
Black-Scholes
 
Binomial
 
Black-Scholes
 
Binomial
 
 
 
 
 
 
 
 
 
Risk-free interest rate (%)
 
1.50 - 1.78

 
0.02 - 2.26

 
1.80 - 1.90

 
0.02 - 2.49

Expected stock price volatility (%)
 
55.06 - 58.58

 
55.06 - 57.60

 
37.57 - 38.58

 
38.48 - 38.58

Expected dividend yield
 

 

 

 

Expected option life (in years)
 
6.00 - 6.25

 

 
6.25

 

Contractual life (in years)
 

 
13.00 - 14.00

 

 
14.00

Fair value
 
$10.01 - $17.34
 
$9.91 - $16.13
 
$35.37 - $41.79
 
$25.51 - $31.93

The following table summarizes the weighted average grant date fair value of stock options granted, the total intrinsic value of stock options exercised and the grant date fair value of stock options that vested during the period presented:
 
 
Nine months ended September 30,
(in thousands, except per share amounts)
 
2015
 
2014
 
 
 
 
 
Weighted average grant date fair value of options granted per share
 
$
12.62

 
$
26.39

Intrinsic value of options exercised
 
232

 
7,636

Grant date fair value of options that vested during the period
 
1,195

 
1,412

 
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, 2014
2,601,892

 
$
21.21

 
4.44
 
$
47,805

Granted
729,910

 
23.19

 
 
 
 
Exercised
(28,109
)
 
11.78

 
 
 
 

Forfeited
(70,402
)
 
69.47

 
 
 
 

 
 
 
 
 
 
 
 
Outstanding at September 30, 2015
3,233,291

 
20.73

 
4.97
 
27,352

 
 
 
 
 
 
 
 
Exercisable at September 30, 2015
2,324,689

 
14.39

 
3.30
 
25,405


Other Share-Based Awards

The Company’s other share-based and similar types of awards consist of restricted shares and Equity Appreciation Rights (“EARs”).

The restricted shares are service-based awards that vest over one to four years with either annual cliff-vesting, vesting of all of the restricted shares at the end of the vesting period or vesting beginning after two years of service. Restricted shares are granted at fair value on the date of grant. The Company granted 0.2 million restricted shares (at a weighted average price of $19.06 per share) during the nine months ended September 30, 2015. A total of 0.3 million service-based restricted shares were outstanding at September 30, 2015.


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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)



The following table summarizes the activity related to our restricted shares:
 
Number of
restricted shares
 
 
Outstanding at December 31, 2014
26,224

Granted
245,938

Issued
(2,836
)
 
 
Outstanding at September 30, 2015
269,326


EARs provide participating employees of certain divisions of the Company with the potential to receive a percentage of the increase in the value of the applicable division during the term of the EARs. The Company has established EAR plans for three divisions: Consumer Analytics, Document Solutions and Marketplace Solutions. These EAR plans allow for the issuance of EARs representing up to 15% of each of these divisions. The EARs consist of service-based awards and performance-based awards. Service-based EARs generally vest in equal installments on the first, second, third and fourth anniversaries of the grant date. Performance-based EARs begin to vest on the date certain performance criteria are achieved by the applicable division of the Company.

The participating employee will have the opportunity at certain times specified in the award agreement to exercise EARs that have vested and in exchange will receive share equivalency units, the number of which will be based on the increase in value of the division and the amount of EARs awarded to the participating employee. After a holding period of six months and one day, the Company, the applicable division or an affiliate of the Company may redeem the share equivalency units for a payment equal to the then fair market value of the share equivalency units. At the Company’s option, the share equivalency units may be redeemed for cash, shares of Altisource’s common stock under its shareholder approved equity incentive plan, a subordinated note payable or, under certain circumstances where the division has been converted into a company form, shares of that company. Upon the occurrence of certain corporate transactions, including the sale of the division, a qualified initial public offering of the equity of the division or a spin-off of the division, the Company will have the right to repurchase and cancel any outstanding share equivalency units or shares of the division that have been issued in payment of redeemed share equivalency units, and the applicable plan administrator will have the discretion to adjust the terms of the applicable division equity appreciation rights plan and any outstanding EARs.

The Company granted EARs with a total grant date fair value of $1.0 million during the nine months ended September 30, 2015 related to the Company's Consumer Analytics, Document Solutions, and Marketplace Solutions divisions. Generally, 25% of these EARs are service-based and 75% of these EARs are performance-based.

The following table summarizes the activity related to our EARs (expressed as a percentage of each of the divisions):
 
 
Consumer Analytics
 
Document Solutions
 
Marketplace Solutions
 
 
 
 
 
 
 
Outstanding at December 31, 2014
 

 

 

Granted
 
5.6
%
 
4.5
%
 
4.9
%
 
 
 
 
 
 
 
Outstanding at September 30, 2015
 
5.6
%
 
4.5
%
 
4.9
%

The Company intends to issue additional EARs to employees.

Share-based compensation expense for stock options, restricted shares and EARs is recorded net of estimated forfeiture rates ranging from 0% to 10%.




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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)



NOTE 16 — 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, reimbursable expenses, technology and telecommunications expenses as well as depreciation and amortization of operating assets. The components of cost of revenue were as follows:
 
 
Three months ended 
 September 30,
 
Nine months ended 
 September 30,
(in thousands)
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
 
Compensation and benefits
 
$
62,997

 
$
68,502

 
$
197,213

 
$
184,273

Outside fees and services
 
66,952

 
62,086

 
175,021

 
186,279

Reimbursable expenses
 
26,456

 
39,149

 
89,242

 
100,220

Technology and telecommunications
 
10,630

 
13,388

 
32,878

 
34,078

Depreciation and amortization
 
6,815

 
5,599

 
20,481

 
15,678

 
 
 
 
 
 
 
 
 
Total
 
$
173,850

 
$
188,724

 
$
514,835

 
$
520,528


NOTE 17 — SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
 
Selling, general and administrative expenses include payroll and employee benefits associated with personnel employed in executive, finance, law, compliance, human resources, vendor management, risk, sales and marketing roles.  This category also includes occupancy costs, professional fees, marketing costs and depreciation and amortization of non-operating assets.  The components of selling, general and administrative expenses were as follows:
 
 
Three months ended 
 September 30,
 
Nine months ended 
 September 30,
(in thousands)
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
 
Compensation and benefits
 
$
13,906

 
$
11,770

 
$
40,305

 
$
31,870

Occupancy related costs
 
9,808

 
9,041

 
30,509

 
27,848

Amortization of intangible assets
 
10,118

 
9,717

 
27,995

 
29,290

Professional services
 
4,008

 
4,106

 
18,637

 
10,896

Marketing costs
 
7,325

 
6,021

 
18,598

 
18,805

Depreciation and amortization
 
2,390

 
2,112

 
7,156

 
5,408

Change in the fair value of Equator Earn Out
 

 

 
(7,591
)
 
(37,924
)
Goodwill impairment
 

 

 

 
37,473

Other
 
3,783

 
3,981

 
12,110

 
15,637

 
 
 
 
 
 
 
 
 
Total
 
$
51,338

 
$
46,748

 
$
147,719

 
$
139,303

 
NOTE 18 — OTHER INCOME (EXPENSE), NET
 
Other income (expense), net consists of the following:
 
 
Three months ended 
 September 30,
 
Nine months ended 
 September 30,
(in thousands)
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
 
Gain on early extinguishment of debt
 
$
872

 
$

 
$
1,986

 
$

Interest income
 
39

 
37

 
101

 
63

Other, net
 
(258
)
 
94

 
(610
)
 
72

 
 
 
 
 
 
 
 
 
Total
 
$
653

 
$
131

 
$
1,477

 
$
135


NOTE 19 — 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.

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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)



 
Basic and diluted EPS are calculated as follows:
 
 
Three months ended 
 September 30,
 
Nine months ended 
 September 30,
(in thousands, except per share data)
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
 
Net income attributable to Altisource
 
$
37,046

 
$
42,287

 
$
86,694

 
$
136,019

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding, basic
 
19,091

 
21,626

 
19,608

 
22,071

Dilutive effect of stock options and restricted shares
 
1,320

 
2,014

 
1,080

 
2,081

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding, diluted
 
20,411

 
23,640

 
20,688

 
24,152

 
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
 
Basic
 
$
1.94

 
$
1.96

 
$
4.42

 
$
6.16

 
 
 
 
 
 
 
 
 
Diluted
 
$
1.82

 
$
1.79

 
$
4.19

 
$
5.63


For the nine months ended September 30, 2015 and 2014, 0.6 million options and less than 0.1 million options, respectively, that were anti-dilutive have been excluded from the computation of diluted EPS (0.4 million options and less than 0.1 million options for the third quarter of 2015 and 2014, respectively).  These options were anti-dilutive because 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, 2015 and 2014 are 0.3 million options and 0.1 million options, respectively (0.3 million options and 0.1 million options for the third quarter of 2015 and 2014, respectively), granted for shares that are issuable upon the achievement of certain market and performance criteria related to our common stock price and an annualized rate of return to investors that have not yet been met.

NOTE 20 — COMMITMENTS, CONTINGENCIES AND REGULATORY MATTERS
 
Litigation
 
From time to time, we are involved in legal and administrative proceedings arising in the course of our business.  We record a liability for these matters 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.
 
On September 8, 2014, the West Palm Beach Firefighter’s Pension Fund filed a putative securities class action suit against Altisource and certain of its officers and directors in the United States District Court for the Southern District of Florida alleging violations of the Securities Exchange Act of 1934 and Rule 10b-5 with regard to disclosures concerning pricing and transactions with related parties that allegedly inflated Altisource share prices. The Court subsequently appointed the Pension Fund of the International Union of Painters and Allied Trades District Council 35 and the Annuity Fund of the International Union of Painters and Allied Trades District Council 35 as Lead Plaintiffs. On January 30, 2015, Lead Plaintiffs filed an amended class action complaint which added Ocwen Financial Corporation as a defendant, and seeks a determination that the action may be maintained as a class action on behalf of purchasers of the Company’s securities between April 25, 2013 and December 21, 2014 and an unspecified amount of damages. Altisource moved to dismiss the suit on March 23, 2015. On September 4, 2015, the Court granted the defendants’ motion to dismiss, finding that the Plaintiffs’ amended complaint failed to state a claim as to any of the defendants, but permitting the Plaintiffs to file another amended complaint. Lead Plaintiffs subsequently filed second and third amended complaints with substantially similar claims and theories. Altisource intends to move to dismiss the third amended complaint and to continue to vigorously defend this suit.
    
On February 11, 2015, W.A. Sokolowski, an alleged shareholder of Ocwen Financial Corporation, filed an amended shareholder derivative complaint in the United States District Court for the Southern District of Florida against Ocwen Financial Corporation, certain of its officers and directors, Altisource and other companies. The suit seeks recovery of an unspecified amount of damages for alleged breaches of fiduciary duty by Ocwen’s current and former officers and directors, which were allegedly aided and abetted by Altisource and other defendants. Ocwen moved to stay this action, and on September 29, 2015, the Court denied the motion to stay without prejudice. Altisource intends to vigorously defend the lawsuit and to move to dismiss all claims against it.


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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)



On March 26, 2015, Robert Moncavage, an alleged shareholder of Ocwen Financial Corporation, filed an amended shareholder derivative complaint in the Circuit Court of the Fifteenth Judicial Circuit in and for Palm Beach County, Florida against Ocwen Financial Corporation, certain of its current and former officers and directors, Altisource and other companies. The suit seeks recovery of an unspecified amount of damages for alleged breaches of fiduciary duty by Ocwen’s current and former officers and directors, which were allegedly aided and abetted by Altisource and other defendants. Ocwen has moved to stay this action, and if the litigation proceeds, Altisource intends to vigorously defend the lawsuit and to move to dismiss all claims against it.

Altisource is unable to predict the outcomes of these lawsuits or reasonably estimate the potential loss, if any, arising from the suits, given that Altisource’s forthcoming motions to dismiss have not yet been adjudicated in the first and second cases, a motion to stay has been filed in the second and third cases, discovery has not commenced in any of the cases and significant legal and factual issues remain to be determined in all three cases.

In addition to the matters referenced above, we are 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
Our business is subject to regulation and oversight by federal, state and local governmental authorities. We periodically receive subpoenas, civil investigative demands or other requests for information from regulatory agencies in connection with their regulatory or investigative authority. We are currently responding to such inquiries from federal and state agencies relating to certain aspects of our business. We believe it is premature to predict the potential outcome or to estimate any potential financial impact in connection with these inquiries.

Ocwen Related Matters

Ocwen is our largest customer and 59% of our revenue for the nine months ended September 30, 2015 (60% of our revenue for the third quarter of 2015) was from Ocwen. Additionally, 21% of our revenue for both the nine months ended September 30, 2015 and the third quarter of 2015 was earned on the portfolios serviced by Ocwen, when a party other than Ocwen selected Altisource as the service provider. Ocwen has been and is subject to a number of pending federal and state regulatory investigations, inquiries and requests for information that have or could result in adverse regulatory actions against Ocwen. For example, as a result of various regulatory actions, Ocwen is (i) subject to an independent auditor’s review of compliance with California servicing laws and has agreed not to obtain any new servicing rights in California until the regulator is satisfied with future document requests, (ii) operating under the oversight of an on-site operations monitor imposed by the New York Department of Financial Services (“NYDFS”), which is assessing the adequacy and effectiveness of Ocwen’s operations, including information technology systems, (iii) required to perform benchmarking pricing studies for transactions with related parties, which are subject to periodic review by the monitor imposed by the NYDFS and (iv) subject to requirements under an agreement with the Consumer Finance Protection Bureau and various states attorneys general and agencies that imposed specific servicing guidelines and oversight by an independent national monitor. In addition to these matters, Ocwen continues to be subject to other regulatory investigations, inquiries and requests for information and pending legal proceedings, and Ocwen may become subject to future federal and state regulatory investigations, inquiries and requests for information, any of which could also result in adverse regulatory or other actions against Ocwen.

On April 6, 2015, HLSS completed the sale of substantially all of its assets to NRZ. As a result, NRZ owns the rights to approximately 77% of Ocwen’s non-government-sponsored enterprise (“non-GSE”) servicing rights. In connection with the sale, Ocwen and HLSS/NRZ amended their agreement to, among other things, eliminate HLSS/NRZ’s ability to transfer servicing away from Ocwen for a servicer rating downgrade for two years (unless HLSS/NRZ determine in good faith that a trustee, or other party entitled to terminate, intends to terminate Ocwen as the servicer). Under the amended agreement, HLSS/NRZ has the ability to transfer servicing away from Ocwen if Ocwen fails to maintain certain minimum servicer ratings on or after April 6, 2017. As of September 30, 2015, Ocwen’s servicer ratings were below the rating required on or after April 6, 2017 under its amended agreement with HLSS/NRZ. The amendment also extends the term of the initial six-year agreements by up to an additional two years.

If Ocwen is not able to increase its servicer ratings prior to the expiration of the suspension of the HLSS/NRZ rights to transfer servicing, HLSS/NRZ could choose to transfer servicing away from Ocwen pursuant to its contract. Further, certain bondholders of Ocwen-serviced residential mortgage-backed securities (“RMBS”) have alleged that Ocwen, as servicer of certain mortgage-backed securities trusts, defaulted on these servicing agreements. Bondholders of RMBS may attempt to replace Ocwen as servicer as a result of such ratings downgrades or the alleged defaults.


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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)



The foregoing may have significant and varied effects on Ocwen’s business and our continuing relationships with Ocwen. For example, Ocwen may be required to alter the way it conducts business, including the parties it contracts with for services (including information technology services), it may be required to seek changes to its existing pricing structure with us or otherwise, it may lose or sell some or all of its non-GSE servicing rights or subservicing arrangements or may lose one or more of its state servicing licenses. Additional regulatory actions may impose additional restrictions on or require changes in Ocwen’s business that would 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 volume of services they purchase from us or the loss of other customers.

If any of the following events occurred, Altisource’s revenue would be significantly lower and our results of operations would be materially adversely affected, including from the 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 or sells a significant portion or all of its non-GSE servicing rights or subservicing arrangements and Altisource fails to be retained as a service provider
Ocwen loses its state servicing licenses in states with a significant number of loans in Ocwen’s servicing portfolio and Altisource fails to be retained as a service provider
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

Management cannot predict the outcome of the Ocwen related matters or the impact they may have on Altisource. However, in the event these Ocwen related matters materially negatively impact Altisource, we believe the impact to Altisource would occur over an extended period of time and the variable nature of our cost structure would allow us to realign our cost structure in line with remaining revenue.

In this regard, we have a plan that allows us to efficiently execute on this realignment. We believe that transfers of Ocwen’s servicing rights to a successor servicer(s) would take an extended period of time because of the approval required from many parties, including regulators, rating agencies, RMBS trustees, lenders and others. During this period of time, we believe we would continue to generate revenue from the services we provide to the portfolio. Additionally, we have several growth initiatives that focus on diversifying and growing our revenue and customer base. Our major growth initiatives include:

Continue to attract clients to our comprehensive servicer related services
Continue to grow our origination services and technologies
Continue to expand our innovative online real estate marketplace
Continue to grow our rental and renovation services and technologies

We have an established sales and marketing strategy to support each of these initiatives.

Management believes our plans, together with current liquidity and cash flows from operations, will be sufficient to meet working capital, capital expenditures, debt service and other cash needs for at least the next year. However, there can be no assurance that our plans would be successful or our operations would be profitable.

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 Financial Services collections.  These amounts are held in escrow and trust accounts for limited periods of time and are not included in the condensed consolidated balance sheets.  Amounts held in escrow and trust accounts were $61.2 million and $62.5 million at September 30, 2015 and December 31, 2014, respectively.

NOTE 21 — 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 classify our businesses into three reportable segments. The Mortgage Services segment provides services that span the mortgage and real estate lifecycle and are typically outsourced by loan servicers, loan originators, home investors and other sellers of single

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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)



family homes. The Financial Services segment provides collection and customer relationship management services primarily to debt originators and servicers (e.g., credit card, auto lending, retail credit and mortgage) and the utility, insurance and hotel industries. The Technology Services segment provides a portfolio of software, data analytics and information technology infrastructure management services that support the efficient and compliant management of mortgage and real estate activities and marketplace transactions across the lifecycle. In addition, Corporate Items and Eliminations include eliminations of transactions between the reportable segments, interest expense and costs related to corporate support functions including executive, finance, law, compliance, human resources, vendor management, risk, sales and marketing. Intercompany transactions primarily consist of information technology infrastructure management services.

Financial information for our segments is as follows:
 
 
Three months ended September 30, 2015
(in thousands)
 
Mortgage
Services
 
Financial
Services
 
Technology
Services
 
Corporate
Items and
Eliminations
 
Consolidated
Altisource
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
209,506

 
$
21,337

 
$
51,437

 
$
(9,504
)
 
$
272,776

Cost of revenue
 
122,724

 
15,418

 
44,419

 
(8,711
)
 
173,850

Gross profit (loss)
 
86,782

 
5,919

 
7,018

 
(793
)
 
98,926

Selling, general and administrative expenses
 
23,399

 
4,553

 
7,628

 
15,758

 
51,338

Income (loss) from operations
 
63,383

 
1,366

 
(610
)
 
(16,551
)
 
47,588

Other income (expense), net
 
9

 
31

 
38

 
(6,466
)
 
(6,388
)
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before income taxes and non-controlling interests
 
$
63,392

 
$
1,397

 
$
(572
)
 
$
(23,017
)
 
$
41,200


 
 
Three months ended September 30, 2014
(in thousands)
 
Mortgage
Services
 
Financial
Services
 
Technology
Services
 
Corporate
Items and
Eliminations
 
Consolidated
Altisource
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
210,747

 
$
26,852

 
$
60,925

 
$
(10,836
)