Altisource Portfolio Solutions
Altisource Portfolio Solutions S.A. (Form: 10-Q, Received: 10/27/2016 08:25:00)
 
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, 2016
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 (§ 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 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 21, 2016 , there were 18,877,614 outstanding shares of the registrant’s shares of beneficial interest (excluding 6,535,134 shares held as treasury stock).
 


Table of Contents

Table of Contents

ALTISOURCE PORTFOLIO SOLUTIONS S.A.

FORM 10-Q

 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

Table of Contents

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,
2016
 
December 31,
2015
 
 
 
 
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
134,948

 
$
179,327

Available for sale securities
45,174

 

Accounts receivable, net
101,580

 
105,023

Prepaid expenses and other current assets
31,927

 
21,751

Total current assets
313,629

 
306,101

 
 
 
 
Premises and equipment, net
109,785

 
119,121

Goodwill
89,905

 
82,801

Intangible assets, net
162,976

 
197,003

Deferred tax assets, net
4,847

 
3,619

Other assets
12,190

 
13,153

 
 
 
 
Total assets
$
693,332

 
$
721,798

 
 
 
 
LIABILITIES AND EQUITY
Current liabilities:
 
 
 
Accounts payable and accrued expenses
$
101,361

 
$
91,871

Current portion of long-term debt
5,945

 
5,945

Deferred revenue
10,927

 
15,060

Other current liabilities
13,846

 
16,266

Total current liabilities
132,079

 
129,142

 
 
 
 
Long-term debt, less current portion
468,689

 
522,233

Other non-current liabilities
13,790

 
18,153

 
 
 
 
Commitments, contingencies and regulatory matters (Note 22)


 


 
 
 
 
Equity:
 
 
 
Common stock ($1.00 par value; 25,413 shares authorized and issued and 18,878 outstanding as of September 30, 2016; 25,413 shares authorized and issued and 19,021 outstanding as of December 31, 2015)
25,413

 
25,413

Additional paid-in capital
101,013

 
96,321

Retained earnings
359,435

 
369,270

Accumulated other comprehensive loss
(2,156
)
 

Treasury stock, at cost (6,535 shares as of September 30, 2016 and 6,392 shares as of December 31, 2015)
(406,559
)
 
(440,026
)
Altisource equity
77,146

 
50,978

 
 
 
 
Non-controlling interests
1,628

 
1,292

Total equity
78,774

 
52,270

 
 
 
 
Total liabilities and equity
$
693,332

 
$
721,798


See accompanying notes to condensed consolidated financial statements .

3

Table of Contents

ALTISOURCE PORTFOLIO SOLUTIONS S.A.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except per share data)
 
 
Three months ended
 September 30,
 
Nine months ended
 September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
 
Revenue
 
$
252,745

 
$
272,776

 
$
758,676

 
$
781,579

Cost of revenue
 
174,002

 
173,850

 
517,236

 
514,835

 
 
 
 
 
 
 
 
 
Gross profit
 
78,743

 
98,926

 
241,440

 
266,744

Selling, general and administrative expenses
 
53,886

 
51,338

 
161,709

 
155,310

Change in the fair value of Equator Earn Out
 

 

 

 
(7,591
)
 
 
 
 
 
 
 
 
 
Income from operations
 
24,857

 
47,588

 
79,731

 
119,025

Other income (expense), net:
 
 
 
 
 
 
 
 
Interest expense
 
(5,952
)
 
(7,041
)
 
(18,481
)
 
(21,396
)
Loss on HLSS equity securities and dividends received, net
 

 

 

 
(1,854
)
Other income (expense), net
 
(109
)
 
653

 
2,608

 
1,477

Total other income (expense), net
 
(6,061
)
 
(6,388
)
 
(15,873
)
 
(21,773
)
 
 
 
 
 
 
 
 
 
Income before income taxes and non-controlling interests
 
18,796

 
41,200

 
63,858

 
97,252

Income tax provision
 
(7,324
)
 
(3,303
)
 
(12,808
)
 
(8,101
)
 
 
 
 
 
 
 
 
 
Net income
 
11,472

 
37,897

 
51,050

 
89,151

Net income attributable to non-controlling interests
 
(883
)
 
(851
)
 
(1,973
)
 
(2,457
)
 
 
 
 
 
 
 
 
 
Net income attributable to Altisource
 
$
10,589

 
$
37,046

 
$
49,077

 
$
86,694

 
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
 
Basic
 
$
0.57

 
$
1.94

 
$
2.63

 
$
4.42

Diluted
 
$
0.54

 
$
1.82

 
$
2.49

 
$
4.19

 
 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
18,715

 
19,091

 
18,669

 
19,608

Diluted
 
19,568

 
20,411

 
19,738

 
20,688

 
 
 
 
 
 
 
 
 
Comprehensive income:
 
 
 
 
 
 
 
 
Net income
 
$
11,472

 
$
37,897

 
$
51,050

 
$
89,151

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Unrealized gain (loss) on securities, net of income tax benefit (provision) of $(2,070), $0, $889, $0
 
5,016

 

 
(2,156
)
 

 
 
 
 
 
 
 
 
 
Comprehensive income, net of tax
 
16,488

 
37,897

 
48,894

 
89,151

Comprehensive income attributable to non-controlling interests
 
(883
)
 
(851
)
 
(1,973
)
 
(2,457
)
 
 
 
 
 
 
 
 
 
Comprehensive income attributable to Altisource
 
$
15,605

 
$
37,046

 
$
46,921

 
$
86,694


See accompanying notes to condensed consolidated financial statements .

4

Table of Contents

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 loss
 
Treasury stock, at cost
 
Non-controlling interests
 
Total
 
Shares
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2015
25,413

 
$
25,413

 
$
96,321

 
$
369,270

 
$

 
$
(440,026
)
 
$
1,292

 
$
52,270

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 
49,077

 

 

 
1,973

 
51,050

Other comprehensive loss, net of tax

 

 

 

 
(2,156
)
 

 

 
(2,156
)
Distributions to non-controlling interest holders

 

 

 

 

 

 
(1,637
)
 
(1,637
)
Share-based compensation expense

 

 
4,692

 

 

 

 

 
4,692

Exercise of stock options

 

 

 
(58,912
)
 

 
67,788

 

 
8,876

Repurchase of shares

 

 

 

 

 
(34,321
)
 

 
(34,321
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2016
25,413

 
$
25,413

 
$
101,013

 
$
359,435

 
$
(2,156
)
 
$
(406,559
)
 
$
1,628

 
$
78,774


See accompanying notes to condensed consolidated financial statements .

5

Table of Contents

ALTISOURCE PORTFOLIO SOLUTIONS S.A.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Nine months ended
 September 30,
 
2016
 
2015
 
 
 
 
Cash flows from operating activities:
 

 
 

Net income
$
51,050

 
$
89,151

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

 
 

Depreciation and amortization
27,521

 
27,637

Amortization of intangible assets
36,432

 
27,995

Loss on HLSS equity securities and dividends received, net

 
1,854

Change in the fair value of acquisition related contingent consideration
(1,174
)
 
(7,302
)
Share-based compensation expense
4,692

 
3,258

Bad debt expense
763

 
3,477

Gain on early extinguishment of debt
(5,464
)
 
(1,986
)
Amortization of debt discount
307

 
379

Amortization of debt issuance costs
850

 
1,045

Deferred income taxes
17

 
54

Loss on disposal of fixed assets
30

 
50

Changes in operating assets and liabilities:
 

 
 

Accounts receivable
3,505

 
(19,681
)
Prepaid expenses and other current assets
(10,167
)
 
2,001

Other assets
496

 
2,085

Accounts payable and accrued expenses
7,005

 
(20,876
)
Other current and non-current liabilities
(9,828
)
 
10

Net cash provided by operating activities
106,035

 
109,151

 
 
 
 
Cash flows from investing activities:
 

 
 

Additions to premises and equipment
(16,525
)
 
(27,670
)
Acquisition of businesses, net of cash acquired
(9,617
)
 
(11,193
)
Purchase of available for sale securities
(48,219
)
 
(29,966
)
Proceeds received from sale of and dividends from HLSS equity securities

 
28,112

Other investing activities
266

 
722

Net cash used in investing activities
(74,095
)
 
(39,995
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Repayment and repurchases of long-term debt
(49,237
)
 
(29,087
)
Proceeds from stock option exercises
8,876

 
332

Purchase of treasury stock
(34,321
)
 
(48,971
)
Distributions to non-controlling interests
(1,637
)
 
(2,144
)
Other financing activities

 
(500
)
Net cash used in financing activities
(76,319
)
 
(80,370
)
 
 
 
 
Net decrease in cash and cash equivalents
(44,379
)
 
(11,214
)
Cash and cash equivalents at the beginning of the period
179,327

 
161,361

 
 
 
 
Cash and cash equivalents at the end of the period
$
134,948

 
$
150,147

 
 
 
 
Supplemental cash flow information:
 

 
 

Interest paid
$
17,244

 
$
19,770

Income taxes paid, net
14,178

 
6,638

 
 
 
 
Non-cash investing and financing activities:
 

 
 

Acquisition of businesses with restricted shares
$

 
$
14,427

Increase (decrease) in payables for purchases of premises and equipment
2,458

 
(5,326
)

See accompanying notes to condensed consolidated financial statements.

6

Table of Contents

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 were formed 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 23 for a description of our business segments).
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 current year presentation.
Altisource consolidates two cooperative entities which are managed by The Mortgage Partnership of America, L.L.C. (“MPA”), a wholly-owned subsidiary of Altisource: Best Partners Mortgage Cooperative, Inc., a mortgage cooperative doing business as Lenders One ® (“Lenders One”) and Best Partners Mortgage Brokers Cooperative, Inc., a mortgage cooperative doing business as Wholesale One ® (“Wholesale 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) and to Wholesale One under a management agreement that ends on July 8, 2039 (with automatic renewals for three successive five-year periods).
The management agreements between MPA and Lenders One and between MPA and Wholesale One, pursuant to which MPA is the management company, represent variable interests in variable interest entities. MPA is the primary beneficiary of Lenders One and Wholesale One as it has the power to direct the activities that most significantly impact each of these cooperatives’ economic performance and the right to receive benefits from each of these cooperatives. As a result, Lenders One and Wholesale One are 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, 2016 , Lenders One had total assets of $4.0 million and total liabilities of $1.9 million . As of December 31, 2015 , Lenders One had total assets of $4.9 million and total liabilities of $3.7 million . As of September 30, 2016 and December 31, 2015 , Wholesale One 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 Company’s Annual Report on Form 10-K for the year ended December 31, 2015 , as filed with the SEC on March 15, 2016.

7

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 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.
Recently Adopted Accounting Pronouncement
On January 1, 2016, Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, became effective. As a result of this accounting change, the Company now presents debt issuance costs, net as a direct deduction from the related debt (see Note 12 ). Prior to January 1, 2016, debt issuance costs, net were included in other assets. We adopted the standard retrospectively. Accordingly, prior period amounts were reclassified to conform to the current presentation.
Future Adoption of New Accounting Pronouncements
In May 2014, the FASB issued 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 this 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. This standard will be effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted, although not prior to annual periods beginning after December 15, 2016. The Company is currently evaluating the impact this guidance may have on its results of operations and financial position.
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 will require 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 will be effective for annual periods beginning after December 31, 2017, including interim periods within that reporting period. Early adoption is not permitted. The Company is currently evaluating the impact this guidance may have on its results of operations and financial position.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) . This standard introduces a new lessee model that brings substantially all leases on the balance sheet. The standard will require companies 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 be effective for annual periods beginning after December 15, 2018, including interim periods within that reporting period. Early application of this standard is permitted. The Company is currently evaluating the impact this guidance may have on its results of operations and financial position.
In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) . This standard clarifies guidance on principal versus agent considerations in connection with revenue recognition. When another party is involved in providing goods or services to a customer, an entity is required to determine whether the nature of its promise is to provide the specified good or service itself (that is, the entity is a principal) or to arrange for that good or service to be provided by the other party (that is, the entity is an agent). An entity is a principal if it controls the specified good or service before that good or service is transferred to a customer. The guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customer. This standard will be effective for annual periods beginning after December 15, 2017, including interim periods within that reporting

8

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



period. Early adoption is permitted, although not prior to annual periods beginning after December 15, 2016. The Company is currently evaluating the impact this guidance may have on its results of operations and financial position.
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting . This standard simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The standard will require companies to recognize all award-related excess tax benefits and tax deficiencies in their income statements, classify any excess tax benefits as an operating activity in their statements of cash flows, provide companies with the option of estimating forfeitures or recognizing forfeitures as they occur, modify the statutory tax withholding requirements and classify cash paid by employers when directly withholding shares for tax withholding purposes as an investing activity in their statements of cash flows. This standard will be effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period. Early application of this standard is permitted. The Company is currently evaluating the impact this guidance may have on its results of operations and financial position.
In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing . This standard provides guidance on identifying performance obligations in a contract with a customer and clarifying several licensing considerations, including whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time) and guidance on sales-based and usage-based royalties. This standard will be effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted, although not prior to annual periods beginning after December 15, 2016. The Company is currently evaluating the impact this guidance may have on its results of operations and financial position.
In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients . This standard addresses collectability, sales taxes and other similar taxes collected from customers, non-cash consideration, contract modifications at transition and completed contracts at transition. This standard will be effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted, although not prior to annual periods beginning after December 15, 2016. The Company is currently evaluating the impact this guidance may have on its results of operations and financial position.
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 will be effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption of this standard is permitted. The Company is currently evaluating the impact this guidance may have on its statement of cash flows.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.   This standard will require that companies recognize the income tax consequences of an intra-entity transfer of an asset (other than inventory) when the transfer occurs.  Current guidance prohibits 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 will be effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period.  Early adoption of this standard is permitted.  The Company is currently evaluating the impact this guidance may have on its results of operations and 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 thereto (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. Certain of 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 servicing portfolios acquired by Ocwen in December 2012 and February 2013, respectively. In addition, Ocwen purchases certain origination services from Altisource under an agreement that extends through January 2017.

9

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



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,
 
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
 
Mortgage Services
 
59
%
 
64
%
 
59
%
 
63
%
Financial Services
 
16
%
 
16
%
 
17
%
 
20
%
Technology Services
 
41
%
 
51
%
 
41
%
 
52
%
Consolidated revenue
 
56
%
 
60
%
 
56
%
 
59
%
For the nine months ended September 30, 2016 and 2015 , we generated revenue from Ocwen of $422.2 million and $464.8 million , respectively ( $141.6 million and $163.8 million for the third quarter of 2016 and 2015 , 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 and preservation services and insurance services. Services provided to Ocwen and reported in the Financial Services segment included mortgage charge-off collections. Services provided to Ocwen and reported in the Technology Services segment included information technology infrastructure management and software applications. As of September 30, 2016 , accounts receivable from Ocwen totaled $32.6 million , $21.8 million of which was billed and $10.8 million of which was unbilled. As of December 31, 2015 , accounts receivable from Ocwen totaled $38.2 million , $20.4 million of which was billed and $17.8 million of which was unbilled.
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, 2016 and 2015 , we recognized revenue of $146.0 million and $164.7 million , respectively ( $48.0 million and $56.7 million for the third quarter of 2016 and 2015 , 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 deriving 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 of any of these companies. Consequently, these companies are no longer related parties of Altisource, as defined by FASB 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.
Ocwen
Revenue
For the period from January 1, 2015 through January 16, 2015, we estimated that we generated revenue from Ocwen of $22.9 million . Services provided to Ocwen during such period 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.
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 billed 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 period from January 1, 2015 through January 16, 2015, we estimated that we incurred $1.9 million of expenses related to these items.

10

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



These amounts are reflected as a component of cost of revenue in the condensed consolidated statements of operations and comprehensive income.
We provided certain other services to Ocwen and Ocwen provided certain other services to us in connection with Support Services Agreements. These services primarily included such areas as vendor management, corporate services and facilities related services. 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. Of the January 2015 billings to Ocwen, we estimated that $0.1 million related to the period from January 1, 2015 through January 16, 2015. Of the January 2015 billings from Ocwen, we estimated that $0.3 million related 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 and comprehensive income.
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 period from January 1, 2015 through January 16, 2015, our billings to HLSS were immaterial.
Residential and AAMC
Residential is focused on providing quality, affordable rental homes to families throughout the United States. AAMC is an asset management company that provides portfolio management and corporate governance services to investment vehicles that own real estate related assets. Its initial client is Residential.
We have agreements and amendments thereto, which extend through 2027, to provide Residential with renovation management, lease management, property management, real estate owned asset management, title insurance, settlement and valuation 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 period from January 1, 2015 through January 16, 2015, we estimated that we generated revenue from Residential of $1.0 million . This amount is reflected in revenue in the condensed consolidated statements of operations and comprehensive income. This excludes revenue from services we provide to Residential’s loans serviced by Ocwen or other loan servicers where we were retained by Ocwen or Residential’s other loan servicers.
For the period from January 1, 2015 through January 16, 2015, our billings to AAMC were immaterial.
NOTE 4 ACQUISITIONS
Granite Acquisition
On July 29, 2016 , we acquired certain assets and assumed certain liabilities of Granite Loan Management of Delaware, LLC (“Granite”) for $9.6 million in cash at closing. Granite provides residential and commercial loan disbursement processing, risk mitigation and construction inspection services to lenders. The Granite 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
 
$
1,103

Prepaid expenses
 
25

Other assets
 
25

Premises and equipment, net
 
299

Goodwill
 
8,449

 
 
9,901

Accounts payable and accrued expenses
 
(111
)
Other current liabilities
 
(173
)
 
 
 
Purchase price
 
$
9,617


11

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



RentRange, Investability and Onit Solutions Acquisitions
On October 9, 2015, we acquired GoldenGator, LLC (doing business as RentRange ® ) (“RentRange”), REIsmart, LLC (doing business as Investability ) (“Investability”) and Onit Solutions, LLC, a support company for RentRange and Investability (collectively “RentRange and Investability”) for $24.8 million . RentRange is a leading provider of rental home data and information to the financial services and real estate industries, delivering a wide assortment of address and geography level data, analytics and rent-based valuation solutions for single and multi-family properties. Investability is an online residential real estate search and acquisition platform that utilizes data and analytics to allow real estate investors to access the estimated cash flow, capitalization rate, net yield and market value of properties for sale in the United States. The purchase price was composed of $17.5 million in cash and 247 thousand shares of restricted common stock of the Company with a value of $7.3 million as of the closing date. Upon issuance, the restricted shares were subject to transfer restrictions and potential forfeiture provisions. These restrictions and forfeiture provisions will lapse over a four year period, subject to the recipients meeting certain continued employment conditions with the Company and the satisfaction of certain acquisition related escrow release conditions. During the third quarter of 2016, management adjusted the allocation of the purchase price based upon information that subsequently became available relating to acquisition date working capital and the purchase price allocation to intangible assets. The working capital adjustment resulted in an obligation of the sellers to pay the Company $0.2 million . RentRange and Investability are not material in relation to the Company’s results of operations or financial position.
The initial and final allocation of the purchase price is as follows:
(in thousands)
 
Initial purchase price allocation
 
Adjustments
 
Final purchase price allocation
 
 
 
 
 
 
 
Cash
 
$
3

 
$

 
$
3

Accounts receivable, net
 
245

 
(76
)
 
169

Premises and equipment, net
 
2,471

 
(1,067
)
 
1,404

Other assets
 
199

 
(196
)
 
3

Trademarks and trade names
 
1,205

 

 
1,205

Databases/other
 
910

 
1,035

 
1,945

Non-compete agreements
 
330

 

 
330

Customer relationships
 
255

 

 
255

Goodwill
 
19,565

 
50

 
19,615

 
 
25,183

 
(254
)
 
24,929

Accounts payable and accrued expenses
 
(391
)
 
46

 
(345
)
 
 
 
 
 
 
 
Purchase price
 
$
24,792

 
$
(208
)
 
$
24,584

CastleLine Acquisition
On July 17, 2015, we acquired CastleLine Holdings, LLC and its subsidiaries (“CastleLine”) for $33.4 million . CastleLine is a specialty risk management and insurance services firm that 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 at 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, that were subject to transfer restrictions, 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. During the second quarter of 2016, management adjusted the allocation of the purchase price based upon information that subsequently became available relating to acquisition date working capital and the purchase price allocation to intangible assets. The CastleLine acquisition is not material in relation to the Company’s results of operations or financial position.

12

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



The initial and final allocation of the purchase price is as follows:
(in thousands)
 
Initial purchase price allocation
 
Adjustments
 
Final purchase price allocation
 
 
 
 
 
 
 
Cash
 
$
1,088

 
$

 
$
1,088

Accounts receivable, net
 
510

 
(410
)
 
100

Prepaid expenses
 
66

 
(46
)
 
20

Restricted cash
 
2,501

 

 
2,501

Non-compete agreements
 
1,105

 
25

 
1,130

Databases/other
 
465

 
1,335

 
1,800

Customer relationships
 
395

 

 
395

Trademarks and trade names
 
150

 
10

 
160

Deferred taxes
 

 
356

 
356

Goodwill
 
28,125

 
(1,395
)
 
26,730

 
 
34,405

 
(125
)
 
34,280

Accounts payable and accrued expenses
 
(875
)
 
38

 
(837
)
Deferred revenue
 
(87
)
 
87

 

 
 
 
 
 
 
 
Purchase price
 
$
33,443

 
$

 
$
33,443

NOTE 5 AVAILABLE FOR SALE SECURITIES
During the nine months ended September 30, 2016 , we purchased 4.1 million shares of Residential common stock for $48.2 million ( no comparative amount in the third quarter of 2016 ). This investment is classified as available for sale and reflected in the condensed consolidated balance sheets at fair value at the balance sheet date ( $45.2 million as of September 30, 2016 ) ( no comparative amount as of December 31, 2015 ). 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 would record a charge to earnings and a new cost basis in the investment would be established. During the nine months ended September 30, 2016 , we incurred expenses of $3.4 million and earned dividends of $1.0 million related to this investment ( no comparative amounts in 2015 ).
NOTE 6 ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consists of the following:
(in thousands)
 
September 30,
2016
 
December 31,
2015
 
 
 
 
 
Billed
 
$
63,066

 
$
67,021

Unbilled
 
48,288

 
56,458

 
 
111,354

 
123,479

Less: allowance for doubtful accounts
 
(9,774
)
 
(18,456
)
 
 
 
 
 
Total
 
$
101,580

 
$
105,023

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 amounts in unbilled receivables that are earned during a month and billed in the following month.

13

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



NOTE 7 PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following:
(in thousands)
 
September 30,
2016
 
December 31,
2015
 
 
 
 
 
Maintenance agreements, current portion
 
$
7,213

 
$
7,000

Short-term investments in real estate
 
8,695

 

Income taxes receivable
 
3,132

 
633

Prepaid expenses
 
6,166

 
7,873

Other current assets
 
6,721

 
6,245

 
 
 
 
 
Total
 
$
31,927

 
$
21,751

NOTE 8 PREMISES AND EQUIPMENT, NET
Premises and equipment, net consists of the following:
(in thousands)
 
September 30,
2016
 
December 31,
2015
 
 
 
 
 
Computer hardware and software
 
$
163,140

 
$
177,010

Office equipment and other
 
19,586

 
21,720

Furniture and fixtures
 
13,792

 
14,443

Leasehold improvements
 
35,726

 
35,503

 
 
232,244

 
248,676

Less: accumulated depreciation and amortization
 
(122,459
)
 
(129,555
)
 
 
 
 
 
Total
 
$
109,785

 
$
119,121

Depreciation and amortization expense amounted to $27.5 million and $27.6 million for the nine months ended September 30, 2016 and 2015 , respectively ( $9.2 million and $9.2 million for the third quarter of 2016 and 2015 , 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.
NOTE 9 GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill
The following is a summary of goodwill by segment:
(in thousands)
 
Mortgage Services
 
Financial Services
 
Total
 
 
 
 
 
 
 
Balance as of December 31, 2015
 
$
80,423

 
$
2,378

 
$
82,801

Acquisition of CastleLine (1)
 
(1,395
)
 

 
(1,395
)
Acquisitions of RentRange and Investability (2)
 
50

 

 
50

Acquisition of Granite
 
8,449

 

 
8,449

Balance as of September 30, 2016
 
$
87,527

 
$
2,378

 
$
89,905

                                                              
(1)  
During the second quarter of 2016, goodwill was revised to reflect a purchase accounting measurement period adjustment related to the CastleLine acquisition. See Note 4 .
(2)  
During the third quarter of 2016, goodwill was revised to reflect a purchase accounting measurement period adjustment related to the RentRange and Investability acquisition. See Note 4 .

14

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



Intangible assets, net
Intangible assets, net consist of the following:
 
 
Weighted average estimated useful life
(in years)
 
Gross carrying amount
 
Accumulated amortization
 
Net book value
(in thousands)
 
 
September 30,
2016
 
December 31,
2015
 
September 30,
2016
 
December 31,
2015
 
September 30,
2016
 
December 31,
2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Definite lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trademarks and trade names
 
13
 
$
15,254

 
$
15,244

 
$
(7,419
)
 
$
(6,491
)
 
$
7,835

 
$
8,753

Customer related intangible assets
 
10
 
274,428

 
274,428

 
(146,890
)
 
(113,725
)
 
127,538

 
160,703

Operating agreement
 
20
 
35,000

 
35,000

 
(11,667
)
 
(10,354
)
 
23,333

 
24,646

Non-compete agreements
 
4
 
1,460

 
1,435

 
(405
)
 
(115
)
 
1,055

 
1,320

Intellectual property
 
10
 
300

 
300

 
(78
)
 
(55
)
 
222

 
245

Other intangible assets
 
5
 
3,745

 
1,375

 
(752
)
 
(39
)
 
2,993

 
1,336

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
 
 
$
330,187

 
$
327,782

 
$
(167,211
)
 
$
(130,779
)
 
$
162,976

 
$
197,003

Amortization expense for definite lived intangible assets was $36.4 million and $28.0 million for the nine months ended September 30, 2016 and 2015 , respectively ( $11.5 million and $10.1 million for the third quarter of 2016 and 2015 , respectively). Expected annual definite lived intangible asset amortization for 2016 through 2020 is $47.7 million , $34.6 million , $26.1 million , $20.7 million and $16.8 million , respectively.
NOTE 10 OTHER ASSETS
Other assets consist of the following:
(in thousands)
 
September 30,
2016
 
December 31,
2015
 
 
 
 
 
Security deposits
 
$
5,599

 
$
5,341

Maintenance agreements, non-current portion
 
1,177

 
1,570

Restricted cash
 
4,505

 
4,801

Other
 
909

 
1,441

 
 
 
 
 
Total
 
$
12,190

 
$
13,153

NOTE 11 ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accounts payable and accrued expenses consist of the following:
(in thousands)
 
September 30,
2016
 
December 31,
2015
 
 
 
 
 
Accounts payable
 
$
16,940

 
$
11,644

Accrued expenses - general
 
34,148

 
30,347

Accrued salaries and benefits
 
46,417

 
46,564

Income taxes payable
 
3,856

 
3,316

 
 
 
 
 
Total
 
$
101,361

 
$
91,871


15

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



Other current liabilities consist of the following:
(in thousands)
 
September 30,
2016
 
December 31,
2015
 
 
 
 
 
Unfunded cash account balances
 
$
2,995

 
$
6,395

Other
 
10,851

 
9,871

 
 
 
 
 
Total
 
$
13,846

 
$
16,266

NOTE 12 LONG-TERM DEBT
Long-term debt consists of the following:
(in thousands)
 
September 30,
2016
 
December 31,
2015
 
 
 
 
 
Senior secured term loan
 
$
481,140

 
$
536,598

Less: debt issuance costs, net
 
(4,778
)
 
(6,184
)
Less: unamortized discount, net
 
(1,728
)
 
(2,236
)
Net long-term debt
 
474,634

 
528,178

Less: current portion
 
(5,945
)
 
(5,945
)
 
 
 
 
 
Long-term debt, less current portion
 
$
468,689

 
$
522,233

On November 27, 2012, Altisource Solutions S.à r.l., a wholly-owned subsidiary of Altisource Portfolio Solutions S.A., entered into a senior secured term loan agreement with Bank of America, N.A., as administrative agent, and certain lenders. Altisource Portfolio Solutions S.A. 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).
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 senior secured term 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 (the percentage increases if the leverage ratio exceeds 3.50 to 1.00 ). No mandatory prepayments were owed for the nine months ended September 30, 2016 .
During the nine months ended September 30, 2016 , we repurchased portions of our senior secured term loan with an aggregate par value of  $51.0 million  at a weighted average discount of  13.2% , recognizing a net gain of  $5.5 million  on the early extinguishment of debt ( no repurchases in the third quarter of 2016 ). During the nine months ended September 30, 2015 , we repurchased portions of our senior secured term loan with an aggregate par value of  $27.0 million at a weighted average discount of  9.8% , recognizing a net gain of  $2.0 million  on the early extinguishment of debt (repurchased aggregate par value of $11.0 million at a weighted average discount of 11.0% , recognizing a net gain of $0.9 million on the early extinguishment of debt for the third quarter of 2015 ). The net gains were included in other income (expense), net in the condensed consolidated statements of operations and comprehensive income.
The term loan bears interest at rates based upon, at our option, the Adjusted Eurodollar Rate or the Base Rate . Adjusted 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, 2016 was 4.50% .

16

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



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.
As of September 30, 2016 , debt issuance costs were $4.8 million , net of $5.5 million of accumulated amortization. As of December 31, 2015 , debt issuance costs were $6.2 million , net of $4.1 million of accumulated amortization.
Interest expense on the term loans totaled $18.5 million and $21.4 million for the nine months ended September 30, 2016 and 2015 , respectively ( $6.0 million and $7.0 million for the third quarter of 2016 and 2015 , respectively).
NOTE 13 OTHER NON-CURRENT LIABILITIES
Other non-current liabilities consist of the following:
(in thousands)
 
September 30,
2016
 
December 31,
2015
 
 
 
 
 
Acquisition related obligations
 
$
3,191

 
$
8,422

Other non-current liabilities
 
10,599

 
9,731

 
 
 
 
 
Total
 
$
13,790

 
$
18,153

NOTE 14 FAIR VALUE
The following table presents the carrying amount and estimated fair value of financial instruments held by the Company as of September 30, 2016 and December 31, 2015 . The following fair values are estimated using market information and what the Company believes to be appropriate valuation methodologies under GAAP are as follows:
 
 
September 30, 2016
 
December 31, 2015
(in thousands)
 
Carrying amount
 
Fair value
 
Carrying amount
 
Fair value
 
 
 
 
Level 1
 
Level 2
 
Level 3
 
 
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
134,948

 
$
134,948

 
$

 
$

 
$
179,327

 
$
179,327

 
$

 
$

Restricted cash
 
4,505

 
4,505

 

 

 
4,801

 
4,801

 

 

Available for sale securities
 
45,174

 
45,174

 

 

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition contingent consideration
 
2,757

 

 

 
2,757

 
3,932

 

 

 
3,932

Long-term debt
 
481,140

 

 
452,272

 

 
536,598

 

 
469,523

 


17

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



Fair Value Measurements on a Recurring Basis
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.
Available for sale securities are carried at fair value and consist of 4.1 million shares of Residential common stock. Available for sale securities are measured using Level 1 inputs as these securities have quoted prices in active markets.
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.
In accordance with ASC Topic 805, Business Combinations , liabilities for contingent consideration are 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 certain assets and assumption of certain liabilities of Mortgage Builder Software, Inc. and Owners Advantage, LLC in 2014. 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.
During the nine months ended September 30, 2015 , we reached an agreement with the former owners of Equator, LLC (“Equator”) to extinguish any liability for the 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 reduction in operating expenses in the condensed consolidated statements of operations and comprehensive income.
There were no transfers between different levels during the periods presented.
NOTE 15 SHAREHOLDERS’ EQUITY AND SHARE-BASED COMPENSATION
Stock Repurchase Plan
On May 18, 2016 , our shareholders approved a new share repurchase program, which replaced the previous share repurchase program. Under the new program, we are authorized to purchase up to 4.6 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. This is in addition to amounts previously purchased under prior programs. Under the existing and prior programs, we purchased 1.3 million shares of common stock at an average price of $26.94 per share during the nine months ended September 30, 2016 and 1.8 million shares at an average price of $27.90 per share during the nine months ended September 30, 2015 ( 0.5 million shares at an average price of $28.68 per share for the third quarter of 2016 and 0.2 million shares at an average price of $26.88 per share for the third quarter of 2015 ). As of September 30, 2016 , approximately 4.0 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, 2016 , approximately $379 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, officers and directors. We recorded share-based compensation expense of $4.7 million and $3.3 million for the nine months ended September 30, 2016 and 2015 , respectively ( $1.1 million and $1.9 million for the third quarter of 2016 and 2015, respectively). As of September 30, 2016 , estimated unrecognized compensation costs related to share-based awards amounted to $7.3 million , which we expect to recognize over a weighted average remaining requisite service period of approximately 2.23 years .
Stock Options
Stock option grants are composed of a combination of service-based, market-based and performance-based options.
Service-Based Options. These options generally vest over three or four years with equal annual cliff-vesting and expire on the earlier of ten years after the date of grant or following termination of service. A total of 0.9 million service-based awards were outstanding at September 30, 2016 .
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,

18

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



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. 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 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 1.1 million market-based awards were outstanding at September 30, 2016 .
Performance-Based Options. These option grants begin to vest upon the achievement of certain business unit specific financial measures. Generally, 25% of the awards vest upon the achievement of the performance criteria and the remaining 75% vest thereafter in three equal annual installments. 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 below a certain threshold, the award is cancelled. The options expire on the earlier of ten years after the date of grant or following termination of service. A total of 0.1 million performance-based awards were outstanding at September 30, 2016 .
The Company granted 0.1 million stock options (at a weighted average exercise price of $29.22 per share) and 0.7 million stock options (at a weighted average exercise price of $23.19 per share) during the nine months ended September 30, 2016 and 2015 , respectively.
The fair values of the service-based and performance-based options were 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, 2016
 
Nine months ended
 September 30, 2015
 
 
Black-Scholes
 
Binomial
 
Black-Scholes
 
Binomial
 
 
 
 
 
 
 
 
 
Risk-free interest rate (%)
 
1.25 - 1.89

 
0.23 - 1.97

 
1.50 - 1.78

 
0.02 - 2.26

Expected stock price volatility (%)
 
59.75 - 62.14

 
59.76 - 62.14

 
55.06 - 58.58

 
55.06 - 57.60

Expected dividend yield
 

 

 

 

Expected option life (in years)
 
6.00 - 6.25

 
4.54 - 4.88

 
6.00 - 6.25

 
4.10 - 4.88

Fair value
 
$11.15 - $18.60

 
$11.06 - $19.27

 
$10.01 - $17.34

 
$9.91 - $16.13

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 period presented:
 
 
Nine months ended September 30,
(in thousands, except per share amounts)
 
2016
 
2015
 
 
 
 
 
Weighted average grant date fair value of stock options granted per share
 
$
16.85

 
$
12.62

Intrinsic value of options exercised
 
17,280

 
232

Grant date fair value of stock options that vested
 
2,372

 
1,195


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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 stock options:
 
Number of options
 
Weighted average exercise price
 
Weighted average contractual term
(in years )
 
Aggregate intrinsic value
( in thousands)
 
 
 
 
 
 
 
 
Outstanding at December 31, 2015
3,163,125

 
$
20.13

 
4.94
 
$
35,842

Granted
142,654

 
29.22

 
 
 
 
Exercised
(1,110,193
)
 
9.57

 
 
 
 

Forfeited
(115,539
)
 
36.53

 
 
 
 

 
 
 
 
 
 
 
 
Outstanding at September 30, 2016
2,080,047

 
$
25.48

 
5.55
 
$
22,595

 
 
 
 
 
 
 
 
Exercisable at September 30, 2016
1,274,537

 
$
20.17

 
3.62
 
$
18,372

Other Share-Based Awards
The Company’s other share-based and similar types of awards are composed of restricted shares and, through August 29, 2016, Equity Appreciation Rights (“EAR”). Effective August 29, 2016, the EAR plans were terminated.
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. The Company granted 13 thousand restricted shares (at a weighted average price of $26.66 per share) during the nine months ended September 30, 2016 .
The following table summarizes the activity related to our restricted shares:
 
Number of restricted shares
 
 
Outstanding at December 31, 2015
272,326

Granted
12,878

Issued
(18,774
)
Forfeited
(15,400
)
 
 
Outstanding at September 30, 2016
251,030

Share-based compensation expense for stock options and restricted shares is recorded net of estimated forfeiture rates ranging from 0% to 40% .
NOTE 16 REVENUE
Revenue includes service revenue, reimbursable expenses and non-controlling interests. Service revenue consists of amounts attributable to our fee-based services. Reimbursable expenses and non-controlling interests are pass-through items for which we earn no margin. Reimbursable expenses consist of amounts we incur on behalf of our customers in performing our fee-based services, but we pass such costs directly on to our customers without any additional markup. Non-controlling interests represent the earnings of Lenders One and Wholesale One, consolidated entities not owned by Altisource, and are included in revenue and reduced from net income to arrive at net income attributable to Altisource (see Note 1 ). The components of revenue were as follows:
 
 
Three months ended
 September 30,
 
Nine months ended
 September 30,
(in thousands)
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
 
Service revenue
 
$
239,782

 
$
245,469

 
$
715,386

 
$
689,880

Reimbursable expenses
 
12,080

 
26,456

 
41,317

 
89,242

Non-controlling interests
 
883

 
851

 
1,973

 
2,457

 
 
 
 
 
 
 
 
 
Total
 
$
252,745

 
$
272,776

 
$
758,676

 
$
781,579


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



NOTE 17 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 costs 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)
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
 
Compensation and benefits
 
$
66,357

 
$
62,997

 
$
201,193

 
$
197,213

Outside fees and services
 
77,445

 
66,952

 
222,574

 
175,021

Reimbursable expenses
 
12,080

 
26,456

 
41,317

 
89,242

Technology and telecommunications
 
11,502

 
10,630

 
32,145

 
32,878

Depreciation and amortization
 
6,618

 
6,815

 
20,007

 
20,481

 
 
 
 
 
 
 
 
 
Total
 
$
174,002