UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| (Mark One) | |||||
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended September 30, 2020
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
Commission File Number: 1-34354
(Exact name of registrant as specified in its Charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
(Address of principal executive offices)
(352 ) 24 69 79 00
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||||||||
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 ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | ☑ | ||||||||||||||||||
Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||||||||
| Emerging growth company | ||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of October 23, 2020, there were 15,649,709 outstanding shares of the registrant’s common stock (excluding 9,763,039 shares held as treasury stock).
Table of Contents
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
FORM 10-Q
| Page | |||||||||||
2
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, 2020 | December 31, 2019 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Investment in equity securities | |||||||||||
| Accounts receivable, net | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Premises and equipment, net | |||||||||||
| Right-of-use assets under operating leases, net | |||||||||||
| Goodwill | |||||||||||
| Intangible assets, net | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable and accrued expenses | $ | $ | |||||||||
| Deferred revenue | |||||||||||
| Other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt | |||||||||||
| Other non-current liabilities | |||||||||||
| Commitments, contingencies and regulatory matters (Note 24) | |||||||||||
| Equity (deficit): | |||||||||||
Common stock ($ | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
Treasury stock, at cost ( | ( | ( | |||||||||
| Altisource deficit | ( | ( | |||||||||
| Non-controlling interests | |||||||||||
| Total deficit | ( | ( | |||||||||
| Total liabilities and deficit | $ | $ | |||||||||
See accompanying notes to condensed consolidated financial statements.
3
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||||||||||||
| Cost of revenue | ||||||||||||||||||||||||||
| Gross profit | ||||||||||||||||||||||||||
| Operating expenses (income): | ||||||||||||||||||||||||||
| Selling, general and administrative expenses | ||||||||||||||||||||||||||
| Gain on sale of business | ( | ( | ||||||||||||||||||||||||
| Restructuring charges | ||||||||||||||||||||||||||
| (Loss) income from operations | ( | ( | ||||||||||||||||||||||||
| Other income (expense), net | ||||||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | ||||||||||||||||||||||
| Unrealized gain (loss) on investment in equity securities | ( | ( | ||||||||||||||||||||||||
| Other (expense) income, net | ( | |||||||||||||||||||||||||
| Total other income (expense), net | ( | ( | ( | ( | ||||||||||||||||||||||
| (Loss) income before income taxes and non-controlling interests | ( | ( | ||||||||||||||||||||||||
| Income tax provision | ( | ( | ( | ( | ||||||||||||||||||||||
| Net (loss) income | ( | ( | ||||||||||||||||||||||||
| Net income attributable to non-controlling interests | ( | ( | ( | ( | ||||||||||||||||||||||
| Net (loss) income attributable to Altisource | $ | ( | $ | $ | ( | $ | ( | |||||||||||||||||||
| (Loss) earnings per share: | ||||||||||||||||||||||||||
| Basic | $ | ( | $ | $ | ( | $ | ( | |||||||||||||||||||
| Diluted | $ | ( | $ | $ | ( | $ | ( | |||||||||||||||||||
| Weighted average shares outstanding: | ||||||||||||||||||||||||||
| Basic | ||||||||||||||||||||||||||
| Diluted | ||||||||||||||||||||||||||
| Comprehensive (loss) income: | ||||||||||||||||||||||||||
| Comprehensive (loss) income, net of tax | $ | ( | $ | $ | ( | $ | ||||||||||||||||||||
| Comprehensive income attributable to non-controlling interests | ( | ( | ( | ( | ||||||||||||||||||||||
| Comprehensive (loss) income attributable to Altisource | $ | ( | $ | $ | ( | $ | ( | |||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
4
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(in thousands)
| Altisource Equity (Deficit) | |||||||||||||||||||||||||||||||||||||||||
| Common stock | Additional paid-in capital | Retained earnings | Treasury stock, at cost | Non-controlling interests | Total | ||||||||||||||||||||||||||||||||||||
| Shares | |||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2018 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||
Distributions to non-controlling interest holders | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
Share-based compensation expense | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Exercise of stock options and issuance of restricted share units and restricted shares | — | — | — | ( | — | ||||||||||||||||||||||||||||||||||||
Treasury shares withheld for the payment of tax on restricted share unit and restricted share issuances | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||
| Balance, March 31, 2019 | ( | ||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||
Distributions to non-controlling interest holders | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
Share-based compensation expense | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Exercise of stock options and issuance of restricted share units and restricted shares | — | — | — | ( | — | ||||||||||||||||||||||||||||||||||||
Treasury shares withheld for the payment of tax on restricted share unit and restricted share issuances | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||
Repurchase of shares | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Balance, June 30, 2019 | ( | ||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Distributions to non-controlling interest holders | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
Share-based compensation expense | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Exercise of stock options and issuance of restricted share units and restricted shares | — | — | — | ( | — | ||||||||||||||||||||||||||||||||||||
| Treasury shares withheld for the payment of tax on restricted share unit and restricted share issuances | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||
Repurchase of shares | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Balance, September 30, 2019 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
5
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(in thousands)
| Altisource Equity (Deficit) | |||||||||||||||||||||||||||||||||||||||||
| Common stock | Additional paid-in capital | Retained earnings | Treasury stock, at cost | Non-controlling interests | Total | ||||||||||||||||||||||||||||||||||||
| Shares | |||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2019 | $ | $ | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||
Distributions to non-controlling interest holders | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
Share-based compensation expense | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Issuance of restricted share units and restricted shares | — | — | — | ( | — | ||||||||||||||||||||||||||||||||||||
Treasury shares withheld for the payment of tax on restricted share unit and restricted share issuances | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||
| Balance, March 31, 2020 | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||
| Distributions to non-controlling interest holders | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Issuance of restricted share units and restricted shares | — | — | — | ( | — | ||||||||||||||||||||||||||||||||||||
Treasury shares withheld for the payment of tax on restricted share unit and restricted share issuances | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||
| Balance, June 30, 2020 | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||
| Distributions to non-controlling interest holders | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Issuance of restricted share units and restricted shares | — | — | — | ( | — | ||||||||||||||||||||||||||||||||||||
| Treasury shares withheld for the payment of tax on restricted share unit and restricted share issuances | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||
| Balance, September 30, 2020 | $ | $ | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
6
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Nine months ended September 30, | |||||||||||
| 2020 | 2019 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net (loss) income | $ | ( | $ | ||||||||
| Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Amortization of right-of-use assets under operating leases | |||||||||||
| Amortization of intangible assets | |||||||||||
| Unrealized loss (gain) on investment in equity securities | ( | ||||||||||
| Share-based compensation expense | |||||||||||
| Bad debt expense | |||||||||||
| Amortization of debt discount | |||||||||||
| Amortization of debt issuance costs | |||||||||||
| Deferred income taxes | |||||||||||
| Loss on disposal of fixed assets | |||||||||||
| Gain on sale of business | ( | ||||||||||
| Changes in operating assets and liabilities (excludes effect of sale of business): | |||||||||||
| Accounts receivable | ( | ||||||||||
| Short-term investments in real estate | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Other assets | ( | ||||||||||
| Accounts payable and accrued expenses | ( | ( | |||||||||
| Current and non-current operating lease liabilities | ( | ( | |||||||||
| Other current and non-current liabilities | ( | ( | |||||||||
| Net cash (used in) provided by operating activities | ( | ||||||||||
| Cash flows from investing activities: | |||||||||||
| Additions to premises and equipment | ( | ( | |||||||||
| Proceeds received from sale of equity securities | |||||||||||
| Proceeds from the sale of business | |||||||||||
| Other | |||||||||||
| Net cash provided by investing activities | |||||||||||
| Cash flows from financing activities: | |||||||||||
| Repayments and repurchases of long-term debt | ( | ||||||||||
| Proceeds from stock option exercises | |||||||||||
| Purchase of treasury shares | ( | ||||||||||
| Distributions to non-controlling interests | ( | ( | |||||||||
| Payments of tax withholding on issuance of restricted share units and restricted shares | ( | ( | |||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Net (decrease) increase in cash, cash equivalents and restricted cash | ( | ||||||||||
| Cash, cash equivalents and restricted cash at the beginning of the period | |||||||||||
| Cash, cash equivalents and restricted cash at the end of the period | $ | $ | |||||||||
| Supplemental cash flow information: | |||||||||||
| Interest paid | $ | $ | |||||||||
| Income taxes paid, net | |||||||||||
| Acquisition of right-of-use assets with operating lease liabilities | |||||||||||
| Reduction of right-of-use assets from operating lease modifications or reassessments | ( | ( | |||||||||
| Non-cash investing and financing activities: | |||||||||||
| Net increase in payables for purchases of premises and equipment | $ | $ | |||||||||
See accompanying notes to condensed consolidated financial statements.
7
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements
NOTE 1 — ORGANIZATION AND BASIS OF PRESENTATION
Description of Business
Altisource Portfolio Solutions S.A., together with its subsidiaries (which may be referred to as “Altisource,” the “Company,” “we,” “us” or “our”), is an integrated service provider and marketplace for the real estate and mortgage industries. Combining operational excellence with a suite of innovative services and technologies, Altisource helps solve the demands of the ever-changing markets we serve.
We are publicly traded on the NASDAQ Global Select Market under the symbol “ASPS.” We are organized under the laws of the Grand Duchy of Luxembourg.
Basis of Accounting and Presentation
The unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Securities and Exchange Commission (“SEC”) Regulation S-X. Accordingly, these financial statements do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, the interim data includes all normal recurring adjustments considered necessary to fairly state the results for the interim periods presented. The preparation of interim condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of our interim condensed consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Intercompany transactions and accounts have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the current year presentation.
Altisource consolidates Best Partners Mortgage Cooperative, Inc., which is managed by The Mortgage Partnership of America, L.L.C. (“MPA”), a wholly-owned subsidiary of Altisource. Best Partners Mortgage Cooperative, Inc. is a mortgage cooperative doing business as Lenders One® (“Lenders One”). MPA provides services to Lenders One under a management agreement that ends on December 31, 2025 (with renewals for three successive five-year periods at MPA’s option).
In 2019, Altisource created Pointillist, Inc. (“Pointillist”) and contributed the Pointillist® customer journey analytics business and $8.5 million to it. Pointillist is owned by Altisource and management of Pointillist. Management of Pointillist owns a non-controlling interest representing 12.1 % of the outstanding equity of Pointillist. Additional equity shares of Pointillist are available for issuance to management and board members of Pointillist. Altisource has no ongoing obligation to provide future funding to Pointillist. Pointillist is presented in the accompanying condensed consolidated financial statements on a consolidated basis and the portion of Pointillist owned by Pointillist management is reported as non-controlling interests.
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, 2019, as filed with the SEC on March 5, 2020.
8
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 Pronouncements
In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This standard simplified the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Prior guidance required that companies compute the implied fair value of goodwill under Step 2 by performing procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. This standard requires companies to perform annual or interim goodwill impairment tests by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The Company adopted this standard effective January 1, 2020 and is applied prospectively. Adoption of this new standard did not have any impact on the Company’s condensed consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. This standard modified certain disclosure requirements such as the valuation processes for Level 3 fair value measurements. This standard also requires new disclosures such as the disclosure of certain assumptions used to develop significant unobservable inputs for Level 3 fair value measurements. The Company adopted this standard effective January 1, 2020 and is applied prospectively. Adoption of this new standard did not have any impact on the Company’s condensed consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force). This standard aligns the requirements for capitalizing implementation costs in a hosting arrangement service contract with the existing guidance for capitalizing implementation costs incurred for an internal-use software license. This standard also requires capitalizing or expensing implementation costs based on the nature of the costs and the project stage during which they are incurred and establishes additional disclosure requirements. The Company adopted this standard effective January 1, 2020 and is applied prospectively. Adoption of this new standard did not have any impact on the Company’s condensed consolidated financial statements.
Future Adoption of New Accounting Pronouncements
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This standard is part of the FASB’s initiative to reduce complexity in accounting standards by instituting several simplifying provisions and removing several exceptions pertaining to income tax accounting. This standard will be effective for annual periods beginning after December 15, 2020, 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 consolidated financial statements.
9
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
NOTE 2 — CUSTOMER CONCENTRATION
Ocwen
Ocwen Financial Corporation (together with its subsidiaries, “Ocwen”) is a residential mortgage loan servicer of mortgage servicing rights (“MSRs”) it owns, including those MSRs in which others have an economic interest, and a subservicer of MSRs owned by others.
During the three and nine months ended September 30, 2020, Ocwen was our largest customer, accounting for 57 % of our total revenue for the nine months ended September 30, 2020 (48 % of our revenue for the third quarter of 2020). Ocwen purchases certain mortgage services from us under the terms of services agreements and amendments thereto (collectively, the “Ocwen Services Agreements”) with terms extending through August 2025. Certain of the Ocwen Services Agreements contain a “most favored nation” provision and also grant the parties the right to renegotiate pricing, among other things.
In February 2019, Altisource and Ocwen entered into agreements that, among other things, facilitated Ocwen’s transition from REALServicing and related technologies to another mortgage servicing software platform, establish a process for Ocwen to review and approve the assignment of one or more of our agreements to potential buyers of Altisource’s business lines, requiring Ocwen to use Altisource as service provider for certain service referrals totaling an amount equal to 100 % of the applicable service referrals on certain portfolios plus an amount equal to not less than 90 % of applicable service referrals from certain other portfolios (determined on a service by service basis), subject to certain additional restrictions and limitations, and affirm Altisource’s role as a strategic service provider to Ocwen through August 2025. In connection with these agreements, Altisource expressly preserved and did not waive any of its existing contractual rights relating to service referrals, other than with respect to Ocwen transitioning from the REALServicing and related technologies. If Altisource fails certain performance standards for specified periods of time, then Ocwen may terminate Altisource as a provider for the applicable service(s), subject to certain limitations and Altisource’s right to cure. Ocwen’s transition to another mortgage servicing platform was completed during 2019.
Revenue from Ocwen primarily consists of revenue earned from the loan portfolios serviced and subserviced by Ocwen when Ocwen engages us as the service provider, and revenue earned directly from Ocwen, pursuant to the Ocwen Services Agreements. For the nine months ended September 30, 2020 and 2019, we recognized revenue from Ocwen of $174.1 million and $275.1 million, respectively ($42.5 million and $89.8 million for the third quarter of 2020 and 2019, respectively). Revenue from Ocwen as a percentage of consolidated revenue was 57 % and 54 % for the nine months ended September 30, 2020 and 2019, respectively (48 % and 63 % for the third quarter of 2020 and 2019, respectively).
We earn additional revenue related to the portfolios serviced and subserviced by Ocwen when a party other than Ocwen or the MSR owner selects Altisource as the service provider. For the nine months ended September 30, 2020 and 2019, we recognized revenue of $19.9 million and $28.3 million, respectively ($7.2 million and $8.1 million for the third quarter of 2020 and 2019, respectively), related to the portfolios serviced by Ocwen when a party other than Ocwen or the MSR owner selected Altisource as the service provider. These amounts are not included in deriving revenue from Ocwen and revenue from Ocwen as a percentage of revenue discussed above.
During the second quarter of 2020, Ocwen informed us that an investor had instructed Ocwen to use a field services provider other than Altisource on properties associated with certain MSRs. They indicated that they were instructed to begin the transition in July 2020, and that the transition should be completed in a few months. We believe Ocwen commenced using another field services provider for these properties in July 2020 and continued to transition services during the third quarter of 2020. Based upon the impacted portfolios to date and the designated service provider, Altisource believes that Ocwen received
10
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
these directions from New Residential Investment Corp. (individually, together with one or more of its subsidiaries or one or more of its subsidiaries individually, “NRZ”). The transition to the replacement field service provider has largely been completed as of September 30, 2020. We estimate that $72.3 million and $115.6 million of service revenue from Ocwen for the nine months ended September 30, 2020 and 2019, respectively ($14.1 million and $38.1 million for the third quarter of 2020 and 2019, respectively) was derived from Field Services referrals from the NRZ portfolios. Without providing the timing or specific services impacted, Ocwen also communicated to Altisource that the same investor plans to direct them to transition certain other default related service referrals to other providers. We estimate that revenue from these certain other default related services represented approximately $25.6 million and $34.9 million of service revenue from Ocwen for the nine months ended September 30, 2020 and 2019, respectively ($6.4 million and $12.5 million for the third quarter of 2020 and 2019, respectively). Altisource believes that any action taken by Ocwen to redirect these service referrals breaches Altisource's agreement with Ocwen. We are currently in discussions with Ocwen to address this matter, and have reserved all of our rights with respect to this matter.
To address the reduction in revenue, Altisource has undertaken several measures to further reduce its cost structure and strengthen its operations.
As of September 30, 2020, accounts receivable from Ocwen totaled $10.2 million, $8.9 million of which was billed and $1.3 million of which was unbilled. As of December 31, 2019, accounts receivable from Ocwen totaled $19.1 million, $15.7 million of which was billed and $3.4 million of which was unbilled.
NRZ
NRZ is a real estate investment trust that invests in and manages investments primarily related to residential real estate, including MSRs and excess MSRs.
Ocwen has disclosed that NRZ is its largest client. As of June 30, 2020, NRZ MSRs or rights to MSRs relating to approximately 53 % of loans serviced and subserviced by Ocwen (measured in unpaid principal balance (“UPB”)). In July 2017 and January 2018, Ocwen and NRZ entered into a series of agreements pursuant to which the parties agreed, among other things, to undertake certain actions to facilitate the transfer from Ocwen to NRZ of Ocwen’s legal title to certain of its MSRs (the “Subject MSRs”) and under which Ocwen will subservice mortgage loans underlying the MSRs for an initial term of five years , subject to early termination rights.
On August 28, 2017, Altisource, through its licensed subsidiaries, entered into a Cooperative Brokerage Agreement, as amended, and related letter agreement (collectively, the “Brokerage Agreement”) with NRZ which extends through August 2025. Under this agreement and related amendments, Altisource remains the exclusive provider of brokerage services for real estate owned (“REO”) associated with the Subject MSRs, irrespective of the subservicer, subject to certain limitations. NRZ’s brokerage subsidiary receives a cooperative brokerage commission on the sale of REO properties from these portfolios subject to certain exceptions.
The Brokerage Agreement may be terminated by NRZ upon the occurrence of certain specified events. Termination events include, but are not limited to, a breach of the terms of the Brokerage Agreement (including, without limitation, the failure to meet performance standards and non-compliance with law in a material respect), the failure to maintain licenses which failure materially prevents performance of the contract, regulatory allegations of non-compliance resulting in an adversarial proceeding against NRZ, voluntary or involuntary bankruptcy, appointment of a receiver, disclosure in a Form 10-K or Form 10-Q that there is significant uncertainty about Altisource’s ability to continue as a going concern, failure to maintain a specified level of cash and an unapproved change of control.
For the nine months ended September 30, 2020 and 2019, we recognized revenue from NRZ of $7.1 million and $9.6 million, respectively ($2.5 million and $2.6 million for the third quarter of 2020 and 2019, respectively), under the Brokerage Agreement. For the nine months ended September 30, 2020 and 2019, we recognized additional revenue of $29.3 million and $45.5 million, respectively ($10.2 million and $11.4 million for the third quarter of 2020 and 2019, respectively), relating to the Subject MSRs when a party other than NRZ selects Altisource as the service provider.
NOTE 3 — SALE OF THE FINANCIAL SERVICES BUSINESS
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
NOTE 4 — INVESTMENT IN EQUITY SECURITIES
During 2016, we purchased 4.1 million shares of Front Yard Residential Corporation (“RESI”) common stock. This investment is reflected in the accompanying condensed consolidated balance sheets at fair value and changes in fair value are included in other income (expense), net in the accompanying condensed consolidated statements of operations and comprehensive income (loss). As of September 30, 2020 and December 31, 2019, we held 3.5 30.2 million and $42.6 million, respectively. During the nine months ended September 30, 2020 and 2019, we recognized an unrealized (loss) gain from the change in fair value of $(12.4 ) million and $11.7 million, respectively ($0.1 million and $(2.3 ) million for the third quarter of 2020 and 2019, respectively). The unrealized (loss) gain for the three and nine months ended September 30, 2019 included less than $0.1 million net loss and a $1.9 million net gain, respectively, recognized on RESI shares sold during the periods. During the nine months ended September 30, 2020 and 2019, we earned dividends of $0.5 million and $1.7 million, respectively (no comparative amount for the third quarter of 2020 and $0.5 million for the third quarter of 2019), related to this investment.
In May 2019, the Company began selling its investment in RESI common stock. During the nine months ended September 30, 2019, the Company sold 0.7 million shares for net proceeds of $7.8 million (0.1 million shares for net proceeds of $1.3 million for the third quarter of 2019) (no 1.6 million shares for net proceeds of $21.1 million. The senior secured term loan agreement requires that the Company use the net proceeds to repay a portion of its senior secured term loan.
On October 19, 2020, RESI announced that it has entered into a definitive merger agreement whereby a partnership led by Pretium and including funds managed by the Real Estate Equity and Alternative Credit strategies of Ares Management Corporation will acquire RESI for $13.50 in cash per share. RESI also announced that the transaction is expected to close in the first quarter of 2021, subject to the approval of the holders of a majority of RESI’s outstanding shares and the satisfaction of customary closing conditions.
NOTE 5 — ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consists of the following:
| (in thousands) | September 30, 2020 | December 31, 2019 | ||||||||||||
| Billed | $ | $ | ||||||||||||
| Unbilled | ||||||||||||||
| Less: Allowance for credit losses | ( | ( | ||||||||||||
| Total | $ | $ | ||||||||||||
Unbilled accounts receivable consist primarily of certain real estate asset management, REO sales, title and closing services for which we generally recognize revenue when the service is provided but collect upon closing of the sale, and foreclosure trustee services, for which we generally recognize revenues over the service delivery period but bill following completion of the service. We also include amounts in unbilled accounts receivable that are earned during a month and billed in the following month.
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
NOTE 6 — PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following:
| (in thousands) | September 30, 2020 | December 31, 2019 | ||||||||||||
| Income taxes receivable | $ | $ | ||||||||||||
| Maintenance agreements, current portion | ||||||||||||||
| Prepaid expenses | ||||||||||||||
| Other current assets | ||||||||||||||
| Total | $ | $ | ||||||||||||
NOTE 7 — DISCONTINUATION OF LINES OF BUSINESS
Owners.com
In October 2019, the Company announced its plans to wind down and close the Owners.com business, which was completed by December 31, 2019. Owners.com was a technology-enabled real estate brokerage and provider of related mortgage brokerage and title services. Owners.com was not material in relation to the Company’s results of operations or financial position. Wind down expenses were included in the Project Catalyst restructuring charges (see Note 23).
Buy-Renovate-Lease-Sell
On November 26, 2018, the Company announced its plans to sell its short-term investments in real estate (“BRS Inventory”) and discontinue the Company’s Buy-Renovate-Lease-Sell (“BRS”) business. Altisource’s BRS business focused on buying, renovating, leasing and selling single-family homes to real estate investors. The BRS business was not material in relation to the Company’s results of operations or financial position. The Company completed the sale of the BRS Inventory during the year ended December 31, 2019.
NOTE 8 — PREMISES AND EQUIPMENT, NET
Premises and equipment, net consists of the following:
| (in thousands) | September 30, 2020 | December 31, 2019 | ||||||||||||
| Computer hardware and software | $ | $ | ||||||||||||
| Leasehold improvements | ||||||||||||||
| Furniture and fixtures | ||||||||||||||
| Office equipment and other | ||||||||||||||
| Less: Accumulated depreciation and amortization | ( | ( | ||||||||||||
| Total | $ | $ | ||||||||||||
Depreciation and amortization expense amounted to $11.5 million and $14.2 million for the nine months ended September 30, 2020 and 2019, respectively ($3.8 million and $3.7 million for the third quarter of 2020 and 2019, respectively), and is included in cost of revenue for operating assets and in selling, general and administrative expenses for non-operating assets in the accompanying condensed consolidated statements of operations and comprehensive income (loss).
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
Premises and equipment, net consist of the following, by country:
| (in thousands) | September 30, 2020 | December 31, 2019 | ||||||||||||
| United States | $ | $ | ||||||||||||
| Luxembourg | ||||||||||||||
| India | ||||||||||||||
| Uruguay | ||||||||||||||
| Philippines | ||||||||||||||
| Total | $ | $ | ||||||||||||
NOTE 9 — RIGHT-OF-USE ASSETS UNDER OPERATING LEASES, NET
Right-of-use assets under operating leases, net consists of the following:
| (in thousands) | September 30, 2020 | December 31, 2019 | ||||||||||||
| Right-of-use assets under operating leases | $ | $ | ||||||||||||
| Less: Accumulated amortization | ( | ( | ||||||||||||
| Total | $ | $ | ||||||||||||
Amortization of operating leases was $8.1 million and $9.1 million for the nine months ended September 30, 2020 and 2019, respectively ($2.6 million and $2.4 million for the third quarter of 2020 and 2019, respectively), and is included in cost of revenue for operating assets and in selling, general and administrative expenses for non-operating assets in the accompanying condensed consolidated statements of operations and comprehensive income (loss).
NOTE 10 — GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill
Goodwill consists of the following:
| (in thousands) | Total | |||||||
| Balance as of September 30, 2020 and December 31, 2019 | $ | |||||||
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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, 2020 | December 31, 2019 | September 30, 2020 | December 31, 2019 | September 30, 2020 | December 31, 2019 | ||||||||||||||||||||||||||||||||||||||
| Definite lived intangible assets: | ||||||||||||||||||||||||||||||||||||||||||||
| Customer related intangible assets | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||
| Operating agreement | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Trademarks and trade names | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Non-compete agreements | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Intellectual property | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Other intangible assets | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||
Amortization expense for definite lived intangible assets was $11.3 million and $15.5 million for the nine months ended September 30, 2020 and 2019, respectively ($4.3 million and $3.3 million for the third quarter of 2020 and 2019, respectively). Expected annual definite lived intangible asset amortization expense for 2020 through 2024 is $14.9 million, $9.3 million, $5.1 million, $5.1 million and $5.1 million, respectively.
NOTE 11 — OTHER ASSETS
Other assets consist of the following:
| (in thousands) | September 30, 2020 | December 31, 2019 | ||||||||||||
| Restricted cash | $ | $ | ||||||||||||
| Security deposits | ||||||||||||||
| Deferred tax assets, net | ||||||||||||||
| Other | ||||||||||||||
| Total | $ | $ | ||||||||||||
NOTE 12 — ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accounts payable and accrued expenses consist of the following:
| (in thousands) | September 30, 2020 | December 31, 2019 | ||||||||||||
| Accounts payable | $ | $ | ||||||||||||
| Accrued expenses - general | ||||||||||||||
| Accrued salaries and benefits | ||||||||||||||
| Income taxes payable | ||||||||||||||
| Total | $ | $ | ||||||||||||
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
Other current liabilities consist of the following:
| (in thousands) | September 30, 2020 | December 31, 2019 | ||||||||||||
| Operating lease liabilities | $ | $ | ||||||||||||
| Other | ||||||||||||||
| Total | $ | $ | ||||||||||||