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, 2021
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 ) 27 61 49 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 29, 2021, there were 15,904,323 outstanding shares of the registrant’s common stock (excluding 9,508,425 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, 2021 | December 31, 2020 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable, net | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Premises and equipment, net | |||||||||||
| Right-of-use assets under operating leases | |||||||||||
| Goodwill | |||||||||||
| Intangible assets, net | |||||||||||
| Deferred tax assets, net | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable and accrued expenses | $ | $ | |||||||||
| Current portion of long-term debt | |||||||||||
| Deferred revenue | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt, less current portion | |||||||||||
| Deferred tax liabilities, net | |||||||||||
| Convertible debt payable to related parties (Note 1) | |||||||||||
Commitments, contingencies and regulatory matters (Note 23) | |||||||||||
| 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 LOSS
(in thousands, except per share data)
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||||||||||||
| Cost of revenue | ||||||||||||||||||||||||||
| Gross profit | ||||||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||
| Selling, general and administrative expenses | ||||||||||||||||||||||||||
| Restructuring charges | ||||||||||||||||||||||||||
| Loss 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 before income taxes and non-controlling interests | ( | ( | ( | ( | ||||||||||||||||||||||
| Income tax provision | ( | ( | ( | ( | ||||||||||||||||||||||
| Net loss | ( | ( | ( | ( | ||||||||||||||||||||||
| Net loss (income) attributable to non-controlling interests | ( | ( | ||||||||||||||||||||||||
| Net loss attributable to Altisource | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
| Loss per share: | ||||||||||||||||||||||||||
| Basic | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
| Diluted | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
| Weighted average shares outstanding: | ||||||||||||||||||||||||||
| Basic | ||||||||||||||||||||||||||
| Diluted | ||||||||||||||||||||||||||
| Comprehensive loss: | ||||||||||||||||||||||||||
| Comprehensive loss, net of tax | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
| Comprehensive loss (income) attributable to non-controlling interests | ( | ( | ||||||||||||||||||||||||
| Comprehensive loss 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, 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. | |||||||||||||||||||||||||||||||||||||||||
5
| Altisource Equity (Deficit) | |||||||||||||||||||||||||||||||||||||||||
| Common stock | Additional paid-in capital | Retained earnings | Treasury stock, at cost | Non-controlling interests | Total | ||||||||||||||||||||||||||||||||||||
| Shares | |||||||||||||||||||||||||||||||||||||||||
| Balance, December 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, March 31, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||
| 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, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||
| 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, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||
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, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Amortization of right-of-use assets under operating leases | |||||||||||
| Amortization of intangible assets | |||||||||||
| Unrealized loss 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 | |||||||||||
| Other non-cash items | |||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | |||||||||||
| 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 operating activities | ( | ( | |||||||||
| Cash flows from investing activities: | |||||||||||
| Additions to premises and equipment | ( | ( | |||||||||
| Proceeds from the sale of business | |||||||||||
| Net cash provided by investing activities | |||||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from revolving credit facility | |||||||||||
| Debt issuance costs | ( | ||||||||||
| Proceeds from convertible debt payable to related parties (Note 1) | |||||||||||
| Distributions to non-controlling interests | ( | ( | |||||||||
| Payments of tax withholding on issuance of restricted share units and restricted shares | ( | ( | |||||||||
| Net cash provided by (used in) financing activities | ( | ||||||||||
| Net decrease 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 (decrease) 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.
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. On May 27, 2021, Pointillist issued $1.3 million in principal of convertible notes to related parties with a maturity date of January 1, 2023. The notes bear interest at a rate of 7 % per annum. The principal and unpaid accrued interest then outstanding under the notes (1) automatically converts to Pointillist equity at the earlier of the time Pointillist receives proceeds of $5.0 million or more from the sale of its equity or January 1, 2023, or (2) are repaid in cash or converted into Pointillist common stock equity based on a $13.1 million Pointillist valuation (at the Lenders’ option) in the event of a corporate transaction or initial public offering of Pointillist. 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.
On October 6, 2021, Altisource entered into a definitive Stock Purchase Agreement to sell all of our equity interest in Pointillist to Genesys Cloud Services, Inc. (“Genesys”). On a fully diluted basis, Altisource owns approximately 69 % of the equity in Pointillist. See Note 24, Subsequent Event.
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, 2020, as filed with the SEC on March 11, 2021.
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 December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 is effective for annual periods beginning after December 15, 2020, including interim periods within that reporting period. The Company adopted this standard effective January 1, 2021 and has applied it prospectively. Adoption of this new standard did not have any impact on the Company’s condensed consolidated financial statements.
In August 2020, the FASB issued ASU No. 2020-06, Debt - Debt with Conversion and Other Options (Topic 470) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Topic 815). This standard simplifies the accounting for certain financial instruments with characteristics of liability and equity, particularly convertible debt instruments. This standard is effective for annual periods beginning after December 15, 2021, including interim periods within that reporting period. Early adoption is permitted for annual periods beginning after December 15, 2020. The Company early adopted this standard effective January 1, 2021 and has applied it prospectively. Adoption of this new standard did not have a material impact on the Company’s condensed consolidated financial statements.
Future Adoption of New Accounting Pronouncements
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting and in January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope. This standard applies only to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. This standard provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting, in response to concerns about structural risks of interbank offered rates, and, particularly, the risk of cessation of LIBOR. This standard is effective from the period from March 12, 2020 through December 31, 2022. An entity may elect to apply the amendments for contract modifications as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a topic or an industry subtopic, the standard must be applied prospectively for all eligible contract modifications for that topic or industry subtopic. The Company is currently evaluating the impact this guidance may have on its condensed consolidated financial statements.
NOTE 2 — CUSTOMER CONCENTRATION
Ocwen
Ocwen Financial Corporation (together with its subsidiaries, “Ocwen”) is a residential mortgage loan servicer of mortgage servicing rights (“MSRs”) it owns, including those MSRs in which others have an economic interest, and a subservicer of MSRs owned by others.
During the three and nine months ended September 30, 2021, Ocwen was our largest customer, accounting for 32 % of our total revenue for the nine months ended September 30, 2021 (31 % of our revenue for the third quarter of 2021). Ocwen purchases certain mortgage services from us under the terms of services agreements and amendments thereto (collectively, the “Ocwen
9
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
Services Agreements”) with terms extending through August 2030. Certain of the Ocwen Services Agreements contain a “most favored nation” provision and also grant the parties the right to renegotiate pricing, among other things.
Revenue from Ocwen primarily consists of revenue earned from the loan portfolios serviced and subserviced by Ocwen when Ocwen engages us as the service provider, and revenue earned directly from Ocwen, pursuant to the Ocwen Services Agreements. For the nine months ended September 30, 2021 and 2020, we recognized revenue from Ocwen of $44.7 million and $174.1 million, respectively ($13.6 million and $42.5 million for the third quarter of 2021 and 2020, respectively). Revenue from Ocwen as a percentage of consolidated revenue was 32 % and 57 % for the nine months ended September 30, 2021 and 2020, respectively (31 % and 48 % for the third quarter of 2021 and 2020, 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, 2021 and 2020, we recognized revenue of $7.4 million and $19.9 million, respectively ($1.9 million and $7.2 million for the third quarter of 2021 and 2020, respectively), related to the portfolios serviced by Ocwen when a party other than Ocwen or the MSRs 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 MSR investor instructed Ocwen to use a field services provider other than Altisource on properties associated with certain MSRs. Based upon the impacted portfolios to date and the designated service provider, Altisource believes that Ocwen received 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”). 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. We believe that the transition to the replacement field service provider was largely completed as of September 30, 2020. We estimate that $0.4 million and $69.1 million of service revenue from Ocwen for the nine months ended September 30, 2021 and 2020, respectively ($0.1 million and $14.1 million for the third quarter of 2021 and 2020, respectively), was derived from Field Services referrals from the NRZ portfolios. Ocwen also communicated to Altisource in the fourth quarter of 2020 that the same investor instructed Ocwen to use a provider for default valuations and certain default title services other than Altisource on properties associated with such certain MSRs and commenced moving these referrals to other service providers in the fourth quarter of 2020. We anticipate that the transition of such default valuations and title services will continue during the course of 2021. We estimate that $2.5 million and $16.7 million of service revenue from Ocwen for the nine months ended September 30, 2021 and 2020, respectively ($0.6 million and $3.9 million for the third quarter of 2021 and 2020, respectively), was derived from default valuations and title services referrals from the NRZ portfolios. To address the reduction in revenue, Altisource undertook several measures to further reduce its cost structure, strengthen its operations and generate cash.
On May 5, 2021 we entered into an agreement with Ocwen (the “Agreement”) pursuant to which the terms of certain services agreements between us and Ocwen were extended from August 2025 through August 2030 and the scope of solutions we provide to Ocwen was expanded to include, among other things, the opportunity for the Company to provide first and second chance foreclosure auctions on Federal Housing Administration (“FHA”) loans and field services on Ocwen’s FHA, Veterans Affairs and United States Department of Agriculture loans (collectively, “Government Loans”), and title services on FHA and Veterans Affairs loans, subject to a process to confirm Altisource’s ability to meet reasonable performance requirements, which process is continuing. The Agreement established a framework for us to expand the foreclosure trustee solutions we provide to Ocwen in additional states, and, as mutually agreed upon by the parties, to deliver reverse mortgage related solutions to Ocwen, subject to negotiation of appropriate statements of work or other agreements, a process to confirm Altisource’s ability to meet reasonable performance requirements, and technical integrations, as may be applicable. The Agreement further resolved the contractual dispute between the parties related to Ocwen’s transfer to NRZ the rights to designate service providers other than Altisource, including mutual releases with respect to such dispute. The Agreement also addressed Ocwen’s rights in the event of certain change of control or sale of a business transactions by us on or after September 1, 2028. Since the date of the Agreement, Ocwen has transitioned over 2,100 of its FHA first chance auction inventory to us and increased our percentage of field services referrals on its Government Loans.
As of September 30, 2021, accounts receivable from Ocwen totaled $4.5 million, $4.2 million of which was billed and $0.3 million of which was unbilled. As of December 31, 2020, accounts receivable from Ocwen totaled $5.9 million, $5.1 million of which was billed and $0.8 million of which was unbilled.
10
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
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, 2021, approximately 26 % of loans serviced and subserviced by Ocwen (measured in unpaid principal balance (“UPB”)) were related to NRZ MSRs or rights to MSRs. In July 2017 and January 2018, Ocwen and NRZ entered into a series of agreements pursuant to which the parties agreed, among other things, to undertake certain actions to facilitate the transfer from Ocwen to NRZ of Ocwen’s legal title to 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, 2021 and 2020, we recognized revenue from NRZ of $2.4 million and $7.1 million, respectively ($0.7 million and $2.5 million for the third quarter of 2021 and 2020, respectively), under the Brokerage Agreement. For the nine months ended September 30, 2021 and 2020, we recognized additional revenue of $10.9 million and $29.3 million, respectively ($3.4 million and $10.2 million for the third quarter of 2021 and 2020, respectively), relating to the Subject MSRs when a party other than NRZ selects Altisource as the service provider.
NOTE 3 — SALE OF BUSINESSES
Financial Services Business
On July 1, 2019, Altisource sold its Financial Services business, consisting of its post-charge-off consumer debt and mortgage charge-off collection services and customer relationship management services (the “Financial Services Business”) to Transworld Systems Inc. (“TSI”) for $44.0 million consisting of an up-front payment of $40.0 million, subject to a working capital adjustment (finalized during 2019) and transaction costs upon closing of the sale, and an additional $4.0 million payment on the one year anniversary of the sale closing. On July 1, 2020, the Company received net proceeds of $3.3 million representing TSI’s final installment payment less certain amounts owed to TSI.
Rental Property Management Business
In August 2018, Altisource entered into an amendment to its agreements with Front Yard Residential Corporation (“RESI”) to sell Altisource’s rental property management business to RESI and permit RESI to internalize certain services that had been provided by Altisource. The proceeds from the transaction totaled $18.0 million, payable in two installments. The first installment of $15.0 million was received on the closing date of August 8, 2018. The second installment of $3.0 million was to be received on the earlier of a RESI change of control or on August 8, 2023. On October 19, 2020, RESI announced that it had entered into a definitive merger agreement to sell RESI. The merger closed on January 11, 2021 and the Company subsequently received the $3.0 million payment. The present value of the second installment is included in other assets in the accompanying condensed consolidated balance sheets at a discounted value of $2.5 million as of December 31, 2020 (no comparative amount as of September 30, 2021).
NOTE 4 — INVESTMENT IN EQUITY SECURITIES
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
NOTE 5 — ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consists of the following:
| (in thousands) | September 30, 2021 | December 31, 2020 | ||||||||||||
| 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.
We are exposed to credit losses through our sales of products and services to our customers which are recorded as accounts receivable, net on the Company’s condensed consolidated financial statements. We monitor and estimate the allowance for credit losses based on our historical write-offs, historical collections, our analysis of past due accounts based on the contractual terms of the receivables, relevant market and industry reports and our assessment of the economic status of our customers, if known. Estimated credit losses are written off in the period in which the financial asset is determined to be no longer collectible. There can be no assurance that actual results will not differ from estimates or that consideration of these factors in the future will not result in an increase or decrease to our allowance for credit losses.
Changes in allowance for expected credit losses consist of the following:
| Additions | ||||||||||||||||||||||||||
| (in thousands) | Balance at Beginning of Period | Charged to Expenses | Deductions Note (1) | Balance at End of Period | ||||||||||||||||||||||
Allowance for expected credit losses: | ||||||||||||||||||||||||||
| Nine months ended September 30, 2021 | $ | $ | $ | $ | ||||||||||||||||||||||
| Twelve months ended December 31, 2020 | ||||||||||||||||||||||||||
______________________________________
(1) Amounts written off as uncollectible or transferred to other accounts or utilized.
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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, 2021 | December 31, 2020 | ||||||||||||
| Income taxes receivable | $ | $ | ||||||||||||
| Maintenance agreements, current portion | ||||||||||||||
| Prepaid expenses | ||||||||||||||
| Other current assets | ||||||||||||||
| Total | $ | $ | ||||||||||||
NOTE 7 — PREMISES AND EQUIPMENT, NET
Premises and equipment, net consists of the following:
| (in thousands) | September 30, 2021 | December 31, 2020 | ||||||||||||
| 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 $3.5 million and $11.5 million for the nine months ended September 30, 2021 and 2020, respectively ($1.1 million and $3.8 million for the third quarter of 2021 and 2020, respectively), and is included in cost of revenue for operating assets and in selling, general and administrative expenses for non-operating assets in the accompanying condensed consolidated statements of operations and comprehensive loss.
Premises and equipment, net consist of the following, by country:
| (in thousands) | September 30, 2021 | December 31, 2020 | ||||||||||||
| Luxembourg | $ | $ | ||||||||||||
| United States | ||||||||||||||
| India | ||||||||||||||
| Uruguay | ||||||||||||||
| Total | $ | $ | ||||||||||||
NOTE 8 — RIGHT-OF-USE ASSETS UNDER OPERATING LEASES, NET
Right-of-use assets under operating leases, net consists of the following:
| (in thousands) | September 30, 2021 | December 31, 2020 | ||||||||||||
| Right-of-use assets under operating leases | $ | $ | ||||||||||||
| Less: Accumulated amortization | ( | ( | ||||||||||||
| Total | $ | $ | ||||||||||||
Amortization of operating leases was $6.3 million and $8.1 million for the nine months ended September 30, 2021 and 2020, respectively ($1.8 million and $2.6 million for the third quarter of 2021 and 2020, respectively), and is included in cost of
13
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Condensed Consolidated Financial Statements (Continued)
NOTE 9 — GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill
Goodwill consists of the following:
| (in thousands) | Total | |||||||
Balance as of September 30, 2021 and December 31, 2020 | $ | |||||||
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, 2021 | December 31, 2020 | September 30, 2021 | December 31, 2020 | September 30, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||||||
| Definite lived intangible assets: | ||||||||||||||||||||||||||||||||||||||||||||
| Customer related intangible assets | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||
| Operating agreement | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Trademarks and trade names | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Non-compete agreements | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Other intangible assets | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||
Amortization expense for definite lived intangible assets was $8.2 million and $11.3 million for the nine months ended September 30, 2021 and 2020, respectively ($2.7 million and $4.3 million for the third quarter of 2021 and 2020, respectively). Expected annual definite lived intangible asset amortization expense for 2021 through 2025 is $9.5 million, $5.1 million, $5.1 million, $5.1 million and $5.1 million, respectively.
NOTE 10 — OTHER ASSETS
Other assets consist of the following:
| (in thousands) | September 30, 2021 | |||||||||||||