Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 


 

FORM 10-Q

 


 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2014

 

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 2469 7900
(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 x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  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  x

 

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  x

 

As of July 19, 2014, there were 21,835,823 outstanding shares of the registrant’s shares of beneficial interest (excluding 3,576,925 shares held as treasury stock).

 

 

 



Table of Contents

 

Table of Contents

 

ALTISOURCE PORTFOLIO SOLUTIONS S.A.

 

FORM 10-Q

 

 

 

 

Page

PART I — Financial Information

 

 

 

 

 

 

Item 1

Interim Condensed Consolidated Financial Statements

 

 

 

Condensed Consolidated Balance Sheets

3

 

 

Condensed Consolidated Statements of Operations

4

 

 

Condensed Consolidated Statements of Equity

5

 

 

Condensed Consolidated Statements of Cash Flows

6

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

 

 

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

25

 

 

 

 

 

Item 3

Quantitative and Qualitative Disclosures about Market Risk

43

 

 

 

 

 

Item 4

Controls and Procedures

44

 

 

 

 

 

 

 

 

PART II — Other Information

 

 

 

 

 

 

Item 1

Legal Proceedings

45

 

 

 

 

 

Item 1A

Risk Factors

45

 

 

 

 

 

Item 2

Issuer Purchases of Equity Securities

46

 

 

 

 

 

Item 6

Exhibits

47

 

 

 

 

SIGNATURES

48

 



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)

 

 

 

June 30,

 

December 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

127,884

 

$

130,429

 

Accounts receivable, net

 

125,047

 

104,787

 

Prepaid expenses and other current assets

 

16,022

 

10,891

 

Deferred tax assets, net

 

2,837

 

2,837

 

Total current assets

 

271,790

 

248,944

 

 

 

 

 

 

 

Premises and equipment, net

 

100,962

 

87,252

 

Deferred tax assets, net

 

160

 

622

 

Intangible assets, net

 

256,889

 

276,162

 

Goodwill

 

61,941

 

99,414

 

Other assets

 

19,258

 

17,658

 

 

 

 

 

 

 

Total assets

 

$

711,000

 

$

730,052

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued expenses

 

$

102,686

 

$

84,706

 

Current portion of long-term debt

 

3,975

 

3,975

 

Deferred revenue

 

21,785

 

36,742

 

Other current liabilities

 

8,957

 

10,131

 

Total current liabilities

 

137,403

 

135,554

 

 

 

 

 

 

 

Long-term debt, less current portion

 

389,385

 

391,281

 

Other non-current liabilities

 

11,733

 

45,476

 

 

 

 

 

 

 

Commitments, contingencies and regulatory matters (Note 18)

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

Common stock ($1.00 par value; 100,000 shares authorized; 25,413 issued and 21,941 outstanding as of June 30, 2014; 25,413 issued and 22,629 outstanding as of December 31, 2013)

 

25,413

 

25,413

 

Additional paid-in capital

 

90,403

 

89,273

 

Retained earnings

 

330,361

 

239,561

 

Treasury stock, at cost (3,472 shares as of June 30, 2014 and 2,784 shares as of December 31, 2013)

 

(274,679

)

(197,548

)

Altisource equity

 

171,498

 

156,699

 

 

 

 

 

 

 

Non-controlling interests

 

981

 

1,042

 

Total equity

 

172,479

 

157,741

 

 

 

 

 

 

 

Total liabilities and equity

 

$

711,000

 

$

730,052

 

 

See accompanying notes to condensed consolidated financial statements.

 

3



Table of Contents

 

ALTISOURCE PORTFOLIO SOLUTIONS S.A.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

296,072

 

$

186,110

 

$

535,341

 

$

334,937

 

Cost of revenue

 

183,999

 

116,972

 

331,804

 

213,934

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

112,073

 

69,138

 

203,537

 

121,003

 

Selling, general and administrative expenses

 

49,021

 

29,828

 

92,555

 

48,508

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

63,052

 

39,310

 

110,982

 

72,495

 

Other income (expense), net:

 

 

 

 

 

 

 

 

 

Interest expense

 

(4,784

)

(4,902

)

(9,560

)

(8,114

)

Other income (expense), net

 

(43

)

77

 

4

 

782

 

Total other income (expense), net

 

(4,827

)

(4,825

)

(9,556

)

(7,332

)

 

 

 

 

 

 

 

 

 

 

Income before income taxes and non-controlling interests

 

58,225

 

34,485

 

101,426

 

65,163

 

Income tax provision

 

(3,493

)

(2,417

)

(6,548

)

(4,568

)

 

 

 

 

 

 

 

 

 

 

Net income

 

54,732

 

32,068

 

94,878

 

60,595

 

Net income attributable to non-controlling interests

 

(631

)

(1,137

)

(1,146

)

(2,146

)

 

 

 

 

 

 

 

 

 

 

Net income attributable to Altisource

 

$

54,101

 

$

30,931

 

$

93,732

 

$

58,449

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

2.45

 

$

1.34

 

$

4.20

 

$

2.51

 

Diluted

 

$

2.24

 

$

1.25

 

$

3.84

 

$

2.34

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

22,089

 

23,161

 

22,301

 

23,267

 

Diluted

 

24,166

 

24,823

 

24,415

 

24,940

 

 

 

 

 

 

 

 

 

 

 

Transactions with related parties included above:

 

 

 

 

 

 

 

 

 

Revenue

 

$

179,027

 

$

121,234

 

$

324,585

 

$

211,332

 

Cost of revenue

 

9,554

 

5,087

 

16,842

 

8,914

 

Selling, general and administrative expenses

 

(489

)

(30

)

(731

)

(284

)

Other income

 

 

 

 

773

 

 

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

 

Non-

 

 

 

 

 

Common stock

 

Additional
paid-in capital

 

Retained
earnings

 

Treasury stock,
at cost

 

controlling
interests

 

Total

 

 

 

Shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2012

 

25,413

 

$

25,413

 

$

86,873

 

$

124,127

 

$

(77,954

)

$

1,370

 

$

159,829

 

Net income

 

 

 

 

58,449

 

 

2,146

 

60,595

 

Contributions from non-controlling interest holders

 

 

 

 

 

 

15

 

15

 

Distributions to non-controlling interest holders

 

 

 

 

 

 

(1,889

)

(1,889

)

Share-based compensation expense

 

 

 

1,519

 

 

 

 

1,519

 

Exercise of stock options

 

 

 

 

(3,639

)

6,553

 

 

2,914

 

Repurchase of shares

 

 

 

 

 

(51,573

)

 

(51,573

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2013

 

25,413

 

$

25,413

 

$

88,392

 

$

178,937

 

$

(122,974

)

$

1,642

 

$

171,410

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2013

 

25,413

 

$

25,413

 

$

89,273

 

$

239,561

 

$

(197,548

)

$

1,042

 

$

157,741

 

Net income

 

 

 

 

93,732

 

 

1,146

 

94,878

 

Distributions to non-controlling interest holders

 

 

 

 

 

 

(1,207

)

(1,207

)

Share-based compensation expense

 

 

 

1,130

 

 

 

 

1,130

 

Exercise of stock options

 

 

 

 

(2,932

)

3,571

 

 

639

 

Repurchase of shares

 

 

 

 

 

(80,702

)

 

(80,702

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2014

 

25,413

 

$

25,413

 

$

90,403

 

$

330,361

 

$

(274,679

)

$

981

 

$

172,479

 

 

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)

 

 

 

Six months ended

 

 

 

June 30,

 

 

 

2014

 

2013

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

94,878

 

$

60,595

 

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

 

 

 

 

 

Depreciation and amortization

 

13,375

 

9,306

 

Amortization of intangible assets

 

19,573

 

10,237

 

Change in the fair value of Equator Earn Out

 

(37,924

)

 

Goodwill impairment

 

37,473

 

 

Share-based compensation expense

 

1,130

 

1,519

 

Equity in losses of investment in affiliate

 

 

122

 

Bad debt expense

 

4,250

 

452

 

Amortization of debt discount

 

90

 

152

 

Amortization of debt issuance costs

 

483

 

451

 

Deferred income taxes

 

462

 

 

Loss on disposal of fixed assets

 

98

 

926

 

Changes in operating assets and liabilities, net of effects of acquisitions:

 

 

 

 

 

Accounts receivable

 

(24,510

)

(10,813

)

Prepaid expenses and other current assets

 

(5,131

)

(3,009

)

Other assets

 

(2,089

)

(1,440

)

Accounts payable and accrued expenses

 

21,319

 

917

 

Other current and non-current liabilities

 

(11,950

)

(1,947

)

Net cash provided by operating activities

 

111,527

 

67,468

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Additions to premises and equipment

 

(30,522

)

(13,397

)

Acquisition of businesses, net of cash acquired

 

 

(215,700

)

Proceeds from loan to Ocwen

 

 

75,000

 

Proceeds from sale of equity affiliate

 

 

12,648

 

Other investing activities

 

(294

)

(50

)

Net cash used in investing activities

 

(30,816

)

(141,499

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of long-term debt

 

 

201,000

 

Repayment of long-term debt and payments on capital lease obligations

 

(1,986

)

(1,733

)

Debt issuance costs

 

 

(2,400

)

Proceeds from stock option exercises

 

639

 

2,914

 

Purchase of treasury stock

 

(80,702

)

(51,573

)

Contributions from non-controlling interests

 

 

15

 

Distributions to non-controlling interests

 

(1,207

)

(1,889

)

Net cash (used in) provided by financing activities

 

(83,256

)

146,334

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

(2,545

)

72,303

 

Cash and cash equivalents at the beginning of the period

 

130,429

 

105,502

 

 

 

 

 

 

 

Cash and cash equivalents at the end of the period

 

$

127,884

 

$

177,805

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Interest paid

 

$

9,074

 

$

7,562

 

Income taxes paid, net

 

1,561

 

1,165

 

 

 

 

 

 

 

Non-cash investing and financing activities:

 

 

 

 

 

(Decrease) increase in payables for purchases of premises and equipment

 

$

(3,339

)

$

891

 

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

 

(3,711

)

11,133

 

 

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 offering both distribution and content. We leverage proprietary business process, vendor and electronic payment management software and behavioral science based analytics to improve outcomes for marketplace participants.

 

We are incorporated under the laws of Luxembourg and are publicly traded on the NASDAQ Global Select Market under the symbol “ASPS.”

 

Altisource® operations are conducted through three reporting segments: Mortgage Services, Financial Services and Technology Services.  In addition, we report our corporate-related expenditures and eliminations separately (see Note 19 for a description of our business segments).

 

Basis of Presentation

 

The unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Securities and Exchange Commission (“SEC”) Regulation S-X.  Accordingly, these financial statements do not include all of the information and notes required by GAAP for complete consolidated financial statements.  In the opinion of management, the interim data includes all normal recurring adjustments considered necessary to fairly state the results for the interim periods presented.  The preparation of interim condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of our interim condensed consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from these estimates.  Intercompany and inter-segment transactions and accounts are eliminated in consolidation.

 

The Mortgage Partnership of America, L.L.C. (“MPA”), a wholly-owned subsidiary of Altisource, serves as the manager of Best Partners Mortgage Cooperative, Inc. doing business as Lenders One Mortgage Cooperative (“Lenders One”).  MPA provides services to Lenders One under a management agreement that ends on December 31, 2025.  The management agreement between MPA and Lenders One® members, pursuant to which MPA is the management company of Lenders One, represents a variable interest in a variable interest entity.  MPA is the primary beneficiary of Lenders One as it has the power to direct the activities that most significantly impact Lenders One’s economic performance and the obligation to absorb losses or the right to receive benefits from Lenders One.  As a result, Lenders One is presented in the accompanying condensed consolidated financial statements on a consolidated basis with the interests of the members reflected as non-controlling interests.  As of June 30, 2014, Lenders One had total assets of $5.8 million and total liabilities of $4.9 million.  As of December 31, 2013, Lenders One had total assets of $4.6 million and total liabilities of $3.5 million.

 

These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in our Form 10-K for the year ended December 31, 2013, filed with the SEC on February 13, 2014, which contains a summary of our significant accounting policies.  Certain footnote detail in the Form 10-K is omitted from the information included herein.

 

Correction of Immaterial Errors

 

During the second quarter of 2014, we determined that while we properly identified our related parties in previously issued financial statements, disclosures of certain immaterial related party expenses were omitted.  We have corrected the previously presented disclosures of related party expenses in Note 2 — Transactions with Related Parties and on the face of the condensed consolidated statements of operations for the three and six months ended June 30, 2013.  The impact of correcting these items in the notes to the condensed consolidated financial statements had the effect of increasing the amounts disclosed as related party cost of revenue from Ocwen Financial Corporation, together with its subsidiaries (“Ocwen”), by $8.9 million for the six months ended June 30, 2013 ($5.1 million for the second quarter of 2013), increasing the amounts disclosed as selling, general and administrative expenses from Ocwen billings to Altisource by $0.2 million for the six months ended June 30, 2013 ($0.1 million for the second quarter of 2013), decreasing the amounts disclosed as selling, general and administrative expenses from Altisource billings to Ocwen by $0.1 million for the six months ended June 30, 2013 ($0.1 million for the second quarter of 2013) and decreasing the amounts disclosed as selling, general and administrative expenses from Altisource billings to Altisource Asset Management Corporation (“AAMC”) by $0.2 million ($0.1 million for the second quarter of 2013).  Correcting these items on the face of the condensed consolidated statements of operations resulted in the disclosure of related party cost of revenue of $8.9 million for the six months ended June 30, 2013 ($5.1 million for the second quarter of 2013) and a decrease in previously

 

7



Table of Contents

 

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

 

disclosed related party selling, general and administrative expenses by $1.7 million for the six months ended June 30, 2013 ($0.8 million for the second quarter of 2013).

 

In accordance with Accounting Standards Codification (“ASC”) Topic 250, Accounting Changes and Error Corrections, the Company evaluated the effect of the disclosure and presentation errors on its previously issued annual and quarterly financial statements, both qualitatively and quantitatively, and concluded that the related party disclosures in the Company’s previously issued annual and quarterly financial statements are not materially misstated.

 

Future Adoption of a New Accounting Pronouncement

 

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers.  This standard establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance.  The core principle of the new standard is an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  This new standard will be effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period.  Early adoption is not permitted.  The Company is currently evaluating the impact this new guidance may have on its results of operations and financial position.

 

Fair Value of Financial Instruments

 

ASC Topic 820, Fair Value Measurement, established a three-level hierarchy that prioritizes the inputs used to measure fair value 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.

 

Our financial assets and liabilities primarily include cash and cash equivalents, restricted cash, long-term debt and acquisition-related contingent consideration.  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.  The fair value for cash and cash equivalents and restricted cash was measured using level 1 inputs.  The carrying amount of long-term debt approximates fair value due to the variable interest rate and consistent credit rating of the Company.  The fair value of long-term debt was measured using level 2 inputs.  The carrying amount of acquisition-related contingent consideration is equal to its fair value.  The fair value of acquisition-related contingent consideration was measured using level 3 inputs, which included sensitivities pertaining to discount rates and financial projections.  See Note 3 for further discussion of the change in fair value of contingent consideration.

 

NOTE 2 — TRANSACTIONS WITH RELATED PARTIES

 

Ocwen®

 

Ocwen is our largest customer.  Our Chairman is also the Executive Chairman of Ocwen. 

 

Revenue

 

Ocwen purchases certain mortgage services and technology services from us under the terms of master services agreements and amendments to the master services agreements (collectively, the “Service Agreements”) with terms extending through August 2025.  The Service Agreements, among other things, contain a “most favored nations” provision and the parties to the Service Agreements have the right to renegotiate pricing.  In connection with our March 29, 2013 acquisition from Ocwen of the fee-based businesses of Homeward Residential, Inc. (“Homeward”) and the April 12, 2013 transaction with Ocwen related to the fee-based businesses of Residential Capital, LLC (“ResCap”) (see Note 3), our Service Agreements with Ocwen were amended to extend the term from 2020 to 2025.  Further, as part of the amendments, Ocwen agreed not to establish similar fee-based businesses that would directly or indirectly compete with Altisource’s services with respect to the Homeward and ResCap businesses.  We settle amounts with Ocwen on a daily, weekly or monthly basis depending upon the nature of the service and when the service is provided.

 

8



Table of Contents

 

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

 

Related party revenue consists of revenue earned directly from Ocwen and revenue earned from the loans serviced by Ocwen when Ocwen designates us as the service provider.  We earn additional revenue on the portfolios serviced by Ocwen that are not considered related party revenue when a party other than Ocwen selects Altisource as the service provider.  Related party revenue from Ocwen as a percentage of segment and consolidated revenue was as follows:

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Mortgage Services

 

65

%

70

%

67

%

69

%

Financial Services

 

28

%

29

%

27

%

17

%

Technology Services

 

40

%

54

%

38

%

52

%

Consolidated revenue

 

59

%

65

%

60

%

63

%

 

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

 

Cost of Revenue

 

At times, we use Ocwen’s contractors and/or employees to support Altisource related services.  Ocwen bills us for these contractors and/or employees based on their fully-allocated cost.  Additionally, we purchase certain data relating to Ocwen’s servicing portfolio in connection with a Data Access and Services Agreement.  The Data Access and Services Agreement may be renegotiated and may be cancelled by either Altisource or Ocwen with 90 days prior written notice. Ocwen bills us a per asset fee for this data.  For the six months ended June 30, 2014 and 2013, Ocwen billed us $16.8 million and $8.9 million, respectively ($9.6 million and $5.1 million for the second quarter of 2014 and 2013, respectively).  These amounts are reflected as a component of cost of revenue in the condensed consolidated statements of operations.

 

Selling, general and administrative expenses

 

We provide certain other services to Ocwen and Ocwen provides certain other services to us.  These services include such areas as human resources, vendor management, vendor oversight, corporate services, operational effectiveness, quality assurance, quantitative analytics and treasury.  Billings for these services are based on the fully-allocated cost of providing the service based on an estimate of the time and expense of providing the service or estimates thereof.  For the six months ended June 30, 2014 and 2013, we billed Ocwen $2.2 million and $1.3 million, respectively ($1.2 million and $0.6 million for the second quarter of 2014 and 2013, respectively), and Ocwen billed us $2.4 million and $1.6 million, respectively ($1.2 million and $0.9 million for the second quarter of 2014 and 2013, respectively).  These amounts are reflected as a component of selling, general and administrative expenses in the condensed consolidated statements of operations.

 

Unsecured Term Loan

 

On December 27, 2012, we entered into a senior unsecured term loan agreement with Ocwen under which we loaned $75.0 million to Ocwen.  Payments of interest were due quarterly at a rate per annum equal to the Eurodollar Rate (as defined in the agreement) plus 6.75%, provided that the Eurodollar Rate is not less than 1.50%.  On February 15, 2013, Ocwen repaid the outstanding principal amount of this loan and all accrued and unpaid interest and the term loan was terminated.  Interest income related to this loan was $0.8 million for the six months ended June 30, 2013, all of which was recognized in the first quarter of 2013.

 

Transactions Related to Fee-Based Businesses

 

On January 31, 2013, we entered into non-binding letters of intent with Ocwen to acquire certain fee-based businesses associated with Ocwen’s acquisitions of the Homeward and ResCap servicing portfolios.  Ocwen acquired the Homeward servicing portfolio on December 27, 2012 and the ResCap servicing portfolio on February 15, 2013.  Altisource acquired the Homeward fee-based businesses from Ocwen on March 29, 2013 (see Note 3).  Altisource entered into an agreement with Ocwen on April 12, 2013 to establish additional terms related to our services in connection with the ResCap fee-based businesses (see Note 3).

 

Correspondent One® and HLSS

 

In July 2011, we acquired an equity interest in Correspondent One S.A. (“Correspondent One”).  Correspondent One purchased closed conforming and government guaranteed residential mortgages from approved mortgage bankers.  On March 31, 2013, we sold our 49% interest in Correspondent One to Ocwen for $12.6 million.  Prior to the sale to Ocwen, we provided Correspondent

 

9



Table of Contents

 

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

 

One certain finance, human resources, legal support, facilities, technology, vendor management and risk management services under a support services agreement.  For the six months ended June 30, 2013, we billed Correspondent One $0.1 million (no comparative amounts for 2014 and the second quarter of 2013).  This amount was reflected as a component of selling, general and administrative expenses in the condensed consolidated statements of operations.  We also provided certain origination related services to Correspondent One.  We earned revenue of $0.1 million for the six months ended June 30, 2013 for these services (no comparative amounts for 2014 and the second quarter of 2013).

 

Home Loan Servicing Solutions, Ltd. (“HLSS”) is a publicly traded company whose primary objective is the acquisition of mortgage servicing rights and advances.  Our Chairman is also the Chairman of HLSS.  Under a support services agreement, we provide HLSS certain finance, human resources and legal support services.  We billed HLSS $0.4 million and $0.3 million for the six months ended June 30, 2014 and 2013, respectively ($0.2 million in each period for the second quarter of 2014 and 2013).  These amounts are reflected as a component of selling, general and administrative expenses in the condensed consolidated statements of operations.

 

Residential and AAMC

 

Altisource Residential Corporation (“Residential”) and AAMC were established, capitalized and their equity was distributed to our shareholders on December 21, 2012 and they are each separate publicly traded companies.  Residential is focused on acquiring and managing single family rental properties by acquiring portfolios of sub-performing and non-performing residential mortgage loans throughout the United States.  AAMC is an asset management company providing portfolio management and corporate governance services to Residential.  Our Chairman is also the Chairman of Residential and AAMC.

 

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

 

For the six months ended June 30, 2014 and 2013, we billed Residential $4.7 million and $0.4 million, respectively ($3.9 million and $0.2 million for the second quarter of 2014 and 2013, respectively).  For the six months ended June 30, 2014 and 2013, we billed AAMC less than $0.1 million in each period (less than $0.1 million in each period for the second quarter of 2014 and 2013) under the services agreements.  These amounts are reflected in revenue in the condensed consolidated statements of operations.  In addition, for the six months ended June 30, 2014 and 2013, we billed AAMC $0.5 million and $0.2 million, respectively ($0.3 million and $0.1 million for the second quarter of 2014 and 2013, respectively), under the support services agreements.  These amounts are reflected as a component of selling, general and administrative expenses in the condensed consolidated statements of operations.

 

NOTE 3 — ACQUISITIONS

 

Homeward Fee-Based Businesses

 

On March 29, 2013, we acquired certain fee-based businesses associated with Ocwen’s acquisition of Homeward.  As part of the acquisition, Ocwen agreed not to develop similar fee-based businesses that would directly or indirectly compete with services provided by Altisource relative to the Homeward servicing portfolio.  Additionally, the terms of our Service Agreements with Ocwen were amended to extend the term from 2020 to 2025 (see Note 2).  We paid $75.8 million, after a working capital and pre-acquisition net income adjustment payment by Ocwen of $11.1 million, which we received in September 2013.

 

Since the acquisition date, management adjusted the purchase price allocation and assigned associated asset lives based upon information that has become available.  In addition to the working capital adjustment, we also reduced premises and equipment by $1.2 million based on a post-acquisition detailed analysis of software licenses received and increased current liabilities by $2.0 million based on a subsequent detailed analysis of obligations payable as of the closing date.  Consequently, the Company retrospectively adjusted the fair value of the assets acquired and liabilities assumed in the condensed consolidated balance sheet as of December 31, 2013 as well as disclosed the corresponding amount of non-cash investing and financing activities in the condensed consolidated statement of cash flows for the six months ended June 30, 2013.

 

10



Table of Contents

 

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

 

The final adjusted allocation of the purchase price is as follows:

 

(in thousands)

 

 

 

 

 

 

 

Premises and equipment

 

$

1,559

 

Customer relationship

 

75,609

 

Goodwill

 

2,039

 

 

 

79,207

 

Accounts payable and accrued expenses

 

(3,390

)

Purchase price

 

$

75,817

 

 

 

 

Estimated life
(in years)

 

 

 

 

 

Premises and equipment

 

3 - 5

 

Customer relationship

 

7

 

 

ResCap Fee-Based Businesses

 

On April 12, 2013, we entered into an agreement with Ocwen to establish additional terms related to the existing servicing arrangements between Altisource and Ocwen in connection with certain mortgage servicing platform assets of ResCap (the “ResCap Business”).  The agreement provides that (i) Altisource will be a provider to Ocwen of certain services related to the ResCap Business, (ii) Ocwen will not establish similar fee-based businesses that would directly or indirectly compete with Altisource’s services as they relate to the ResCap Business and (iii) Ocwen will market and promote the utilization of Altisource’s services to their various third party relationships.  Additionally, the parties agreed to use commercially reasonable best efforts to ensure that the loans associated with the ResCap Business are boarded onto Altisource’s mortgage servicing platform.  We paid $128.8 million to Ocwen in connection with the ResCap fee-based businesses agreement.

 

We acquired no tangible assets and assumed no liabilities in connection with the ResCap transaction.  However, certain employees as well as practices and processes developed to support the ResCap servicing portfolio were components of the transaction.  We accounted for this transaction as a business combination in accordance with ASC Topic 805, Business Combinations.

 

Management prepared a final purchase price allocation and assigned associated asset lives based upon available information at the time of the agreement and until finalized as of December 31, 2013.  The agreement consideration of $128.8 million was fully allocated to the customer relationship intangible asset with an estimated average useful life of 7 years.

 

Equator® Acquisition

 

On November 15, 2013, we completed the acquisition of all of the outstanding limited liability company interests of Equator, LLC (“Equator”) pursuant to a Purchase and Sale Agreement dated as of August 19, 2013 (the “Purchase Agreement”).  Pursuant to the terms of the Purchase Agreement, we paid $63.4 million at closing in cash (net of closing working capital adjustments), subject to certain post-closing adjustments based on current assets and current liabilities of Equator at closing.  After the acquisition date, management adjusted the purchase price allocation based upon information that has subsequently become available relating to acquisition date working capital, resulting in an obligation of the Company to pay the sellers an additional $3.7 million.  Consequently, the Company retrospectively adjusted the fair value of the assets acquired and liabilities assumed in the condensed consolidated balance sheet as of December 31, 2013 as well as disclosed the corresponding amount of non-cash investing and financing activities in the condensed consolidated statement of cash flows for the six months ended June 30, 2014.

 

The Purchase Agreement also provides for the payment of up to $80 million in potential additional consideration (the “Earn Out”). The Earn Out is determined based on Equator’s Adjusted EBITA (as defined in the Purchase Agreement) in the three consecutive 12-month periods following closing. Up to $22.5 million of the Earn Out can be earned in each of the first two 12-month periods, and up to $35.0 million can be earned in the third 12-month period.  Any amounts earned upon the achievement of Adjusted EBITA thresholds are payable through 2017.  We may, in our discretion, pay up to 20% of each payment of any Earn Out in shares of Company restricted stock, with the balance to be paid in cash.  As of the closing date, we estimated the fair value of the Earn Out to be $46.0 million, determined based on the present value of future estimated Earn Out payments at such date, which has subsequently been adjusted as further described below.  The acquisition date fair value of the Earn Out is included as a component of the purchase price of Equator.

 

11



Table of Contents

 

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

 

The preliminary adjusted allocation of the purchase price is as follows:

 

(in thousands)

 

Initial purchase
price allocation

 

Adjustments

 

Adjusted purchase
price allocation

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

$

105

 

$

105

 

Accounts receivable

 

9,293

 

3,490

 

12,783

 

Prepaid expenses and other current assets

 

954

 

(498

)

456

 

Premises and equipment

 

16,974

 

 

16,974

 

Customer relationships and trade names

 

43,393

 

 

43,393

 

Goodwill

 

82,460

 

 

82,460

 

Other non-current assets

 

242

 

78

 

320

 

Assets acquired

 

153,316

 

3,175

 

156,491

 

Accounts payable and accrued expenses

 

(7,232

)

536

 

(6,696

)

Deferred revenue

 

(36,689

)

 

(36,689

)

Liabilities assumed

 

(43,921

)

536

 

(43,385

)

 

 

 

 

 

 

 

 

Purchase price

 

$

109,395

 

$

3,711

 

$

113,106

 

 

 

 

Estimated life
(in years)

 

 

 

 

 

Premises and equipment (excluding internally developed software)

 

3 - 5

 

Internally developed software (included in premises and equipment)

 

7

 

Customer relationships

 

7 - 15

 

Trade names

 

4

 

 

In accordance with ASC 805, Business Combinations, the liability for Earn Out payments is remeasured to fair value each period until the contingency is resolved with the change in fair value recognized in earnings.  As of the closing date, December 31, 2013 and March 31, 2014, we estimated the fair value of the Earn Out to be $46.0 million, determined based on the present value of future estimated Earn Out payments.  As of June 30, 2014, we estimate the fair value of the Earn Out to be $8.1 million, determined based on the present value of future estimated Earn Out payments.  The lower fair value of the Earn Out is based on management’s current estimates that expected earnings of Equator will be lower than projected at the time of acquisition.  The change in fair value of $37.9 million is reflected as a reduction of selling, general and administrative expenses in the condensed consolidated statements of operations.

 

As a result of the decline in fair value of the Earn Out, management evaluated and determined that Equator goodwill should be tested for impairment.  Consequently, we initiated a quantitative two-step goodwill impairment test by comparing the carrying value of the net assets of Equator to its fair value based on a discounted cash flow analysis.  We determined, based on a preliminary assessment, that the fair value of Equator was less than its carrying value.  Based on this preliminary assessment, management has estimated that the Equator goodwill impairment is approximately $37.5 million, which is reflected as a component of selling, general and administrative expenses in the condensed consolidated statements of operations (see Note 15).  This assessment is preliminary due to the timing of revisions to forecasted results of operations and cash flows and the volatility of the markets in which Equator’s customers operate.  The Company expects to complete its Equator goodwill impairment assessment in the third quarter of 2014.

 

The following table presents the impact of the change in the fair value of the Equator Earn Out and Equator goodwill impairment for the second quarter of 2014 and for the six months ended June 30, 2014, which are included in selling, general and administrative expenses in the condensed consolidated statements of operations:

 

(in thousands)

 

 

 

 

 

 

 

Change in the fair value of Equator Earn Out

 

$

(37,924

)

Goodwill impairment

 

37,473

 

 

 

 

 

 

 

$

(451

)

 

The final determination of any further post-closing purchase price adjustments is in process.

 

12



Table of Contents

 

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

 

The following tables present the unaudited pro forma consolidated results of operations as if the Homeward, ResCap Business and Equator transactions had occurred at the beginning of the period presented:

 

 

 

Three months ended
June 30, 2013

 

(in thousands, except per share amounts)

 

As reported

 

Pro forma

 

 

 

 

 

 

 

Revenue

 

$

186,110

 

$

201,039

 

Net income attributable to Altisource

 

30,931

 

29,064

 

Earnings per share - Diluted

 

1.25

 

1.17

 

 

 

 

Six months ended
June 30, 2013

 

(in thousands, except per share amounts)

 

As reported

 

Pro forma

 

 

 

 

 

 

 

Revenue

 

$

334,937

 

$

398,285

 

Net income attributable to Altisource

 

58,449

 

61,708

 

Earnings per share - Diluted

 

2.34

 

2.47

 

 

The unaudited pro forma information presents the combined operating results of Altisource and the Homeward, ResCap Business and Equator transactions.  The Homeward, ResCap Business and Equator operating results were derived from their historical financial statements for the most comparable periods available.  The results prior to the acquisition dates have been adjusted to include the pro forma impact of the adjustment of amortization of the acquired intangible assets based on the purchase price allocations, the adjustment of interest expense reflecting the portion of our senior secured term loan used in the Homeward, ResCap Business and Equator transactions and to reflect the impact of income taxes on the pro forma adjustments utilizing Altisource’s effective income tax rate.

 

The unaudited pro forma results are presented for illustrative purposes only and do not reflect additional revenue opportunities, the realization of any potential cost savings and any related integration costs.  Certain revenue opportunities and cost savings may result from the transactions and the conversion to the Altisource model; however, there can be no assurance that these revenue opportunities and cost savings will be achieved.  These pro forma results do not purport to be indicative of the results that would have actually been obtained if the transactions occurred as of the beginning of the period presented, nor is the pro forma data intended to be a projection of results that may be obtained in the future.

 

NOTE 4 — ACCOUNTS RECEIVABLE, NET

 

Accounts receivable, net consists of the following:

 

 

 

June 30,

 

December 31,

 

(in thousands)

 

2014

 

2013(1)

 

 

 

 

 

 

 

Billed

 

 

 

 

 

Non-related parties

 

$

41,533

 

$

41,011

 

Ocwen

 

28,137

 

11,658

 

HLSS

 

194

 

83

 

AAMC

 

195

 

1,347

 

Residential

 

4,247

 

547

 

Other receivables

 

786

 

1,643

 

 

 

75,092

 

56,289

 

Unbilled

 

 

 

 

 

Non-related parties

 

53,911

 

44,102

 

Ocwen

 

5,730

 

10,027

 

 

 

134,733

 

110,418

 

Less: allowance for doubtful accounts

 

(9,686

)

(5,631

)

 

 

 

 

 

 

Total

 

$

125,047

 

$

104,787

 

 


(1) December 31, 2013 accounts receivable has been revised to reflect a purchase accounting measurement period adjustment related to the Equator acquisition.  See Note 3.

 

13



Table of Contents

 

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

 

Unbilled receivables consist primarily of asset management and default management services for which we recognize revenues over the service delivery period but bill following completion of the service.

 

NOTE 5 — PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consist of the following:

 

 

 

June 30,

 

December 31,

 

(in thousands)

 

2014

 

2013(1)

 

 

 

 

 

 

 

Maintenance agreements, current portion

 

$

7,047

 

$

4,600

 

Income taxes receivable

 

2,553

 

1,645

 

Prepaid expenses

 

4,212

 

3,672

 

Other current assets

 

2,210

 

974

 

 

 

 

 

 

 

Total

 

$

16,022

 

$

10,891

 

 


(1)  December 31, 2013 prepaid expenses and other current assets have been revised to reflect a purchase accounting measurement period adjustment related to the Equator acquisition.  See Note 3.

 

NOTE 6 — PREMISES AND EQUIPMENT, NET

 

Premises and equipment, net consist of the following:

 

 

 

June 30,

 

December 31,

 

(in thousands)

 

2014

 

2013

 

 

 

 

 

 

 

Computer hardware and software

 

$

122,072

 

$

103,400

 

Office equipment and other

 

31,627

 

28,057

 

Furniture and fixtures

 

9,844

 

8,391

 

Leasehold improvements

 

20,224

 

17,574

 

 

 

183,767

 

157,422

 

Less: accumulated depreciation and amortization

 

(82,805

)

(70,170

)

 

 

 

 

 

 

Total

 

$

100,962

 

$

87,252

 

 

Depreciation and amortization expense, inclusive of capital leases, amounted to $13.4 million and $9.3 million for the six months ended June 30, 2014 and 2013, respectively ($7.2 million and $4.6 million for the second quarter of 2014 and 2013, 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.

 

14



Table of Contents

 

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

 

NOTE 7 — GOODWILL AND INTANGIBLE ASSETS, NET

 

Goodwill

The following is a summary of goodwill by segment:

 

 

 

Mortgage

 

Financial

 

Technology

 

 

 

(in thousands)

 

Services(1)

 

Services

 

Services

 

Total

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2013

 

$

12,958

 

$

2,378

 

$

84,078

 

$

99,414

 

Impairment of Equator goodwill(2)

 

 

 

(37,473

)

(37,473

)

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2014

 

$

12,958

 

$

2,378

 

$

46,605

 

$

61,941

 

 


(1) December 31, 2013 goodwill has been revised to reflect a purchase accounting measurement period adjustment related to the  Homeward acquisition.  See Note 3.

 

(2) See Note 3 for a discussion of the Equator goodwill impairment.

 

Intangible Assets, Net

 

Intangible assets, net consist of the following:

 

 

 

Weighted
average
estimated

 

Gross carrying amount

 

Accumulated amortization

 

Net book value

 

(in thousands)

 

useful life
(in years)

 

June 30,
2014

 

December 31,
2013

 

June 30,
2014

 

December 31,
2013

 

June 30,
2014

 

December 31,
2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Definite lived intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks

 

14

 

$

12,249

 

$

12,249

 

$

(4,771

)

$

(4,534

)

$

7,478

 

$

7,715

 

Customer-related intangible assets

 

10

 

284,484

 

284,484

 

(62,634

)

(44,208

)

221,850

 

240,276

 

Operating agreement

 

20

 

35,000

 

35,000

 

(7,729

)

(6,854

)

27,271

 

28,146

 

Non-compete agreement

 

4

 

 

1,300

 

 

(1,275

)

 

25

 

Intellectual property

 

10

 

300

 

 

(10

)

 

290

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

$

332,033

 

$

333,033

 

$

(75,144

)

$

(56,871

)

$

256,889

 

$

276,162

 

 

Amortization expense for definite lived intangible assets was $19.6 million and $10.2 million for the six months ended June 30, 2014 and 2013, respectively ($10.1 million and $9.0 million for the second quarter of 2014 and 2013, respectively).  Expected annual definite lived intangible asset amortization for 2014 through 2018 is $40.5 million, $39.9 million, $33.7 million, $29.2 million and $25.1 million, respectively.

 

NOTE 8 — INVESTMENT IN EQUITY AFFILIATE

 

Correspondent One purchased closed conforming residential mortgages from approved mortgage bankers.  Prior to the sale of our interest in Correspondent One to Ocwen on March 31, 2013 (see Note 2), we had significant influence over the general operations of Correspondent One consistent with our 49% ownership level, and therefore, accounted for our investment under the equity method. On March 31, 2013, we sold our 49% interest in Correspondent One to Ocwen for $12.6 million.

 

Our net loss on this investment using the equity method was $0.1 million for the six months ended June 30, 2013 and was a $0.1 million gain for the second quarter of 2013 (no comparative amounts for 2014).

 

15



Table of Contents

 

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

 

NOTE 9 — OTHER ASSETS

 

Other assets consist of the following: 

 

 

 

June 30,

 

December 31,

 

(in thousands)

 

2014

 

2013(1)

 

 

 

 

 

 

 

Security deposits, net

 

$

7,860

 

$

7,314

 

Debt issuance costs, net

 

6,158

 

6,687

 

Maintenance agreements, non-current portion

 

2,920

 

1,465

 

Restricted cash

 

1,615

 

1,620

 

Other

 

705

 

572

 

 

 

 

 

 

 

Total

 

$

19,258

 

$

17,658

 

 


(1) December 31, 2013 security deposits and other assets have been revised to reflect a purchase accounting measurement period adjustment related to the Equator acquisition.  See Note 3.

 

NOTE 10 — ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

Accounts payable and accrued expenses consist of the following: 

 

 

 

June 30,

 

December 31,

 

(in thousands)

 

2014

 

2013(1)

 

 

 

 

 

 

 

Accounts payable

 

$

22,593

 

$

15,171

 

Accrued expenses - general

 

27,869

 

20,945

 

Accrued salaries and benefits

 

32,418

 

30,011

 

Income taxes payable

 

14,805

 

11,211

 

Payable to Ocwen

 

5,001

 

7,361

 

Payable to AAMC

 

 

7

 

 

 

 

 

 

 

Total

 

$

102,686

 

$

84,706

 

 


(1) December 31, 2013 payables have been revised to reflect purchase accounting measurement period adjustments related to the Homeward and Equator acquisitions.  See Note 3.

 

Other current liabilities consist of the following:

 

 

 

June 30,

 

December 31,

 

(in thousands)

 

2014

 

2013

 

 

 

 

 

 

 

Book overdrafts

 

$

5,250

 

$

4,232

 

Other

 

3,707

 

5,899

 

 

 

 

 

 

 

Total

 

$

8,957

 

$

10,131

 

 

16



Table of Contents

 

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

 

NOTE 11 — LONG-TERM DEBT

 

Long-term debt consists of the following:

 

 

 

June 30,

 

December 31,

 

(in thousands)

 

2014

 

2013

 

 

 

 

 

 

 

Senior secured term loan

 

$

394,517

 

$

396,503

 

Less: unamortized discount, net

 

(1,157

)

(1,247

)

Net long-term debt

 

393,360

 

395,256

 

Less: current portion

 

(3,975

)

(3,975

)

 

 

 

 

 

 

Long-term debt, less current portion

 

$

389,385

 

$

391,281

 

 

On November 27, 2012, Altisource Solutions S.à r.l., a wholly-owned subsidiary of the Company, entered into a senior secured term loan agreement, as subsequently amended, with Bank of America, N.A., as administrative agent, and certain lenders, pursuant to which we borrowed $200.0 million.  The senior secured term loan was issued with a 1.0% original issue discount of $2.0 million, resulting in net proceeds of $198.0 million with the Company and certain wholly-owned subsidiaries acting as guarantors (collectively, the “Guarantors”).

 

On May 7, 2013, we amended the senior secured term loan agreement to increase the principal amount of the senior secured term loan by $200.0 million (the “Incremental Term Loan”), which was issued with a $1.0 million original issue premium, resulting in gross proceeds to the Company of $201.0 million.  Additionally, the Incremental Term Loan amended the senior secured term loan agreement to, among other changes, provide for an additional $200.0 million incremental term loan facility accordion and increase the maximum amount of Restricted Junior Payments (as defined in the senior secured term loan agreement) that may be made by us, including increasing the amount of Company share repurchases permitted.

 

On December 9, 2013, we entered into an Amendment No. 2 (“Second Amendment”) to the senior secured term loan agreement in which we incurred indebtedness in the form of Refinancing Debt (as defined in the senior secured term loan agreement), the proceeds of which were used to refinance, in full, the $397.5 million of term loans outstanding under the senior secured term loan agreement immediately prior to the effectiveness of the Second Amendment.  The Refinancing Debt bears interest at lower rates and has a maturity date approximately one year later than the prior term loans.  The Second Amendment further modified the senior secured term loan agreement to, among other changes, increase the maximum permitted amount of Restricted Junior Payments (as defined in the senior secured term loan agreement), including share repurchases by the Company.

 

The Refinancing Debt must be repaid in equal consecutive quarterly principal installments of $1.0 million commencing on December 31, 2013, with the balance due at maturity.  After giving effect to the Second Amendment, all amounts outstanding under the senior secured term loan agreement will become due on the earlier of (i) December 9, 2020, being the seventh anniversary of the closing date of the Second Amendment, and (ii) the date on which the loans are declared to be due and owing by the administrative agent at the request (or with the consent) of the Required Lenders (as defined in the 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, the Refinancing Debt is (with certain exceptions) subject to mandatory prepayment upon issuances of debt, casualty and condemnation events and sales of assets, as well as from a percentage of excess cash flow (as defined in the senior secured term loan agreement) if the leverage ratio (as defined in the senior secured term loan agreement) is greater than 2.75 to 1.00.  No mandatory prepayments were owed for the six months ended June 30, 2014.  We are currently permitted to make voluntary prepayments without penalty.

 

After giving effect to the Second Amendment, all of the term loans outstanding under the senior secured term loan bear interest at rates based upon, at our option, the Adjusted Eurodollar Rate or the Base Rate (each as defined in the senior secured term loan agreement).  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 June 30, 2014 was 4.50%.

 

Payments under the senior secured term loan agreement 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

 

17



Table of Contents

 

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

 

share repurchases; 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 its 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 5 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 in Control (as defined in the senior secured term loan agreement), (vii) bankruptcy and insolvency events (as defined in the senior secured term loan agreement), (viii) entry by a court of one or more judgments against us (as defined in the senior secured term loan agreement) 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 (as defined in the senior secured term loan agreement) to be in full force and effect.  If any event of default occurs and is not cured within applicable grace periods set forth in the senior secured term loan agreement or waived, all loans and other obligations could become due and immediately payable and the facility could be terminated.

 

At June 30, 2014, debt issuance costs were $6.2 million, net of $1.5 million of accumulated amortization.  At December 31, 2013, debt issuance costs were $6.7 million, net of $1.0 million of accumulated amortization.  Debt issuance costs are included in other assets in the accompanying condensed consolidated balance sheets.

 

Interest expense on the term loans, including amortization of debt issuance costs and the net debt discount, totaled $9.6 million and $8.1 million for the six months ended June 30, 2014 and 2013, respectively ($4.8 million and $4.9 million for the second quarter of 2014 and 2013, respectively).

 

NOTE 12 — OTHER NON-CURRENT LIABILITIES

 

Other non-current liabilities consist of the following:

 

 

 

June 30,

 

December 31,

 

(in thousands)

 

2014

 

2013

 

 

 

 

 

 

 

Contingent consideration (Earn Out)

 

$

8,091

 

$

42,946

 

Other non-current liabilities

 

3,642

 

2,530

 

 

 

 

 

 

 

Total

 

$

11,733

 

$

45,476

 

 

NOTE 13 — EQUITY AND SHARE-BASED COMPENSATION

 

Stock Repurchase Plan

 

On February 28, 2014, our shareholders approved a new stock repurchase program, which replaced the previous stock repurchase program.  Under the new program, we are authorized to purchase up to 3.4 million shares of our common stock, based on a limit of 15% of the outstanding shares of common stock on the date of approval, in the open market, at a minimum price of $1.00 per share and a maximum price of $500.00 per share.  This is in addition to amounts previously purchased under the prior programs.  From authorization of the previous programs through June 30, 2014, we have purchased approximately 4.5 million shares of our common stock in the open market at an average price of $70.62 per share.  We purchased 0.7 million shares of common stock at an average price of $109.00 per share during the six months ended June 30, 2014 and 0.6 million shares at an average price of $89.01 per share during the six months ended June 30, 2013 (0.4 million shares at an average price of $108.24 per share for the second quarter of 2014 and 0.3 million shares at an average price of $94.49 per share for the second quarter of 2013). As of June 30, 2014, approximately 2.9 million shares of common stock remain available for repurchase under the new program. Luxembourg law also limits share repurchases to approximately the balance of Altisource Portfolio Solutions S.A. (unconsolidated parent company) retained earnings, less the value of shares repurchased.  As of June 30, 2014, approximately $16 million was available to repurchase our common stock under Luxembourg law.  Our senior secured term loan also limits the amount we can spend on share repurchases in any year and may prevent repurchases in certain circumstances.  As of June 30, 2014, approximately $88 million was available to repurchase our common stock under our senior secured term loan.

 

18



Table of Contents

 

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

 

Share-Based Compensation

 

We issue share-based awards in the form of stock options and certain other equity-based awards for certain employees and officers.  We recorded share-based compensation expense of $1.1 million and $1.5 million for the six months ended June 30, 2014 and 2013, respectively ($0.4 million and $0.1 million for the second quarter of 2014 and 2013, respectively).

 

Outstanding share-based compensation currently consists primarily of stock option grants that are a combination of service-based and market-based options.

 

Service-Based Options.  These options are granted at fair value on the date of grant. The options generally vest over four years with equal annual cliff-vesting and expire on the earlier of 10 years after the date of grant or following termination of service.  A total of 0.7 million service-based awards were outstanding at June 30, 2014.

 

Market-Based Options.  These option grants have two components each of which vest only upon the achievement of certain criteria. The first component, which we refer to internally as “ordinary performance” grants, consists of two-thirds of the market-based grant and begins to vest if the stock price is at least double the exercise price, as long as the stock price realizes a compounded annual gain of at least 20% over the exercise price. The remaining third of the market-based options, which we refer to internally as “extraordinary performance” grants, begins to vest if the stock price is at least triple the exercise price, as long as the stock price realizes a compounded annual gain of at least 25% over the exercise price.  The vesting schedule for all market-based awards is 25% upon achievement of the criteria and the remaining 75% in three equal annual installments.  A total of 1.8 million market-based awards were outstanding at June 30, 2014.

 

The Company granted less than 0.1 million stock options in each period (at a weighted average exercise price of $105.11 and $90.75 per share) during the six months ended June 30, 2014 and 2013, respectively.

 

The fair value of the service-based options was determined using the Black-Scholes option pricing model, and a lattice (binomial) model was used to determine the fair value of the market-based options, using the following assumptions as of the grant date:

 

 

 

Six months ended
June 30, 2014

 

Six months ended
June 30, 2013

 

 

 

Black-Scholes

 

Black-Scholes

 

Binomial

 

 

 

 

 

 

 

 

 

Risk-free interest rate

 

1.80%

 

1.02% – 1.13%

 

0.01% – 2.02%

 

Expected stock price volatility

 

37.57%

 

36.35% – 36.76%

 

36.40% – 36.80%

 

Expected dividend yield

 

 

 

 

Expected option life (in years)

 

6.25

 

6.25

 

 

Contractual life (in years)

 

 

 

14

 

Fair value

 

$41.79

 

$31.33 – $35.77

 

$16.12 – $31.15

 

 

The following table summarizes the weighted average fair value of stock options granted, the total intrinsic value of stock options exercised and the fair value of stock options vested:

 

 

 

Six months ended June 30,

 

(in thousands, except per share amounts)

 

2014

 

2013

 

 

 

 

 

 

 

Weighted average fair value at grant date per share

 

$

41.79

 

$

25.83

 

Intrinsic value of options exercised

 

4,124

 

9,625

 

Fair value of options vested

 

950

 

1,475

 

 

 

 

 

 

 

 

Share-based compensation expense is recorded net of estimated forfeiture rates ranging from 1% to 10%.

 

As of June 30, 2014, estimated unrecognized compensation costs related to share-based payments amounted to $1.7 million, which we expect to recognize over a weighted average remaining requisite service period of approximately 2.7 years.

 

19



Table of Contents

 

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, 2013

 

2,589,343

 

$

18.33

 

5.20

 

$

363,293

 

Granted

 

15,000

 

105.11

 

 

 

 

 

Exercised

 

(44,565

)

14.43

 

 

 

 

 

Forfeited

 

(16,001

)

73.14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at June 30, 2014

 

2,543,777

 

18.56

 

4.71

 

244,590

 

 

 

 

 

 

 

 

 

 

 

Exercisable at June 30, 2014

 

2,216,285

 

13.28

 

4.35

 

224,515

 

 

NOTE 14 — COST OF REVENUE

 

Cost of revenue principally includes payroll and employee benefits associated with personnel employed in customer service and operations roles, fees paid to external providers related to the provision of services, reimbursable expenses, technology and telecommunications expenses as well as depreciation and amortization of operating assets.  The components of cost of revenue were as follows:

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

(in thousands)

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

$

63,121

 

$

36,744

 

$

115,771

 

$

69,323

 

Outside fees and services

 

71,365

 

46,345

 

124,193

 

81,240

 

Reimbursable expenses

 

32,276

 

23,299

 

61,071

 

43,565

 

Technology and telecommunications

 

11,849

 

7,060

 

20,690

 

12,551

 

Depreciation and amortization

 

5,388

 

3,524

 

10,079

 

7,255

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

183,999

 

$

116,972

 

$

331,804

 

$

213,934

 

 

NOTE 15 — SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

 

Selling, general and administrative expenses include payroll for personnel employed in executive, finance, legal, human resources, vendor management, risk and operational effectiveness roles.  This category also includes occupancy costs, professional fees and depreciation and amortization on non-operating assets.  The components of selling, general and administrative expenses were as follows:

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

(in thousands)

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

$

11,111

 

$

6,609

 

$

20,100

 

$

12,066

 

Professional services

 

2,808

 

1,384

 

6,790

 

3,016

 

Occupancy related costs

 

9,496

 

7,957

 

18,807

 

14,533

 

Amortization of intangible assets

 

10,107

 

9,037

 

19,573

 

10,237

 

Depreciation and amortization

 

1,741

 

1,058

 

3,296

 

2,051

 

Change in the fair value of Equator Earn Out

 

(37,924

)

 

(37,924

)

 

Goodwill impairment

 

37,473

 

 

37,473

 

 

Marketing costs

 

7,667

 

1,328

 

12,784

 

1,980

 

Other

 

6,542

 

2,455

 

11,656

 

4,625

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

49,021

 

$

29,828

 

$

92,555

 

$

48,508

 

 

20



Table of Contents

 

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

 

NOTE 16 — OTHER INCOME (EXPENSE), NET

 

Other income (expense), net consists of the following: 

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

(in thousands)

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Gain (loss) in equity affiliate

 

$

 

$

54

 

$

 

$

(122

)

Interest income

 

14

 

11

 

26

 

867

 

Other, net

 

(57

)

12

 

(22

)

37

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

(43

)

$

77

 

$

4

 

$

782

 

 

Loss in equity affiliate for the six months ended June 30, 2013 represents our proportional share of the losses in Correspondent One (see Note 8).  The gain in equity affiliate for the second quarter of 2013 represents the gain on sale of Correspondent One (see Note 2).  There were no comparative amounts in 2014.

 

NOTE 17 — EARNINGS PER SHARE

 

Basic earnings per share (“EPS”) is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period.  Diluted EPS reflects the assumed conversion of all dilutive securities using the treasury stock method.

 

Basic and diluted EPS are calculated as follows:

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

(in thousands, except per share data)

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Altisource

 

$

54,101

 

$

30,931

 

$

93,732

 

$

58,449

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding, basic

 

22,089

 

23,161

 

22,301

 

23,267

 

Dilutive effect of stock options

 

2,077

 

1,662

 

2,114

 

1,673

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding, diluted

 

24,166

 

24,823

 

24,415

 

24,940

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

2.45

 

$

1.34

 

$

4.20

 

$

2.51

 

Diluted

 

$

2.24

 

$

1.25

 

$

3.84

 

$

2.34

 

 

For the six months ended June 30, 2014 and 2013, less than 0.1 million and 0.1 million options, respectively, that were anti-dilutive, have been excluded from the computation of diluted EPS (less than 0.1 million options in each period for the second quarter of 2014 and 2013).  These options were anti-dilutive because their exercise price was greater than the average market price of our common stock.  Also excluded from the computation of diluted EPS for the six months ended June 30, 2014 and 2013 are 0.1 million options in each period (0.1 million options in each period for the second quarter of 2014 and 2013), granted for shares that are issuable upon the achievement of certain market and performance criteria related to our common stock price and an annualized rate of return to investors that have not yet been met.

 

NOTE 18 — COMMITMENTS, CONTINGENCIES AND REGULATORY MATTERS

 

Litigation

 

From time to time, we are involved in legal proceedings arising in the ordinary course of business.  We record a liability for litigation if an unfavorable outcome is probable and the amount of loss can be reasonably estimated, including expected insurance coverage.  For proceedings where a range of loss is determined, we record a best estimate of loss within the range.

 

21



Table of Contents

 

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

 

Regulatory Matters

 

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

 

Escrow and Trust Balances

 

We hold customers’ assets in escrow and trust accounts at various financial institutions pending completion of certain real estate activities.  We also hold cash in trust accounts at various financial institutions where contractual obligations mandate maintaining dedicated bank accounts for Financial Services collections.  These amounts are held in escrow and trust accounts for limited periods of time and are not included in the condensed consolidated balance sheets.  Amounts held in escrow and trust accounts were $64.0 million and $71.8 million at June 30, 2014 and December 31, 2013, respectively.

 

NOTE 19 — SEGMENT REPORTING

 

Our business segments are based upon our organizational structure, which focuses primarily on the services offered, and are consistent with the internal reporting used by our Chief Executive Officer to evaluate operating performance and to assess the allocation of our resources.

 

We classify our business into three reporting segments.  The Mortgage Services segment provides services that span the mortgage and real estate lifecycle and are typically outsourced by loan servicers, loan originators and investors in single family homes.  The Financial Services segment provides collection and customer relationship management services primarily to debt originators and servicers (e.g., credit card, auto lending, retail credit and mortgage) and the utility and insurance industries.  The Technology Services segment principally consists of our REALSuite software applications, Equator’s software applications as well as our information technology infrastructure services.  The REALSuite platform provides a fully integrated set of software applications and technologies that manage the end-to-end lifecycle for residential and commercial mortgage loan servicing including the automated management and payment of a distributed network of vendors. Equator’s software applications provide comprehensive, end-to-end workflow and transaction services to manage real estate and foreclosure related activities and purchase related services from vendors.  In addition, Corporate Items and Eliminations include eliminations of transactions between the reporting segments and costs related to corporate support functions including executive, finance, legal, human resources, vendor management, risk and operational effectiveness as well as interest expense.

 

Financial information for our segments is as follows:

 

 

 

Three months ended June 30, 2014

 

 

 

 

 

 

 

 

 

Corporate

 

 

 

 

 

Mortgage

 

Financial

 

Technology

 

Items and

 

Consolidated

 

(in thousands)

 

Services

 

Services

 

Services

 

Eliminations

 

Altisource

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

221,344

 

$

25,476

 

$

57,983

 

$

(8,731

)

$

296,072

 

Cost of revenue

 

128,919

 

16,058

 

46,906

 

(7,884

)

183,999

 

Gross profit

 

92,425

 

9,418

 

11,077

 

(847

)

112,073

 

Selling, general and administrative expenses

 

23,472

 

4,773

 

7,533

 

13,243

 

49,021

 

Income from operations

 

68,953

 

4,645

 

3,544

 

(14,090

)

63,052

 

Other income (expense), net

 

80

 

12

 

(106

)

(4,813

)

(4,827

)

Income before income taxes and non-controlling interests

 

$

69,033

 

$

4,657

 

$

3,438

 

$

(18,903

)

$

58,225

 

 

22



Table of Contents

 

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

 

 

 

Three months ended June 30, 2013

 

 

 

 

 

 

 

 

 

Corporate

 

 

 

 

 

Mortgage

 

Financial

 

Technology

 

Items and

 

Consolidated

 

(in thousands)

 

Services

 

Services

 

Services

 

Eliminations

 

Altisource

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

144,210

 

$

23,072

 

$

24,783

 

$

(5,955

)

$

186,110

 

Cost of revenue

 

89,078

 

13,807

 

19,407

 

(5,320

)

116,972

 

Gross profit

 

55,132

 

9,265

 

5,376

 

(635

)

69,138

 

Selling, general and administrative expenses

 

12,590

 

3,534

 

3,028

 

10,676

 

29,828

 

Income from operations

 

42,542

 

5,731