Altisource Asset Management(AAMC) - 2020 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents Altisource Asset Management Corporation's (AAMC) unaudited condensed consolidated financial statements for the period ended September 30, 2020, along with detailed notes Item 1. Financial Statements (Unaudited) Presents AAMC's unaudited condensed consolidated financial statements for Q3 2020, including balance sheets, operations, comprehensive income, deficit, cash flows, and detailed notes Condensed Consolidated Balance Sheets Presents AAMC's financial position, detailing assets, liabilities, and equity as of September 30, 2020, and December 31, 2019 Condensed Consolidated Balance Sheets (In thousands) | Item | September 30, 2020 (unaudited) | December 31, 2019 | |:-----------------------------------------|:-------------------------------|:------------------| | Assets: | | | | Total current assets | $84,154 | $47,151 | | Total non-current assets | $5,667 | $6,097 | | Total assets | $89,821 | $53,248 | | Liabilities: | | | | Total current liabilities | $42,720 | $7,000 | | Total non-current liabilities | $3,937 | $4,218 | | Total liabilities | $46,657 | $11,218 | | Redeemable preferred stock | $250,000 | $249,958 | | Total stockholders' deficit | $(206,836) | $(207,928) | | Total liabilities and equity | $89,821 | $53,248 | Condensed Consolidated Statements of Operations Outlines AAMC's financial performance, including revenues, expenses, and net income (loss) for the three and nine months ended September 30, 2020 and 2019 Condensed Consolidated Statements of Operations (In thousands, except share and per share amounts) | Item | Three months ended Sep 30, 2020 | Three months ended Sep 30, 2019 | Nine months ended Sep 30, 2020 | Nine months ended Sep 30, 2019 | |:------------------------------------------------|:--------------------------------|:--------------------------------|:-------------------------------|:-------------------------------| | Total expenses | $3,682 | $3,836 | $14,471 | $12,288 | | Total other income (loss) | $70 | $(788) | $(5,575) | $5,458 | | Net loss from continuing operations before taxes| $(3,612) | $(4,624) | $(20,046) | $(6,830) | | Income tax (benefit) expense | $(523) | $843 | $(1,091) | $29 | | Net loss from continuing operations | $(3,089) | $(5,467) | $(18,955) | $(6,859) | | Gain on discontinued operations | $14,843 | $1,944 | $19,117 | $5,785 | | Net income (loss) | $11,754 | $(3,523) | $162 | $(1,074) | | Net income (loss) attributable to common stockholders | $11,754 | $(3,575) | $120 | $(1,229) | | Earnings (loss) per basic common share | $7.20 | $(2.25) | $0.07 | $(0.77) | | Earnings (loss) per diluted common share | $7.20 | $(2.25) | $0.07 | $(0.77) | Condensed Consolidated Statements of Comprehensive Income (Loss) Presents AAMC's comprehensive income (loss), including net income and other comprehensive income components for the three and nine months ended September 30, 2020 and 2019 Condensed Consolidated Statements of Comprehensive Income (Loss) (In thousands) | Item | Three months ended Sep 30, 2020 | Three months ended Sep 30, 2019 | Nine months ended Sep 30, 2020 | Nine months ended Sep 30, 2019 | |:--------------------------------------|:--------------------------------|:--------------------------------|:-------------------------------|:-------------------------------| | Net income (loss) | $11,754 | $(3,523) | $162 | $(1,074) | | Currency translation adjustments, net | $42 | $(37) | $(51) | $(20) | | Total other comprehensive income (loss)| $42 | $(37) | $(51) | $(20) | | Comprehensive income (loss) | $11,796 | $(3,560) | $111 | $(1,094) | Condensed Consolidated Statements of Stockholders' Deficit Details changes in AAMC's stockholders' deficit, reflecting net income (loss) and other equity transactions for the periods presented Changes in Total Stockholders' Deficit (In thousands) | Date | Total Stockholders' Deficit | |:-------------------|:----------------------------| | December 31, 2019 | $(207,928) | | March 31, 2020 | $(211,531) | | June 30, 2020 | $(218,967) | | September 30, 2020 | $(206,836) | - Net income of $11,754 thousand for the three months ended September 30, 2020, contributed to a reduction in the total stockholders' deficit from $(218,967) thousand at June 30, 2020, to $(206,836) thousand at September 30, 2020[13] Condensed Consolidated Statements of Cash Flows Summarizes AAMC's cash inflows and outflows from operating, investing, and financing activities for the nine months ended September 30, 2020 and 2019 Condensed Consolidated Statements of Cash Flows (In thousands) | Activity | Nine months ended Sep 30, 2020 | Nine months ended Sep 30, 2019 | |:------------------------------------------|:-------------------------------|:-------------------------------| | Net cash provided by (used in) operating activities | $9,279 | $(4,823) | | Net cash provided by (used in) investing activities | $3,615 | $(569) | | Net cash used in financing activities | $(182) | $(201) | | Net change in cash and cash equivalents | $12,712 | $(5,593) | | Cash and cash equivalents as of end of period | $32,639 | $21,558 | Notes to Condensed Consolidated Financial Statements Provides detailed explanatory notes supporting the condensed consolidated financial statements, covering key accounting policies and significant events 1. Organization and Basis of Presentation AAMC, a USVI-incorporated entity, provides asset management services, primarily to Front Yard, and is transitioning to new business lines following a termination agreement and ongoing litigation - AAMC's primary business is providing asset management and corporate governance services, with Front Yard Residential Corporation historically being its sole client and revenue source[16][17] - On August 13, 2020, AAMC and Front Yard entered into a Termination and Transition Agreement, which will internalize Front Yard's asset management function and terminate the Amended AMA by February 9, 2021. This agreement includes a $46.0 million termination fee and the sale of AAMC's Disposal Group for $8.2 million[23] - AAMC is establishing new business lines, including an investment fund, a short-term investor loan aggregation business, and strategic relationships with real estate loan originators, leveraging its existing expertise[18] - AAMC is involved in litigation with Luxor Capital Group and Putnam regarding the redemption of $250.0 million in Series A Convertible Preferred Stock, as AAMC claims it does not have legally available funds to redeem all shares[30][31] 2. Discontinued Operations Details the financial impact of classifying Front Yard-related operations as discontinued, including assets, liabilities, revenues, expenses, and cash flows Assets and Liabilities Held for Sale (In thousands) | Item | September 30, 2020 (unaudited) | December 31, 2019 | |:--------------------------------------|:-------------------------------|:------------------| | Total current assets held for sale | $2,619 | $2,176 | | Total non-current assets held for sale| $3,705 | $3,895 | | Total assets held for sale | $6,324 | $6,071 | | Total current liabilities held for sale| $2,001 | $2,002 | | Total non-current liabilities held for sale| $3,317 | $3,543 | | Total liabilities held for sale | $5,318 | $5,545 | Revenues and Expenses from Discontinued Operations (In thousands) | Item | Three months ended Sep 30, 2020 | Three months ended Sep 30, 2019 | Nine months ended Sep 30, 2020 | Nine months ended Sep 30, 2019 | |:--------------------------------------|:--------------------------------|:--------------------------------|:-------------------------------|:-------------------------------| | Total revenues from discontinued operations | $16,477 | $3,834 | $24,726 | $11,635 | | Total expenses from discontinued operations | $1,311 | $1,871 | $5,218 | $5,692 | | Net income from discontinued operations | $14,843 | $1,944 | $19,117 | $5,785 | Cash Flow Information from Discontinued Operations (In thousands) | Item | Nine months ended Sep 30, 2020 | Nine months ended Sep 30, 2019 | |:--------------------------------------|:-------------------------------|:-------------------------------| | Total operating cash flows provided by discontinued operations | $19,055 | $5,047 | | Total investing cash flows provided by (used in) discontinued operations | $438 | $(455) | 3. Fair Value of Financial Instruments Focuses on the fair value measurement of AAMC's Front Yard common stock holdings, valued at $14.2 million with a $6.4 million unrealized loss as of September 30, 2020 Fair Value of Front Yard Common Stock (In thousands) | Item | September 30, 2020 | December 31, 2019 | |:------------------------|:-------------------|:------------------| | Front Yard common stock | $14,198 | $20,046 | Cost Basis and Fair Value of Front Yard Common Stock (In thousands) | Date | Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |:-------------------|:--------|:-----------------------|:------------------------|:-----------| | September 30, 2020 | $20,596 | $— | $(6,398) | $14,198 | | December 31, 2019 | $20,596 | $— | $(550) | $20,046 | - The company held 1,624,465 shares of Front Yard's common stock at both September 30, 2020, and December 31, 2019, representing approximately 2.8% and 3.0% of Front Yard's then-outstanding common stock, respectively[50] 4. Leases Details AAMC's office space leases, including remaining terms, expected transfers to Front Yard, and changes in rent expense - AAMC leases office space in Christiansted, USVI; Charlotte, North Carolina; College Station, Texas; George Town, Cayman Islands; and Bengaluru, India. Most of these are expected to transfer to Front Yard post-Termination Date, with new leases planned for Charlotte and Bengaluru[52] - As of September 30, 2020, the weighted average remaining lease term was 8.3 years (9.1 years at December 31, 2019), with a consistent discount rate of 8.4%[53] Rent Expense (In thousands) | Lease Type | Three months ended Sep 30, 2020 | Nine months ended Sep 30, 2020 | Three months ended Sep 30, 2019 | Nine months ended Sep 30, 2019 | |:-----------------------|:--------------------------------|:-------------------------------|:--------------------------------|:-------------------------------| | Long-term operating leases | $0.2 | $0.5 | $0.1 | $0.4 | | Short-term operating leases| $0.027 | $0.081 | $0.1 | $0.2 | Future Lease Obligations as of September 30, 2020 (In thousands) | Year | Liabilities | |:-----------------|:------------| | 2020 (1) | $156 | | 2021 | $634 | | 2022 | $659 | | 2023 | $686 | | 2024 | $708 | | Thereafter | $3,121 | | Total lease payments | $5,964 | | Less: interest | $1,733 | | Lease liabilities| $4,231 | 5. Commitments and Contingencies Addresses AAMC's legal proceedings, including a derivative action and preferred stock redemption dispute, alongside potential COVID-19 pandemic impacts - AAMC is a defendant in a stockholder derivative action, Erbey Holding Corporation et al. v. Blackrock Management Inc., et al., alleging a conspiracy to harm AAMC and seeking monetary damages[57] - AAMC filed a declaratory judgment action against Luxor Capital Group regarding its Series A Convertible Preferred Stock redemption obligations, asserting it is not required to redeem shares if it lacks legally available funds for all requested redemptions[60] - Luxor Capital Group and Putnam filed a complaint against AAMC for breach of contract, seeking over $226 million in damages for unredeemed Series A Shares, or a return of the initial purchase price of $231.8 million[61] - The COVID-19 pandemic poses a significant risk, potentially causing office closures and disruptions that could materially adversely impact AAMC's business operations and financial performance, especially concerning transition obligations to Front Yard and new business development[62] 6. Related Party Transactions Details AAMC's historical asset management agreements with Front Yard, including fee structures and the termination agreement ending these arrangements - Under the Amended AMA, AAMC was the exclusive asset manager for Front Yard, responsible for business strategy, operations, asset acquisitions, property management, and corporate governance[64] - The Amended AMA provided for a quarterly Base Management Fee (minimum $3,584,000) and a potential annual Incentive Fee, both dependent on Front Yard's performance[68] - The Termination Agreement, effective August 13, 2020, ended the Amended AMA, allowing AAMC to provide advisory or other services to businesses competing with Front Yard without prior consent[65][66] - Under the Former AMA (April 1, 2015 – May 7, 2019), AAMC received a Base Management Fee (up to 2.0% of invested capital), a quarterly Incentive Management Fee (20-25% of return on invested capital exceeding a hurdle rate), and a Conversion Fee (1.5% of assets converted to leased single-family homes)[71] 7. Share-Based Payments Outlines AAMC's share-based compensation, including new grants to the Co-CEO, related expenses, and the adoption of a 2020 Equity Incentive Plan - On January 30, 2020, AAMC granted 60,000 restricted stock shares and 60,000 stock options to its new Co-Chief Executive Officer. Restricted stock vests in four equal annual installments, while stock options have an exercise price of $13.11 and vest based on achieving share price targets (400% and 800% of exercise price) and time-based service[73] Share-Based Compensation Expense (In thousands) | Period | Compensation Expense | |:--------------------------------------|:---------------------| | Three months ended September 30, 2020 | $0.3 | | Nine months ended September 30, 2020 | $1.2 | | Three months ended September 30, 2019 | $0.6 | | Nine months ended September 30, 2019 | $1.9 | - As of September 30, 2020, AAMC had $1.4 million in total unrecognized share-based compensation cost, to be recognized over a weighted average remaining estimated term of 1.7 years[76] - The Altisource Asset Management Corporation 2020 Equity Incentive Plan was adopted by the Board on September 11, 2020, and approved by stockholders on October 12, 2020, making 185,000 shares of common stock available for awards[77] 8. Income Taxes Details AAMC's income tax position, including USVI tax benefits and deferred tax assets and liabilities as of September 30, 2020 - AAMC receives a 90% tax reduction on its USVI-sourced income taxes until 2043, pursuant to a certificate of benefits from the USVI Economic Development Commission[78] Deferred Tax Assets and Liabilities (In thousands) | Item | September 30, 2020 | December 31, 2019 | |:--------------------------------------|:-------------------|:------------------| | Gross deferred tax assets | $2,330 | $2,143 | | Gross deferred tax liabilities | $854 | $968 | | Net deferred tax assets before valuation allowance | $1,476 | $1,175 | | Valuation allowance | $(804) | $(491) | | Deferred tax asset, net | $672 | $684 | 9. Earnings Per Share Presents AAMC's basic and diluted earnings per share, showing significant improvement for the three and nine months ended September 30, 2020 Earnings (Loss) Per Share of Common Stock (Basic and Diluted) | Item | Three months ended Sep 30, 2020 | Three months ended Sep 30, 2019 | Nine months ended Sep 30, 2020 | Nine months ended Sep 30, 2019 | |:--------------------------------------|:--------------------------------|:--------------------------------|:-------------------------------|:-------------------------------| | Continuing operations – basic | $(1.89) | $(3.47) | $(11.69) | $(4.42) | | Discontinued operations – basic | $9.09 | $1.22 | $11.76 | $3.65 | | Earnings (loss) per basic common share| $7.20 | $(2.25) | $0.07 | $(0.77) | | Continuing operations – diluted | $(1.89) | $(3.47) | $(11.69) | $(4.42) | | Discontinued operations – diluted | $9.09 | $1.22 | $11.76 | $3.65 | | Earnings (loss) per diluted common share| $7.20 | $(2.25) | $0.07 | $(0.77) | Weighted Average Common Stock Outstanding (Basic and Diluted) | Period | Weighted Average Shares | |:--------------------------------------|:------------------------| | Three months ended September 30, 2020 | 1,632,117 | | Three months ended September 30, 2019 | 1,590,739 | | Nine months ended September 30, 2020 | 1,625,727 | | Nine months ended September 30, 2019 | 1,587,448 | - Items excluded from diluted EPS calculation as antidilutive to loss per share from continuing operations for the nine months ended September 30, 2020, included 8,167 stock options, 58,565 restricted stock shares, and 200,000 preferred stock shares (if converted)[83] 10. Segment Information AAMC operates as a single segment, historically deriving all revenue from asset management and corporate governance services to Front Yard - AAMC operates as a single segment, providing asset management and corporate governance services, with all revenue historically derived from Front Yard[84] 11. Subsequent Events Management evaluated subsequent events through the issuance date and identified no events requiring adjustment or disclosure - No subsequent events requiring adjustment or disclosure were identified by management through the issuance date of the financial statements[85] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Discusses AAMC's business overview, strategic shift post-Front Yard agreement termination, new initiatives, COVID-19 impacts, and analysis of financial condition, results, and liquidity Our Company AAMC, a USVI investment adviser, is transitioning from sole reliance on Front Yard to new business lines following an agreement termination and Front Yard's merger - AAMC's business is providing asset management and corporate governance services, with all revenue historically generated from Front Yard Residential Corporation[87][88] - A new Co-Chief Executive Officer was appointed on January 13, 2020, to lead the development and implementation of new business initiatives, leveraging AAMC's experience in asset management and real estate[90] - On August 13, 2020, AAMC and Front Yard entered into a Termination and Transition Agreement to terminate the Amended AMA, effectively internalizing Front Yard's asset management function[93] - Front Yard entered a definitive merger agreement on October 19, 2020, where stockholders will receive $13.50 per share. AAMC expects its 1,624,465 shares of Front Yard common stock to convert to approximately $21.9 million in cash upon consummation[95] Management Overview AAMC is developing new business lines, including an investment fund and loan aggregation, targeting positive net income through management fees and investment returns - AAMC is establishing new business lines: an investment fund, a short-term investor loan aggregation business, and strategic relationships with real estate loan originators[96] - The company aims to generate management fees and returns on its own investments through these opportunities, targeting positive net income for both 2020 and 2021[96] - AAMC has secured a firm, non-binding commitment for an initial $20.0 million investment in its investment fund, to be used for real estate debt products, specifically short-term investor loans[96] - The loan aggregation business will use company funds and/or investment fund assets to aggregate short-term investor loans, aiming for competitive risk-adjusted returns and access to the secondary market[97] Termination of the Amended AMA with Front Yard Details the Termination Agreement with Front Yard, including a $46.0 million fee, sale of Disposal Group, continued management fees, and Co-CEO resignation - Front Yard will pay AAMC an aggregate termination fee of $46.0 million, consisting of $15.0 million cash paid on August 17, 2020, $15.0 million cash payable on the Termination Date, and $16.0 million payable in cash or Front Yard common stock on the Termination Date[100] - Front Yard will acquire AAMC's Indian and Cayman Islands subsidiaries, designated employees, and other assets (the 'Disposal Group') for $8.2 million, with $3.2 million paid upfront and the remaining $5.0 million potentially in Front Yard common stock[100] - Front Yard will continue to pay AAMC Base Management Fees of $3.6 million per quarter until the transition is satisfactorily completed, subject to proration[100] - Mr. Ellison will resign as Co-Chief Executive Officer of AAMC two business days prior to the Termination Date[100] COVID-19 Pandemic Update The COVID-19 pandemic poses significant risks to AAMC's business, operations, and new business development, despite a successful transition to remote work - The COVID-19 pandemic could adversely impact AAMC's business, financial position, operations, and ability to complete transition obligations to Front Yard or develop new businesses[101] - The magnitude and duration of the pandemic's impact are highly uncertain and depend on future developments, including severity, containment actions, and economic recovery[101] - AAMC implemented a robust technology platform to transition seamlessly to a remote workplace, ensuring normal operations continue without disruption[102] Asset Management Agreement with Front Yard Refers to Note 6 for details on the Amended and Former AMAs with Front Yard, and Note 1 and Management Overview for the Termination Agreement Metrics Affecting our Consolidated Results Discusses AAMC's historical revenue metrics from Front Yard, now classified as discontinued, and other income and expense components - Revenues from Front Yard under the Amended AMA included a quarterly Base Management Fee (minimum $3,584,000) and a potential annual Incentive Fee, along with expense reimbursements[104][106] - All revenues from Front Yard have been classified within discontinued operations due to the Termination Agreement and are expected to cease after the transition period[107] - Dividend income on Front Yard common stock ceased in the first quarter of 2020, as Front Yard determined not to pay dividends until further notice[108] - AAMC's expenses primarily consist of salaries and employee benefits, legal and professional fees, and general and administrative expenses, with certain expenses also classified within discontinued operations[110][111] Results of Operations Provides a detailed analysis of AAMC's financial performance, including key revenue and expense trends for the periods presented Three and Nine Months Ended September 30, 2020 Compared to Three and Nine Months Ended September 30, 2019 Compares AAMC's financial performance for the three and nine months ended September 30, 2020 and 2019, highlighting changes in expenses and other income Key Expense and Income Changes (In thousands) | Item | Three months ended Sep 30, 2020 | Three months ended Sep 30, 2019 | Nine months ended Sep 30, 2020 | Nine months ended Sep 30, 2019 | |:--------------------------------------|:--------------------------------|:--------------------------------|:-------------------------------|:-------------------------------| | Salaries and Employee Benefits | $1,668 | $2,827 | $8,081 | $8,634 | | Legal and Professional Fees | $1,455 | $351 | $4,681 | $1,964 | | General and Administrative Expenses | $559 | $658 | $1,709 | $1,690 | | Change in Fair Value of Front Yard Common Stock | $65 | $(1,072) | $(5,848) | $4,597 | | Dividend Income on Front Yard Common Stock | $— | $244 | $244 | $731 | - Salaries and employee benefits decreased primarily due to the reversal of certain unpaid 2019 bonus accruals and reduced share-based compensation expense, partially offset by increased headcount[112] - Legal and professional fees increased significantly due to litigation, internal inquiries, matters related to the Termination Agreement, and fees incurred in creating new business lines[113] - Dividend income on Front Yard common stock ceased in Q1 2020, as Front Yard determined not to pay dividends until further notice[116] Discontinued Operations Explains the classification of Front Yard-related operations as discontinued due to a strategic shift, detailing included revenues, expenses, and costs - The termination of the Amended AMA and the sale of assets to Front Yard led to the classification of Front Yard-related operations as discontinued due to a significant strategic shift[118] - Discontinued operations include management fee revenues, expense reimbursements from Front Yard, results of Indian and Cayman Islands subsidiaries, employment costs for Front Yard-dedicated individuals, and costs associated with the Charlotte, NC lease[118] Liquidity and Capital Resources Discusses AAMC's liquidity, including increased cash from the Termination Agreement, expected future payments, and potential impacts from preferred stock redemption litigation - Cash and cash equivalents increased to $32.6 million as of September 30, 2020, from $20.0 million at December 31, 2019, primarily due to the initial $18.2 million payment from the Termination Agreement[119] - AAMC expects to receive an additional $36 million in termination and related payments from Front Yard, of which up to $21 million may be paid in cash or Front Yard common stock[119] - The company believes these liquidity sources, along with continued asset management fees during transition and potential new business revenues, will be sufficient to meet anticipated short-term liquidity requirements[119] - The ongoing litigation regarding Series A Preferred Stock redemption obligations could materially and adversely affect AAMC's liquidity if Luxor and Putnam prevail[123] Series A Preferred Stock Details the ongoing dispute and litigation regarding the $250 million Series A Preferred Stock redemption, posing a significant risk to AAMC's liquidity - Holders of Series A Shares requested redemption of $250 million on March 15, 2020, but AAMC believes it is not obligated to redeem due to insufficient legally available funds[121] - AAMC filed a declaratory relief claim in USVI, while Luxor and Putnam filed a breach of contract complaint in New York, seeking over $226 million in damages for unredeemed Series A Shares[121][122] - If Luxor and Putnam prevail, AAMC's liquidity could be materially and adversely affected, potentially requiring the company to cease or curtail business initiatives[123] Treasury Shares Reports AAMC's common stock repurchases totaling $268.7 million under a $300.0 million authorization, with $31.3 million remaining - As of September 30, 2020, AAMC had repurchased $268.7 million of common stock under a $300.0 million authorization[124] - An aggregate of $31.3 million remains available for repurchases under the Board-approved plan[124] Cash Flows Summarizes AAMC's cash flow activities for the nine months ended September 30, 2020, showing positive operating and investing cash flows Cash Flow Summary (In thousands) | Activity | Nine months ended Sep 30, 2020 | Nine months ended Sep 30, 2019 | |:------------------------------------------|:-------------------------------|:-------------------------------| | Net cash provided by (used in) operating activities | $9,279 | $(4,823) | | Net cash provided by (used in) investing activities | $3,615 | $(569) | | Net cash used in financing activities | $(182) | $(201) | | Net change in cash and cash equivalents | $12,712 | $(5,593) | - Net cash provided by operating activities for the nine months ended September 30, 2020, was primarily driven by the initial $15.0 million Termination Fee payment and ongoing revenues from Front Yard[125] - Net cash provided by investing activities for the nine months ended September 30, 2020, primarily resulted from the receipt of $3.2 million from Front Yard related to the Disposal Group and proceeds from short-term investment maturities[126] Off-balance Sheet Arrangements AAMC reported no off-balance sheet arrangements as of September 30, 2020, or December 31, 2019 - AAMC had no off-balance sheet arrangements as of September 30, 2020, or December 31, 2019[128] Recent Accounting Pronouncements Refers to Note 1 for details on recently issued accounting standards and their impact on AAMC's financial statements Critical Accounting Judgments Highlights that financial statements rely on significant estimates and assumptions, which may differ from actual results and are subject to revision - Financial statements require significant estimates and assumptions that affect reported amounts of assets, liabilities, revenues, expenses, and contingent disclosures[128] - Actual results may differ significantly from estimates, and revisions are recorded in the period when the facts giving rise to the revision become known[128] Item 3. Quantitative and Qualitative Disclosures About Market Risk Discusses AAMC's primary market risk related to its investment in Front Yard common stock, subject to market fluctuations and merger consummation Investment Risk Relating to Front Yard's Common Stock Details market risk associated with AAMC's Front Yard common stock holdings, including price fluctuations and the impact of the proposed merger - AAMC holds 1,624,465 shares of Front Yard common stock, exposing it to market risks, including downward pressure on stock price, especially if the Merger Transaction is not consummated[131] - Under the Termination Agreement, Front Yard may pay up to $21.0 million of the termination fee and other consideration in its common stock, further increasing AAMC's exposure to Front Yard's market risk[132] - Risks include potential reduction or increase of dividends on Front Yard stock and inability to dispose of shares when desired or needed[131] Item 4. Controls and Procedures AAMC's disclosure controls and procedures were effective as of September 30, 2020, with no material changes in internal control over financial reporting - AAMC's disclosure controls and procedures were evaluated as effective as of September 30, 2020, ensuring timely and accurate information disclosure[135] - No material changes in internal control over financial reporting occurred during the quarter ended September 30, 2020[136] - Disclosure controls and procedures, and internal control over financial reporting, are designed to provide reasonable assurance, not absolute, that objectives will be met and errors/fraud prevented or detected[137] Changes in Internal Control over Financial Reporting Confirms no material changes in internal control over financial reporting occurred during the quarter ended September 30, 2020 - There were no changes in internal control over financial reporting identified during the quarter ended September 30, 2020, that materially affected, or are reasonably likely to materially affect, AAMC's internal control over financial reporting[136] Limitations on Controls Acknowledges that control systems have inherent limitations, providing only reasonable assurance against error and fraud - Control systems, regardless of design, provide only reasonable, not absolute, assurance that objectives will be met and cannot prevent or detect all error and fraud[137] PART II. OTHER INFORMATION Provides additional information including legal proceedings, risk factors, mine safety disclosures, and exhibits Item 1. Legal Proceedings Refers to Note 5, 'Commitments and Contingencies,' for a detailed description of the company's legal proceedings - For a description of the Company's legal proceedings, refer to Item 1 - Financial Statements (Unaudited) - Note 5, 'Commitments and Contingencies'[140] Item 1A. Risk Factors Highlights key risk factors including the termination of the Amended AMA, Front Yard merger failure, transition challenges, and COVID-19 pandemic impacts - The termination of the Amended AMA with Front Yard could be materially detrimental to AAMC's financial condition and prospects, as all revenues were derived from Front Yard and new business initiatives are not yet fully developed[142][143][145] - AAMC may be unable to realize the expected increase in value of its Front Yard common stock if the proposed Merger Transaction is not consummated, potentially leading to a material drop in stock price and adverse effects on liquidity[147][148] - Challenges in completing required actions under the Termination Agreement, such as transferring assets, assigning contracts, and training replacement employees, in a timely or cost-effective manner could negatively impact AAMC's financial condition and results of operations[149][150] - The COVID-19 pandemic and governmental responses could materially adversely affect AAMC's financial condition and results of operations through impacts on workforce, operations, vendors, and the ability to develop new business lines[151][152][153] Item 4. Mine Safety Disclosures This item is not applicable to Altisource Asset Management Corporation - This item is not applicable[156] Item 6. Exhibits Lists various exhibits filed with the report, including key agreements, corporate documents, and certifications - Key exhibits include the Separation Agreement, Amended and Restated Articles of Incorporation, Third Amended and Restated Bylaws, Certificate of Designations for Series A Convertible Preferred Stock, Termination and Transition Agreement, and the 2020 Equity Incentive Plan[158] - Certifications from Co-Chief Executive Officers and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act are also included[158] Signatures The report was signed on November 6, 2020, by Indroneel Chatterjee, Chairman and Co-Chief Executive Officer of Altisource Asset Management Corporation - The report was signed on November 6, 2020, by Indroneel Chatterjee, Chairman and Co-Chief Executive Officer of Altisource Asset Management Corporation[160]