Altisource Portfolio Solutions S.A.(ASPS) - 2022 Q3 - Quarterly Report

PART I — Financial Information This section presents Altisource Portfolio Solutions S.A.'s unaudited interim condensed consolidated financial statements and management's discussion and analysis for the periods ended September 30, 2022 and 2021 Item 1. Interim Condensed Consolidated Financial Statements (Unaudited) This section presents Altisource Portfolio Solutions S.A.'s unaudited interim condensed consolidated financial statements, including balance sheets, statements of operations and comprehensive loss, statements of equity, and statements of cash flows, along with detailed notes explaining the company's organization, accounting policies, customer concentrations, debt, equity, and segment performance for the periods ended September 30, 2022 and 2021 Condensed Consolidated Balance Sheets The condensed consolidated balance sheets show a decrease in total assets and total liabilities from December 31, 2021, to September 30, 2022, with a notable increase in the total deficit attributable to Altisource Condensed Consolidated Balance Sheets (in thousands) | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | | :-------------------- | :----------- | :----------- | | ASSETS | | | | Cash and cash equivalents | $63,812 | $98,132 | | Total current assets | $99,851 | $138,004 | | Total assets | $211,282 | $257,808 | | LIABILITIES AND DEFICIT | | | | Total current liabilities | $48,601 | $54,747 | | Long-term debt | $244,844 | $243,637 | | Total deficit | $(108,520) | $(68,870) | | Total liabilities and deficit | $211,282 | $257,808 | Condensed Consolidated Statements of Operations and Comprehensive Loss Altisource reported a decrease in revenue and net loss for both the three and nine months ended September 30, 2022, compared to the same periods in 2021, with an improved gross profit and reduced operating loss Condensed Consolidated Statements of Operations and Comprehensive Loss (in thousands, except per share data) | Metric (in thousands, except per share data) | Three months ended Sep 30, 2022 | Three months ended Sep 30, 2021 | Nine months ended Sep 30, 2022 | Nine months ended Sep 30, 2021 | | :------------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Revenue | $38,380 | $43,243 | $118,317 | $139,749 | | Cost of revenue | $34,387 | $40,667 | $104,611 | $134,862 | | Gross profit | $3,993 | $2,576 | $13,706 | $4,887 | | Loss from operations | $(10,563) | $(14,028) | $(29,349) | $(47,159) | | Net loss attributable to Altisource | $(14,389) | $(18,269) | $(42,074) | $(58,746) | | Basic Loss per share | $(0.89) | $(1.15) | $(2.62) | $(3.71) | Condensed Consolidated Statements of Equity The statements of equity show a significant increase in Altisource's total deficit from December 31, 2021, to September 30, 2022, primarily due to net losses, partially offset by increases in additional paid-in capital from share-based compensation Condensed Consolidated Statements of Equity (in thousands) | Metric (in thousands) | Dec 31, 2021 | Sep 30, 2022 | | :-------------------- | :----------- | :----------- | | Common Shares | 25,413 | 25,413 | | Common stock | $25,413 | $25,413 | | Additional paid-in capital | $144,298 | $148,197 | | Retained earnings | $186,592 | $131,124 | | Treasury stock, at cost | $(426,445) | $(414,102) | | Noncontrolling interests | $1,272 | $848 | | Total deficit | $(68,870) | $(108,520) | - Net loss for the nine months ended September 30, 2022, was $(41,606) thousand, contributing to the increase in total deficit[18] - Share-based compensation expense increased additional paid-in capital by $3,899 thousand for the nine months ended September 30, 2022[18][20] Condensed Consolidated Statements of Cash Flows Altisource experienced a net decrease in cash, cash equivalents, and restricted cash for the nine months ended September 30, 2022, primarily due to cash used in operating activities, a shift from cash provided to cash used in investing activities, and reduced cash provided by financing activities compared to the prior year Condensed Consolidated Statements of Cash Flows (in thousands) | Metric (in thousands) | Nine months ended Sep 30, 2022 | Nine months ended Sep 30, 2021 | | :-------------------- | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(32,293) | $(41,133) | | Net cash (used in) provided by investing activities | $(517) | $1,875 | | Net cash (used in) provided by financing activities | $(1,943) | $17,929 | | Net decrease in cash, cash equivalents and restricted cash | $(34,753) | $(21,329) | | Cash, cash equivalents and restricted cash at the end of the period | $67,396 | $40,767 | - The decrease in cash used in operating activities was driven by a $17.3 million decrease in net loss, partially offset by a $4.1 million decrease in non-cash expenses and a $4.0 million increase in cash used for working capital[246] - Investing activities shifted from providing $1.9 million in 2021 to using $0.5 million in 2022, mainly due to the absence of proceeds from the sale of the rental property management business received in 2021[247] Notes to Condensed Consolidated Financial Statements The notes provide detailed disclosures on Altisource's business, accounting policies, significant customer relationships, asset and liability breakdowns, debt obligations, equity, revenue recognition, expenses, income taxes, and commitments, offering crucial context to the condensed financial statements NOTE 1 — ORGANIZATION AND BASIS OF PRESENTATION Altisource is an integrated service provider and marketplace for the real estate and mortgage industries, publicly traded on NASDAQ. Effective January 1, 2022, the company changed its reportable segments to Servicer and Real Estate, Origination, and Corporate and Others, restating prior year disclosures for comparability. The company consolidates Lenders One as a variable interest entity and previously consolidated Pointillist until its sale in December 2021 - Altisource is an integrated service provider and marketplace for the real estate and mortgage industries, publicly traded on NASDAQ under 'ASPS'[23] - Effective January 1, 2022, reportable segments changed to Servicer and Real Estate, Origination, and Corporate and Others, with prior year comparable period segment disclosures restated[25] - Lenders One is consolidated as a variable interest entity, with its members' interests reflected as non-controlling interests. Pointillist was consolidated until its sale on December 1, 2021[26][27] Fair Value Measurements Fair value is defined as an exit price, categorized into a three-tier hierarchy (Level 1, 2, 3) based on input observability. Financial assets and liabilities are classified based on the lowest significant input level, with cash and restricted cash using Level 1 and the senior secured term loan using Level 2 - Fair value is defined as an exit price, categorized into a three-tier hierarchy: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[29] - Cash and cash equivalents and restricted cash are measured using Level 1 inputs, while the fair value of the senior secured term loan is based on Level 2 inputs due to less active trading[87] Future Adoption of New Accounting Pronouncements The company is evaluating the impact of ASU No. 2020-04 and ASU No. 2021-01, related to Reference Rate Reform (Topic 848), which provides optional guidance for contracts referencing LIBOR or other discontinued rates, effective through December 31, 2022 - The FASB issued ASU No. 2020-04 and ASU No. 2021-01 on Reference Rate Reform (Topic 848), providing optional guidance for contracts referencing LIBOR or other discontinued rates[30] - This standard is effective from March 12, 2020, through December 31, 2022, and the Company is currently evaluating its potential impact on condensed consolidated financial statements[30] NOTE 2 — CUSTOMER CONCENTRATION Ocwen Financial Corporation remains Altisource's largest customer, accounting for 40% of total revenue for the nine months ended September 30, 2022, and 45% for the third quarter of 2022. Rithm Capital Corp. (RITM) is Ocwen's largest client, with Altisource providing exclusive brokerage services for RITM's REO properties - Ocwen Financial Corporation was Altisource's largest customer, contributing 40% of total revenue for the nine months ended September 30, 2022, and 45% for the third quarter of 2022[31] Revenue from Ocwen (in millions) | Revenue from Ocwen (in millions) | Nine months ended Sep 30, 2022 | Nine months ended Sep 30, 2021 | Third quarter 2022 | Third quarter 2021 | | :------------------------------- | :----------------------------- | :----------------------------- | :----------------- | :----------------- | | Recognized from Ocwen | $47.2 | $44.7 | $17.2 | $13.6 | | Additional revenue (non-Ocwen selection) | $7.3 | $7.4 | $2.2 | $1.9 | - Rithm Capital Corp. (RITM) is Ocwen's largest client, and Altisource exclusively provides brokerage services for RITM's real estate owned (REO) properties under a Brokerage Agreement[37] NOTE 3 — SALE OF BUSINESSES Altisource completed the sale of its equity interests in Pointillist to Genesys Cloud Services, Inc. on December 1, 2021, for $150.0 million, receiving approximately $106.0 million after adjustments. The company also received the second installment of $3.0 million in January 2021 from the August 2018 sale of its rental property management business - Altisource sold its 69% equity interest in Pointillist to Genesys Cloud Services, Inc. for $150.0 million on December 1, 2021[39] - After adjustments, Altisource received approximately $106.0 million from the Pointillist sale, with $102.2 million at closing and the remaining $3.8 million in escrow, which was largely received by May 2022[39] - The second installment of $3.0 million from the August 2018 sale of the rental property management business to Front Yard Residential Corporation was received in January 2021[41] NOTE 4 — ACCOUNTS RECEIVABLE, NET Accounts receivable, net, decreased from $18.0 million at December 31, 2021, to $14.3 million at September 30, 2022, primarily due to a reduction in billed receivables and a decrease in the allowance for credit losses Accounts Receivable, Net (in thousands) | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | | :-------------------- | :----------- | :----------- | | Billed | $13,384 | $17,907 | | Unbilled | $5,432 | $5,398 | | Less: Allowance for credit losses | $(4,481) | $(5,297) | | Total | $14,335 | $18,008 | - The allowance for credit losses decreased from $5.3 million at December 31, 2021, to $4.5 million at September 30, 2022, with additions to expenses of $0.6 million and deductions of $1.4 million during the nine months ended September 30, 2022[45] NOTE 5 — PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets remained relatively stable, decreasing slightly from $21.9 million at December 31, 2021, to $21.7 million at September 30, 2022, with notable changes in income taxes receivable and surety bond collateral Prepaid Expenses and Other Current Assets (in thousands) | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | | :-------------------- | :----------- | :----------- | | Income taxes receivable | $6,214 | $8,403 | | Maintenance agreements, current portion | $1,794 | $1,717 | | Prepaid expenses | $3,614 | $2,865 | | Surety bond collateral | $4,000 | $2,000 | | Other current assets | $6,082 | $6,879 | | Total | $21,704 | $21,864 | NOTE 6 — PREMISES AND EQUIPMENT, NET Premises and equipment, net, decreased from $6.9 million at December 31, 2021, to $5.0 million at September 30, 2022, primarily due to accumulated depreciation and amortization, which amounted to $2.7 million for the nine months ended September 30, 2022 Premises and Equipment, Net (in thousands) | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | | :-------------------- | :----------- | :----------- | | Computer hardware and software | $49,339 | $50,452 | | Leasehold improvements | $5,848 | $5,927 | | Furniture and fixtures | $3,840 | $4,441 | | Office equipment and other | $440 | $811 | | Less: Accumulated depreciation and amortization | $(54,497) | $(54,758) | | Total | $4,970 | $6,873 | - Depreciation and amortization expense was $2.7 million for the nine months ended September 30, 2022, a decrease from $3.5 million in the prior year period[51] NOTE 7 — RIGHT-OF-USE ASSETS UNDER OPERATING LEASES, NET Right-of-use assets under operating leases, net, decreased from $7.6 million at December 31, 2021, to $6.0 million at September 30, 2022, driven by accumulated amortization of $2.3 million for the nine months ended September 30, 2022 Right-of-Use Assets Under Operating Leases, Net (in thousands) | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | | :-------------------- | :----------- | :----------- | | Right-of-use assets under operating leases | $12,529 | $19,595 | | Less: Accumulated amortization | $(6,564) | $(12,001) | | Total | $5,965 | $7,594 | - Amortization of operating leases was $2.3 million for the nine months ended September 30, 2022, a significant decrease from $6.3 million in the prior year period[53] NOTE 8 — GOODWILL AND INTANGIBLE ASSETS, NET Goodwill remained stable at $56.0 million across the Servicer and Real Estate and Origination segments. Intangible assets, net, decreased from $36.9 million at December 31, 2021, to $33.0 million at September 30, 2022, primarily due to amortization expense of $3.8 million for the nine months ended September 30, 2022 Goodwill by Segment (in thousands) | Segment (in thousands) | Goodwill (Sep 30, 2022 & Dec 31, 2021) | | :--------------------- | :------------------------------------- | | Servicer and Real Estate | $30,681 | | Origination | $25,279 | | Total | $55,960 | Intangible Assets, Net Book Value (in thousands) | Intangible Asset (in thousands) | Net book value Sep 30, 2022 | Net book value Dec 31, 2021 | | :------------------------------ | :-------------------------- | :-------------------------- | | Customer related intangible assets | $17,463 | $19,713 | | Operating agreement | $12,834 | $14,146 | | Trademarks and trade names | $2,713 | $3,000 | | Total | $33,010 | $36,859 | - Amortization expense for definite-lived intangible assets was $3.8 million for the nine months ended September 30, 2022, down from $8.2 million in the prior year[58] NOTE 9 — OTHER ASSETS Other assets decreased from $6.1 million at December 31, 2021, to $5.5 million at September 30, 2022, primarily due to a reduction in restricted cash and security deposits Other Assets (in thousands) | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | | :-------------------- | :----------- | :----------- | | Restricted cash | $3,584 | $4,017 | | Security deposits | $825 | $1,043 | | Other | $1,094 | $1,072 | | Total | $5,503 | $6,132 | NOTE 10 — ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accounts payable and accrued expenses decreased from $46.5 million at December 31, 2021, to $41.5 million at September 30, 2022, mainly due to lower accounts payable and income taxes payable. Other current liabilities also decreased from $3.9 million to $3.1 million Accounts Payable and Accrued Expenses (in thousands) | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | | :-------------------- | :----------- | :----------- | | Accounts payable | $13,937 | $15,978 | | Accrued expenses - general | $14,920 | $13,653 | | Accrued salaries and benefits | $10,711 | $12,254 | | Income taxes payable | $1,888 | $4,650 | | Total Accounts payable and accrued expenses | $41,456 | $46,535 | Other Current Liabilities (in thousands) | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | | :-------------------- | :----------- | :----------- | | Operating lease liabilities | $2,303 | $2,893 | | Other | $792 | $977 | | Total Other current liabilities | $3,095 | $3,870 | NOTE 11 — LONG-TERM DEBT Total long-term debt increased slightly from $243.6 million at December 31, 2021, to $244.8 million at September 30, 2022, primarily due to the Senior Secured Term Loans. The Term B Loans, with a principal balance of $247.2 million, mature in April 2024 and bear interest at 6.25% as of September 30, 2022. The revolving Credit Facility with STS Master Fund, Ltd. had no outstanding debt as of September 30, 2022 Long-Term Debt (in thousands) | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | | :-------------------- | :----------- | :----------- | | Senior secured term loans | $247,204 | $247,204 | | Less: Debt issuance costs, net | $(1,053) | $(1,632) | | Less: Unamortized discount, net | $(999) | $(1,494) | | Total Senior secured term loans | $245,152 | $244,078 | | Net Credit Facility | $(308) | $(441) | | Total Long-term debt | $244,844 | $243,637 | - The Term B Loans, with a principal balance of $247.2 million, mature in April 2024 and bear interest at 6.25% as of September 30, 2022[67][70] - The Credit Agreement includes covenants restricting additional debt, liens, asset sales, share repurchases, dividends, and investments, and contains various events of default[71][72] - The revolving Credit Facility with STS Master Fund, Ltd. allows borrowing up to $15.0 million through June 22, 2023, and $10.0 million thereafter, bearing interest at 9.00% per annum, with no outstanding debt as of September 30, 2022[74][76][77][80] NOTE 12 — OTHER NON-CURRENT LIABILITIES Other non-current liabilities decreased from $19.3 million at December 31, 2021, to $17.5 million at September 30, 2022, primarily due to reductions in operating lease liabilities and income tax liabilities Other Non-Current Liabilities (in thousands) | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | | :-------------------- | :----------- | :----------- | | Operating lease liabilities | $3,800 | $5,029 | | Income tax liabilities | $13,588 | $14,156 | | Deferred revenue | $36 | $0 | | Other non-current liabilities | $84 | $81 | | Total | $17,508 | $19,266 | NOTE 13 — FAIR VALUE MEASUREMENTS AND FINANCIAL INSTRUMENTS Altisource measures financial instruments using a three-tier fair value hierarchy. Cash, cash equivalents, and restricted cash are valued using Level 1 inputs, while the senior secured term loan is valued using Level 2 inputs. The company also has short-term receivables from the Pointillist sale measured at present value using Level 3 inputs Fair Value Measurements (in thousands) | Metric (in thousands) | Carrying amount Sep 30, 2022 | Fair value Sep 30, 2022 (Level 1) | Fair value Sep 30, 2022 (Level 2) | Fair value Sep 30, 2022 (Level 3) | | :-------------------- | :--------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Cash and cash equivalents | $63,812 | $63,812 | — | — | | Restricted cash | $3,584 | $3,584 | — | — | | Short-term receivable | $3,433 | — | — | $3,433 | | Senior secured term loan | $247,204 | — | $200,235 | — | - Cash, cash equivalents, and restricted cash are carried at fair value using Level 1 inputs due to their highly liquid nature[87] - The fair value of the senior secured term loan is based on Level 2 quoted market prices, and short-term receivables from the Pointillist sale are measured at present value using Level 3 inputs[87] NOTE 14 — SHAREHOLDERS' EQUITY AND SHARE-BASED COMPENSATION Altisource has a share repurchase program with approximately 2.4 million shares remaining available as of September 30, 2022, subject to Luxembourg law and Credit Agreement limits. Share-based compensation expense for the nine months ended September 30, 2022, was $3.9 million, with various types of stock options and restricted share awards outstanding - Approximately 2.4 million shares of common stock remain available for repurchase under the program as of September 30, 2022, with no purchases made during the nine months ended September 30, 2022 and 2021[89] - Share-based compensation expense recognized was $3.9 million for the nine months ended September 30, 2022, compared to $2.5 million in the prior year period[91] Share-Based Award Type (in thousands) | Share-Based Award Type | Outstanding as of Sep 30, 2022 (in thousands) | | :--------------------- | :-------------------------------------------- | | Service-Based Options | 185 | | Market-Based Options | 96 | | Performance-Based Options | 450 | | Service-Based Restricted Awards | 402 | | Performance-Based Restricted Awards | 154 | | Market-Based Restricted Awards | 112 | | Performance-Based and Market-Based Restricted Awards | 98 | NOTE 15 — REVENUE Total revenue for the nine months ended September 30, 2022, decreased by 15% to $118.3 million, primarily driven by a 16% decrease in service revenue to $111.7 million. This decline was mainly due to the Pointillist sale and a market decline in mortgage originations, partially offset by growth in the Servicer and Real Estate segment Revenue by Category (in thousands) | Revenue Category (in thousands) | Three months ended Sep 30, 2022 | Three months ended Sep 30, 2021 | Nine months ended Sep 30, 2022 | Nine months ended Sep 30, 2021 | | :------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Service revenue | $36,290 | $41,626 | $111,691 | $133,672 | | Reimbursable expenses | $1,957 | $1,416 | $6,158 | $5,365 | | Non-controlling interests | $133 | $201 | $468 | $712 | | Total | $38,380 | $43,243 | $118,317 | $139,749 | Segment Revenue (in thousands) | Segment Revenue (in thousands) | Nine months ended Sep 30, 2022 | Nine months ended Sep 30, 2021 | | :----------------------------- | :----------------------------- | :----------------------------- | | Servicer and Real Estate | $91,349 | $89,584 | | Origination | $26,968 | $46,756 | | Corporate and Others | $0 | $3,409 | | Total revenue | $118,317 | $139,749 | - Revenue recognized from contract liabilities at the beginning of the period was $3.7 million for the nine months ended September 30, 2022, down from $4.7 million in the prior year[114] NOTE 16 — COST OF REVENUE Cost of revenue decreased by 22% to $104.6 million for the nine months ended September 30, 2022, primarily due to reductions in compensation and benefits, outside fees and services, and technology costs, partially offset by an increase in reimbursable expenses Cost of Revenue Components (in thousands) | Cost Component (in thousands) | Three months ended Sep 30, 2022 | Three months ended Sep 30, 2021 | Nine months ended Sep 30, 2022 | Nine months ended Sep 30, 2021 | | :---------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Compensation and benefits | $11,885 | $15,171 | $39,231 | $55,655 | | Outside fees and services | $15,319 | $16,891 | $42,573 | $52,473 | | Technology and telecommunications | $4,656 | $6,391 | $14,844 | $18,972 | | Reimbursable expenses | $1,957 | $1,416 | $6,158 | $5,365 | | Depreciation and amortization | $570 | $798 | $1,805 | $2,397 | | Total | $34,387 | $40,667 | $104,611 | $134,862 | - Compensation and benefits decreased primarily due to cash cost savings measures, the Pointillist sale, and lower service revenue in the Origination segment[191] - Outside fees and services decreased mainly from lower service revenue in the Origination segment and reduced Field Services revenue in the Servicer and Real Estate segment[192] NOTE 17 — SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative (SG&A) expenses decreased by 17% to $43.1 million for the nine months ended September 30, 2022, driven by cash cost savings initiatives, facility consolidation, and lower amortization of intangible assets, partially offset by increased marketing costs SG&A Components (in thousands) | SG&A Component (in thousands) | Three months ended Sep 30, 2022 | Three months ended Sep 30, 2021 | Nine months ended Sep 30, 2022 | Nine months ended Sep 30, 2021 | | :---------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Compensation and benefits | $7,388 | $6,859 | $19,093 | $21,007 | | Amortization of intangible assets | $1,281 | $2,673 | $3,849 | $8,183 | | Professional services | $2,584 | $2,318 | $8,432 | $7,896 | | Occupancy related costs | $1,008 | $2,182 | $4,049 | $7,652 | | Marketing costs | $774 | $327 | $2,446 | $1,500 | | Total | $14,556 | $16,604 | $43,055 | $52,046 | - Compensation and benefits decreased for the nine months ended September 30, 2022, due to cash cost savings initiatives[195] - Occupancy related costs and amortization of intangible assets significantly decreased due to facility consolidation and the completion of amortization periods for certain assets[195] NOTE 18 — OTHER INCOME (EXPENSE), NET Total other income (expense), net, remained relatively stable at $(10.0) million for the nine months ended September 30, 2022, compared to $(9.9) million in the prior year, primarily influenced by increased interest expense partially offset by higher interest income and foreign currency exchange gains Other Income (Expense), Net (in thousands) | Component (in thousands) | Three months ended Sep 30, 2022 | Three months ended Sep 30, 2021 | Nine months ended Sep 30, 2022 | Nine months ended Sep 30, 2021 | | :----------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Interest income (expense) | $212 | $0 | $318 | $(28) | | Other, net | $247 | $(115) | $1,074 | $819 | | Total | $459 | $(115) | $1,392 | $791 | - The change for the nine months ended September 30, 2022, was primarily driven by an increase of $0.8 million in interest expense due to higher interest rates on the Credit Facility, partially offset by higher interest income and foreign currency exchange gains[198] NOTE 19 — INCOME TAXES Altisource recognized an income tax provision of $(2.2) million for the nine months ended September 30, 2022, compared to $(1.9) million in the prior year. This was driven by income tax expense on transfer pricing income from India, income tax benefit from U.S. losses, no tax benefit on Luxembourg losses, and uncertain tax positions Income Tax Benefit (Provision) (in thousands) | Metric (in thousands) | Nine months ended Sep 30, 2022 | Nine months ended Sep 30, 2021 | | :-------------------- | :----------------------------- | :----------------------------- | | Income tax benefit (provision) | $(2,210) | $(1,857) | - The income tax provision for the nine months ended September 30, 2022, was influenced by income tax expense on transfer pricing income from India, income tax benefit from losses in the United States, and no tax benefit on the pretax loss from the Luxembourg operating company[123] NOTE 20 — LOSS PER SHARE Basic and diluted loss per share for Altisource was $(2.62) for the nine months ended September 30, 2022, an improvement from $(3.71) in the prior year. All dilutive securities were excluded from the computation due to the net loss, anti-dilutive exercise prices, or unfulfilled market/performance criteria Loss Per Share (in thousands, except per share data) | Metric (in thousands, except per share data) | Three months ended Sep 30, 2022 | Three months ended Sep 30, 2021 | Nine months ended Sep 30, 2022 | Nine months ended Sep 30, 2021 | | :------------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net loss attributable to Altisource | $(14,389) | $(18,269) | $(42,074) | $(58,746) | | Weighted average common shares outstanding, basic | 16,087 | 15,831 | 16,051 | 15,816 | | Loss per share: Basic | $(0.89) | $(1.15) | $(2.62) | $(3.71) | | Loss per share: Diluted | $(0.89) | $(1.15) | $(2.62) | $(3.71) | - Approximately 1.3 million stock options, restricted shares, and restricted share units were excluded from the diluted loss per share computation for the nine months ended September 30, 2022, because their impact would be anti-dilutive[127] NOTE 21 — COMMITMENTS, CONTINGENCIES AND REGULATORY MATTERS Altisource is involved in ongoing legal actions and regulatory inquiries, but management does not anticipate a material impact on financial condition. The company faces significant risks related to its largest customer, Ocwen, and its client RITM, which could adversely affect revenue. Lease liabilities for premises and equipment totaled $6.1 million as of September 30, 2022, with maturities extending through 2026. Escrow balances held for customers were $20.0 million - Altisource is involved in legal actions and regulatory inquiries, but management does not believe the outcomes will have a material impact on financial condition, results of operations, or cash flows[129][130] - Ocwen is Altisource's largest customer, and risks associated with Ocwen's regulatory matters or changes in its relationship with RITM could significantly reduce Altisource's revenue and materially adversely affect its operations[132][133][134][135] Lease Liability Maturities (in thousands) | Lease Liability Maturities (in thousands) | Operating lease obligations | | :---------------------------------------- | :-------------------------- | | 2022 | $557 | | 2023 | $2,233 | | 2024 | $1,715 | | 2025 | $1,233 | | 2026 | $636 | | Total lease payments | $6,374 | | Present value of lease liabilities | $6,103 | - Amounts held in escrow accounts for customers were $20.0 million as of September 30, 2022, down from $27.5 million at December 31, 2021[140] NOTE 22 — SEGMENT REPORTING Effective January 1, 2022, Altisource changed its reportable segments to Servicer and Real Estate, Origination, and Corporate and Others, with prior year data restated. The Servicer and Real Estate segment provides solutions for loan servicers and real estate investors, while the Origination segment focuses on mortgage originators. Corporate and Others includes corporate functions and the previously sold Pointillist business - Effective January 1, 2022, Altisource's reportable segments changed to Servicer and Real Estate, Origination, and Corporate and Others, with prior year disclosures restated[142] - The Servicer and Real Estate segment offers solutions and technologies across the mortgage and real estate lifecycle for loan servicers and real estate investors[144] - The Origination segment provides solutions and technologies for mortgage originators across the mortgage origination lifecycle[144] Segment Performance (in thousands) | Segment (in thousands) | Revenue (9 months ended Sep 30, 2022) | Income (loss) from operations (9 months ended Sep 30, 2022) | | :--------------------- | :------------------------------------ | :---------------------------------------------------------- | | Servicer and Real Estate | $91,349 | $17,887 | | Origination | $26,968 | $(5,977) | | Corporate and Others | $0 | $(41,259) | | Consolidated Altisource | $118,317 | $(29,349) | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Altisource's financial condition, results of operations, and liquidity, highlighting the impact of segment changes, the COVID-19 pandemic, and customer concentration risks. It details consolidated and segment-specific financial performance, liquidity sources, debt obligations, and critical accounting policies FORWARD-LOOKING STATEMENTS This section contains forward-looking statements based on future expectations, subject to various assumptions, risks, and uncertainties that could cause actual results to differ materially. Key risk factors include the timing of default-related referrals, ability to retain major customers like Ocwen and RITM, compliance with agreements, execution of strategic plans, and impacts of the COVID-19 pandemic - Forward-looking statements are based on future expectations and involve assumptions, risks, and uncertainties that could cause actual results to differ materially[153] - Important factors include the timing of increased default-related referrals, ability to retain Ocwen and RITM as customers, compliance with material agreements, execution of strategic plans, and impacts of the COVID-19 pandemic[154][155] OVERVIEW Altisource is an integrated service provider for the real estate and mortgage industries, with reportable segments including Servicer and Real Estate, Origination, and Corporate and Others. The company's strategy focuses on growing and diversifying its customer base, leveraging core competencies in large markets. The COVID-19 pandemic significantly impacted default-related services and mortgage originations, leading to cost reduction efforts and the sale of Pointillist. Ocwen remains a critical customer, posing concentration risks - Altisource is an integrated service provider and marketplace for the real estate and mortgage industries, with operations reported through Servicer and Real Estate, Origination, and Corporate and Others segments[157][158] - The company's strategy is to become the premier provider of mortgage and real estate marketplaces and technology-enabled solutions, focusing on growth and diversification[165][166] - The COVID-19 pandemic led to a significant decrease in default-related referrals, while mortgage originations initially increased but then declined due to rising interest rates. Altisource responded by reducing costs, maintaining infrastructure for default services, growing Lenders One, and selling Pointillist[170][171][172][173] - Ocwen was Altisource's largest customer, accounting for 40% of total revenue for the nine months ended September 30, 2022, and regulatory matters or changes in the Ocwen-RITM relationship could significantly impact Altisource's revenue[176][178][179] CONSOLIDATED RESULTS OF OPERATIONS Altisource's consolidated results for the nine months ended September 30, 2022, show a 16% decrease in total service revenue to $111.7 million, but a significant improvement in gross profit margin to 12% and a reduced operating loss. Net loss attributable to Altisource decreased by 28% to $(42.1) million Consolidated Results of Operations (in thousands, except per share data) | Metric (in thousands, except per share data) | Nine months ended Sep 30, 2022 | Nine months ended Sep 30, 2021 | % Increase (decrease) | | :------------------------------------------- | :----------------------------- | :----------------------------- | :-------------------- | | Total service revenue | $111,691 | $133,672 | (16)% | | Total revenue | $118,317 | $139,749 | (15)% | | Cost of revenue | $104,611 | $134,862 | (22)% | | Gross profit | $13,706 | $4,887 | 180% | | Selling, general and administrative expenses | $43,055 | $52,046 | (17)% | | Loss from operations | $(29,349) | $(47,159) | 38% | | Net loss attributable to Altisource | $(42,074) | $(58,746) | 28% | | Basic Loss per share | $(2.62) | $(3.71) | 29% | | Gross profit/service revenue | 12% | 4% | | | Loss from operations/service revenue | (26)% | (35)% | | - The increase in gross profit and improved operating loss margin were primarily due to a favorable revenue mix with higher-margin businesses in Servicer and Real Estate, the Pointillist sale, and cash cost savings measures[193][196] - Other income (expense), net, remained stable, with increased interest expense offset by higher interest income and foreign currency exchange gains[198] SEGMENT RESULTS OF OPERATIONS Segment results show varied performance: Servicer and Real Estate experienced revenue growth and improved operating income, while Origination saw significant revenue decline and an operating loss due to market conditions. Corporate and Others' revenue decreased to zero following the Pointillist sale, and it continued to incur substantial operating losses Servicer and Real Estate The Servicer and Real Estate segment's service revenue increased by 1% to $85.6 million for the nine months ended September 30, 2022, driven by growth in Marketplace and Technology and SaaS Products, partially offset by a decline in Solutions. Operating income significantly improved to $17.9 million, representing 21% of service revenue, due to higher gross profit margins and cost savings Servicer and Real Estate Segment Performance (in thousands) | Metric (in thousands) | Nine months ended Sep 30, 2022 | Nine months ended Sep 30, 2021 | % Increase (decrease) | | :-------------------- | :----------------------------- | :----------------------------- | :-------------------- | | Service revenue | $85,601 | $84,730 | 1% | | Reimbursable expenses | $5,748 | $4,854 | 18% | | Total revenue | $91,349 | $89,584 | 2% | | Cost of revenue | $64,235 | $69,063 | (7)% | | Gross profit | $27,114 | $20,521 | 32% | | Selling, general and administrative expenses | $9,227 | $10,709 | (14)% | | Income from operations | $17,887 | $9,812 | 21% | - Service revenue growth was primarily from higher revenue in Marketplace (driven by more homes sold) and Technology and SaaS Products (higher professional services in Equator), partially offset by fewer preservation referrals in Field Services[207] - Gross profit as a percentage of service revenue increased to 32% from 24%, mainly due to COVID-19 cash cost savings and efficiency measures[213] Origination The Origination segment experienced a significant 43% decrease in service revenue to $26.1 million for the nine months ended September 30, 2022, primarily due to the overall market decline in mortgage originations. This led to a shift from operating income of $3.6 million to an operating loss of $(6.0) million, as costs did not decline at the same rate as revenue Origination Segment Performance (in thousands) | Metric (in thousands) | Nine months ended Sep 30, 2022 | Nine months ended Sep 30, 2021 | % Increase (decrease) | | :-------------------- | :----------------------------- | :----------------------------- | :-------------------- | | Service revenue | $26,090 | $45,533 | (43)% | | Reimbursable expenses | $410 | $511 | (20)% | | Non-controlling interests | $468 | $712 | (34)% | | Total revenue | $26,968 | $46,756 | (42)% | | Cost of revenue | $26,206 | $38,722 | (32)% | | Gross profit | $762 | $8,034 | (90)% | | Selling, general and administrative expenses | $6,739 | $4,468 | 51% | | (Loss) Income from operations | $(5,977) | $3,566 | (268)% | - The decline in Lenders One revenue was less than the overall market decline due to traction with solutions designed to help members save money[219] - Gross profit as a percentage of service revenue decreased significantly to 3% from 18%, as costs did not decline proportionally with revenue[223] Corporate and Others The Corporate and Others segment reported no revenue for the nine months ended September 30, 2022, following the December 2021 Pointillist sale. Cost of revenue decreased by 48% to $14.2 million, and SG&A expenses decreased by 27% to $27.1 million, primarily due to cost savings initiatives and the Pointillist sale. The segment continued to incur significant operating losses Corporate and Others Segment Performance (in thousands) | Metric (in thousands) | Nine months ended Sep 30, 2022 | Nine months ended Sep 30, 2021 | % Increase (decrease) | | :-------------------- | :----------------------------- | :----------------------------- | :-------------------- | | Service revenue | $0 | $3,409 | (100)% | | Total revenue | $0 | $3,409 | (100)% | | Cost of revenue | $14,170 | $27,077 | (48)% | | Selling, general and administrative expenses | $27,089 | $36,869 | (27)% | | Total other income (expense), net | $(10,051) | $(9,887) | 2% | - The decrease in cost of revenue was driven by lower compensation and benefits due to cash cost savings and the Pointillist sale, as well as reduced technology and telecommunications costs[228] - SG&A expenses decreased due to cash cost savings initiatives, the assignment of sales and marketing employees to other segments, and facility elimination initiatives[231] LIQUIDITY AND CAPITAL RESOURCES Altisource's liquidity has been impacted by negative operating cash flow, but was bolstered by the $106.0 million proceeds from the Pointillist sale and a $20 million revolving credit facility. The company's primary liquidity obligations include the $247.2 million Senior Secured Term Loans maturing in April 2024 and operating lease payments. Future liquidity needs are expected to be met through existing cash, operating activities, and debt refinancing - Altisource's liquidity has been negatively impacted by significant revenue decline and negative operating cash flow, but was supported by the $106.0 million proceeds from the Pointillist sale and a $20 million revolving credit facility[233] - The Senior Secured Term Loans have a principal balance of $247.2 million, maturing in April 2024, with an interest rate of 6.25% as of September 30, 2022[234][236] Future Uses of Cash (in thousands) | Future Uses of Cash (in thousands) | Total | 2022 | 2023-2024 | 2025-2026 | | :--------------------------------- | :------ | :---- | :-------- | :-------- | | Credit Agreement outstanding balance | $247,204 | $0 | $247,204 | $0 | | Interest expense payments | $28,562 | $4,743 | $23,819 | $0 | | Lease payments | $6,919 | $1,102 | $3,948 | $1,869 | | Total | $282,685 | $5,845 | $274,971 | $1,869 | - Net cash used in operating activities was $(32.3) million for the nine months ended September 30, 2022, an improvement from $(41.1) million in the prior year[245][246] CRITICAL ACCOUNTING POLICIES, ESTIMATES AND RECENT ACCOUNTING PRONOUNCEMENTS Altisource prepares its financial statements using GAAP, which requires management to make subjective estimates and judgments. There have been no material changes to the company's critical accounting policies during the nine months ended September 30, 2022. Information on recently issued accounting pronouncements is discussed in Note 1 - Financial statements are prepared in accordance with GAAP, requiring management to make assumptions, estimates, and judgments that affect reported amounts[253][254] - No material changes to critical accounting policies occurred during the nine months ended September 30, 2022[254] - Recently issued accounting pronouncements are discussed in Note 1 to the condensed consolidated financial statements[255] Item 3. Quantitative and Qualitative Disclosures about Market Risk Altisource's primary financial market risks are interest rate risk, mainly from its Term B Loan, and foreign currency exchange rate risk, predominantly from the Indian rupee. A one percentage point increase in the Eurodollar rate would increase annual interest expense by approximately $2.5 million, and a similar change in the Indian rupee's value would impact annual expenses by about $0.3 million - Altisource's financial market risk primarily consists of interest rate and foreign currency exchange rate risk[255] - A one percentage point increase in the Eurodollar rate above the minimum floor would increase annual interest expense by approximately $2.5 million, based on the Term B Loan's principal outstanding as of September 30, 2022[256] - The most significant currency exposure is to the Indian rupee; a one percentage point change in its value would impact annual expenses by approximately $0.3 million[256] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that Altisource's disclosure controls and procedures were effective as of September 30, 2022. There were no material changes in internal control over financial reporting during the quarter - Management, including the Chairman and Chief Executive Officer and Chief Financial Officer, concluded that disclosure controls and procedures were effective as of September 30, 2022[258] - No changes in internal control over financial reporting occurred during the quarter ended September 30, 2022, that materially affected or are reasonably likely to materially affect internal control over financial reporting[259] PART II — Other Information This section provides additional information on Altisource's legal proceedings, risk factors, equity security sales, and required exhibits Item 1. Legal Proceedings Altisource is involved in various legal actions and regulatory inquiries, but management does not anticipate a material impact on the company's financial condition, results of operations, or cash flows. Liabilities for contingencies are recorded when an unfavorable outcome is probable and estimable - Altisource records a liability for contingencies if an unfavorable outcome is probable and the amount of loss can be reasonably estimated[260] - Management does not believe the outcome of current legal actions, individually or in aggregate, will have a material impact on financial condition, results of operations, or cash flows[261] - The company is responding to inquiries from governmental authorities regarding certain business aspects, but it is premature to predict the outcome or estimate financial impact[262] Item 1A. Risk Factors As of the filing date, there have been no material changes to the risk factors previously disclosed in Altisource's Form 10-K for the year ended December 31, 2021 - No material changes in risk factors from those disclosed in the Form 10-K for the year ended December 31, 2021, as of the filing date[263] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No common stock was purchased under the share repurchase program during the three months ended September 30, 2022, with approximately 2.4 million shares remaining available. Additionally, 93,628 common shares were withheld from employees to satisfy tax withholding obligations related to restricted share vesting - No purchases of common stock were made during the three months ended September 30, 2022, under the share repurchase program[264] - Approximately 2.4 million shares of common stock remain available for repurchase under the program as of September 30, 2022[264] - 93,628 common shares were withheld from employees during the three months ended September 30, 2022, to satisfy tax withholding obligations from restricted share vesting[264] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including Section 302 and 906 certifications, and Inline XBRL financial data files - Exhibits include Section 302 Certifications of the Chief Executive Officer and Chief Financial Officer, Section 906 Certification, and Inline XBRL interactive data files for financial information[266] SIGNATURES The report was duly signed on November 3, 2022, by Michelle D. Esterman, Chief Financial Officer, on behalf of Altisource Portfolio Solutions S.A - The report was signed by Michelle D. Esterman, Chief Financial Officer, on November 3, 2022[268]