ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Management's discussion and analysis of financial condition and results of
operations ("MD&A") is a supplement to the accompanying interim condensed
consolidated financial statements and is intended to provide a reader of our
financial statements with a narrative from the perspective of management on our
businesses, current developments, financial condition, results of operations and
liquidity. Our MD&A should be read in conjunction with our Form 10-K for the
year ended December 31, 2020 filed with the Securities and Exchange Commission
("SEC") on March 11, 2021 .
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements within the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. These
statements may relate to, among other things, future events or our future
performance or financial condition. Words such as "anticipate," "intend,"
"expect," "may," "could," "should," "would," "plan," "estimate," "believe,"
"predict," "potential" or "continue" or the negative of these terms and
comparable terminology are intended to identify such forward-looking statements.
Such statements are based on expectations as to the future and are not
statements of historical fact. Furthermore, forward-looking statements are not
guarantees of future performance and involve a number of assumptions, risks and
uncertainties that could cause actual results to differ materially. The
following are examples of such items and are not intended to be all inclusive:
•assumptions related to sources of liquidity and the adequacy of financial
resources;
•assumptions about our ability to grow our business, including executing on our
strategic initiatives;
•assumptions about our ability to improve margins and affect anticipated expense
reductions as a result of Project Catalyst and otherwise in response to lower
revenues due to COVID-19, or other factors;
•assumptions about the variable nature of our cost structure that would allow us
to realign our cost structure in line with revenue;
•assumptions regarding the impact of seasonality;
•assumptions regarding the impacts of the COVID-19 pandemic and the timeliness
and effectiveness of actions taken in response thereto;
•estimates regarding our effective tax rate; and
•estimates regarding our reserves and valuations.
Important factors that could cause actual results to differ materially from
those suggested by the forward-looking statements include, but are not limited
to, the risks discussed in the Risk Factors section of our Form 10-K for the
year ended December 31, 2020 including:
•the timing of the anticipated increase in default related referrals following
the expiration of foreclosure and eviction moratoriums and forbearance programs,
the timing of the expiration of such moratoriums and programs, and any other
delays occasioned by government, investor or servicer actions;
•our ability to retain Ocwen Financial Corporation (together with its
subsidiaries, "Ocwen") as a customer or our ability to receive the anticipated
volume of referrals from Ocwen;
•our ability to retain New Residential Investment Corp. (individually, together
with one or more of its subsidiaries, or one or more of its subsidiaries
individually, "NRZ") as a customer or our ability to receive the anticipated
volume of referrals from NRZ;
•our ability to comply with material agreements if a change of control is deemed
to have occurred including, among other things, through the formation of a
shareholder group, which may cause a termination event or event of default under
certain of our agreements;
•our ability to execute on our strategic plan;
•our ability to retain our existing customers, expand relationships and attract
new customers;
•our ability to comply with governmental regulations and policies and any
changes in such regulations and policies;
•the level of loan delinquencies and charge-offs;
•the level of origination volume;
•technology incidents, data breaches and cybersecurity risks;
•significant changes in tax regulations and interpretations in the countries,
states and local jurisdictions in which we operate; and
•the risks and uncertainties related to pandemics, epidemics or other force
majeure events, including the COVID-19 pandemic, and associated impacts on the
economy, supply chain, transportation, movement of people, availability of
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vendors and demand for our products or services as well as increased costs,
recommendations or restrictions imposed by governmental entities, changes in
relevant business practices undertaken or imposed by our clients, vendors or
regulators, impacts on contracts and client relationships and potential
litigation exposure.
We caution the reader not to place undue reliance on these forward-looking
statements as they reflect our view only as of the date of this report. We are
under no obligation (and expressly disclaim any obligation) to update or alter
any forward-looking statements contained herein to reflect any change in our
expectations with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.
OVERVIEW
Our Business
When we refer to "Altisource ," the "Company," "we," "us" or "our" we mean
Altisource Portfolio Solutions S.A. , a Luxembourg société anonyme, or public
limited liability company, and its subsidiaries.
We are an integrated service provider and marketplace for the real estate and
mortgage industries. Combining operational excellence with a suite of innovative
services and technologies, Altisource helps solve the demands of the
ever-changing markets we serve.
We provide loan servicers and originators with marketplaces, services and
technologies that span the residential mortgage lifecycle. We provide buyers,
sellers, servicers and investors with the technology enabled marketplaces and
other solutions that span the residential real estate lifecycle.
The Company operates with one reportable segment (total Company). Our principal
revenue generating activities are as follows:
Core Businesses
Field Services
•Property preservation and inspection services and vendor management oversight
software-as-a-service ("SaaS") platform
Marketplace
•Hubzu® online real estate auction platform, real estate auction, real estate
brokerage and asset management
•Equator®, a SaaS-based technology to manage real estate owned ("REO"), short
sales, foreclosure, bankruptcy and eviction processes
Mortgage and Real Estate Solutions
•Mortgage loan fulfillment, certification and certification insurance services
and technologies
•Title insurance (as an agent) and settlement services
•Real estate valuation services
•Residential and commercial construction inspection and risk mitigation services
•Management of the Best Partners Mortgage Cooperative, Inc., doing business as
Lenders One® ("Lenders One"), mortgage banking cooperative
•Foreclosure trustee services
•Business services
Other Businesses
Earlier Stage Business
•Pointillist® customer journey analytics platform
Other
•Commercial loan servicing technology
We classify revenue in three categories: service revenue, revenue from
reimbursable expenses and non-controlling interests. In evaluating our
performance, we focus on service revenue. Service revenue consists of amounts
attributable to our fee-based services. Reimbursable expenses and
non-controlling interests are pass-through items for which we earn no margin.
Reimbursable expenses consist of amounts we incur on behalf of our customers in
performing our fee-based services that we
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pass directly on to our customers without a markup. Non-controlling interests
represent the earnings of Lenders One. Lenders One is a mortgage cooperative
managed, but not owned, by Altisource . The Lenders One members' earnings are
included in revenue and reduced from net income to arrive at net income
attributable to Altisource .
Strategy and Core Businesses
We are focused on becoming the premier provider of mortgage and real estate
marketplaces and related technology enabled solutions to a broad and diversified
customer base of residential loan investors and servicers, and originators. The
real estate and mortgage marketplaces represent very large markets, and we
believe our scale and suite of offerings provide us with competitive advantages
that could support our growth. As we navigate the COVID-19 pandemic and its
impacts on our business, we continue to evaluate our strategy and core
businesses and seek to position out businesses to provide long term value to our
shareholders.
Through our offerings that support residential loan investors and servicers, we
provide a suite of solutions and technologies intended to meet their growing and
evolving needs. We are focused on growing referrals from our existing customer
base and attracting new customers to our offerings. We have a customer base that
includes government-sponsored enterprises ("GSEs"), asset managers, and several
large bank and non-bank servicers including Ocwen and NRZ. We believe we are one
of only a few providers with a broad suite of servicer solutions, nationwide
coverage and scalability. Further, we believe we are well positioned to gain
market share from existing and new customers in the event delinquency rates
rise, or customers and prospects consolidate to larger, full-service providers
or outsource services that have historically been performed in-house.
We also provide services to mortgage loan originators (or other similar mortgage
market participants) in originating, buying and selling residential mortgages.
We provide a suite of solutions and technologies to meet the evolving and
growing needs of lenders, mortgage purchasers and securitizers. We are focused
on growing referrals from our existing customer base and attracting new
customers to our offerings. We have a customer base that includes the Lenders
One cooperative mortgage bankers and mid-size and larger bank and non-bank loan
originators. We believe our suite of services, technologies and unique access to
the members of the Lenders One mortgage cooperative position us to grow our
relationships with our existing customer base by cross-selling existing
offerings and developing new offerings. Further, we believe we are well
positioned to gain market share from existing and new customers as customers and
prospects consolidate to larger, full-service providers or outsource services
that have historically been performed in-house.
Our earlier stage business consists of Pointillist, Inc. ("Pointillist"). The
Pointillist business was developed by Altisource through our consumer analytics
capabilities. We believe the Pointillist business is a potentially disruptive
SaaS-based platform which provides unique customer journey analytics at scale
and enables customers to engage through our intelligent platform. During 2019,
we created Pointillist as a separate legal entity to position it for accelerated
growth and outside investment and contributed the Pointillist business and $8.5
million to it. Pointillist is owned by Altisource and management of Pointillist.
Management of Pointillist owns a non-controlling interest representing 12.1% of
the outstanding equity of Pointillist. Additional equity shares of Pointillist
are available for issuance to management and board members of Pointillist.
Altisource has an option, but no ongoing obligation, to participate in future
funding of Pointillist.
COVID-19 Pandemic Impacts
In response to the COVID-19 pandemic, various governmental entities and
servicers implemented unprecedented foreclosure and eviction moratoriums and
forbearance programs to help mitigate the impact to borrowers and renters.
Additionally, at various times throughout 2020, certain jurisdictions in the
United States placed restrictions on non-essential services and travel. As a
result of these measures, foreclosure initiations were 86% lower for the first
quarter of 2021 compared to the first quarter of 2020 despite 232% growth in the
number of delinquent mortgages in March 2021 compared to March 2020 (according
to data from a recent Black Knight report). The decline in foreclosure
initiations resulted in significantly lower REO referrals and negatively
impacted virtually all of the default related services performed on delinquent
loans, loans in foreclosure and REO. With the expectation that the
pandemic-related foreclosure and eviction moratoriums will continue through at
least June 30, 2021 , and that there will be additional pandemic-related borrower
protection measures in place through December 31, 2021 , we anticipate that
default related referrals will remain severely depressed throughout 2021.
At the same time, to reduce interest rates, the Federal Reserve lowered the
target for the federal funds rate to 0% to 0.25% and bought billions of dollars
of mortgage backed securities on the secondary market. As a result of the lower
interest rate environment, first quarter 2021 mortgage originations were 94%
higher than first quarter 2020 (according to the Mortgage Bankers Association )
driving higher demand for origination related services. For the full year, the
Mortgage Bankers Association forecasts that origination volume will decline by
14%.
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While we cannot predict the duration of the pandemic and future governmental
measures, we anticipate that revenue from our default related businesses will
continue to be under significant pressure throughout 2021 with referrals being
impacted by the foreclosure and eviction moratoriums, forbearance plans, and
borrower protection measures that may be undertaken, and Ocwen's transition of
field services, valuation and title referrals associated with certain investor's
mortgage servicing rights ("MSRs") to the investor's captive service provider
(see Ocwen Related Matters below). Furthermore, we anticipate that our
Marketplace and Field Services businesses will continue to be negatively
impacted by low REO referrals and declining REO inventory. We further anticipate
that our origination related business will continue to experience growth from
new customer wins and, more recently, new product launches. However, due to the
relative size of Altisource's default related businesses compared to its
origination related businesses, we anticipate that Altisource's total service
revenue will decline in 2021 compared to 2020.
To address the lower anticipated revenue, Altisource is working to (1) reduce
our cost structure, (2) maintain the infrastructure to deliver default related
services for our customer base and support the anticipated surge in demand
following the expiration of the moratoriums and forbearance plans, and (3)
accelerate the growth of our originations related businesses.
We anticipate that demand for default related services will begin to return in
late 2021 and into 2022 after the expiration of the pandemic related foreclosure
and eviction moratoriums, forbearance plans and other loss mitigation
activities. We anticipate that the volume of referrals will be significantly
higher driven by the return to a more normal default operating environment. We
believe the magnitude of the increase in demand for default services will be
largely based upon the delinquency rate at the time the foreclosure and eviction
moratoriums and forbearance plans expire. We currently anticipate that the
default related business should stabilize in 2023 when foreclosures commenced
after the expiration of the foreclosure moratoriums and forbearance plans become
REO. We further anticipate that our originations related business will continue
to grow from new customer wins, and cross selling existing and new offerings to
customers.
Share Repurchase Program
On May 15, 2018 , our shareholders approved the renewal and replacement of the
share repurchase program previously approved by the shareholders on May 17,
2017 . Under the program, we are authorized to purchase up to 4.3 million shares
of our common stock, based on a limit of 25% of the outstanding shares of common
stock on the date of approval, at a minimum price of $1.00 per share and a
maximum price of $500.00 per share, for a period of five years from the date of
approval. As of March 31, 2021 , approximately 2.4 million shares of common stock
remain available for repurchase under the program. There were no purchases of
shares of common stock during the three months ended March 31, 2021 and 2020.
Luxembourg law limits share repurchases to the balance of Altisource Portfolio
Solutions S.A. (unconsolidated parent company) retained earnings, less the value
of shares repurchased. As of March 31, 2021 , we can repurchase up to
approximately $86 million of our common stock under Luxembourg law. Our Credit
Agreement also limits the amount we can spend on share repurchases, which limit
was approximately $398 million as of March 31, 2021 , and may prevent repurchases
in certain circumstances, including if our leverage ratio exceeds 3.50 to 1.00.
Our leverage ratio exceeded 3.50 to 1.00 for the twelve months ended March 31,
2021 .
Ocwen Related Matters
During the three months ended March 31, 2021 , Ocwen was our largest customer,
accounting for 34% of our total revenue for the three months ended March 31,
2021 . Additionally, 5% of our revenue for the three months ended March 31, 2021
was earned on the loan portfolios serviced by Ocwen, when a party other than
Ocwen or the MSRs owner selected Altisource as the service provider.
Ocwen has disclosed that it is subject to a number of ongoing federal and state
regulatory examinations, consent orders, inquiries, subpoenas, civil
investigative demands, requests for information and other actions and is subject
to pending and threatened legal proceedings, some of which include claims
against Ocwen for substantial monetary damages. In addition to monetary damages,
various complaints have sought to obtain injunctive relief, consumer redress,
refunds, restitution, disgorgement, civil penalties, costs and fees and other
relief. Existing or future similar matters could result in, and in some cases,
have resulted in, adverse regulatory or other actions against Ocwen. Previous
regulatory actions against Ocwen have subjected Ocwen to independent oversight
of its operations and placed certain restrictions on its ability to acquire
servicing rights. In addition to the above, Ocwen may become subject to future
adverse regulatory or other actions.
Ocwen has disclosed that NRZ is its largest client. As of March 31, 2021 ,
approximately 36% of loans serviced and subserviced by Ocwen (measured in unpaid
principal balance) were related to NRZ MSRs or rights to MSRs. In July 2017 and
January 2018 , Ocwen and NRZ entered into a series of agreements pursuant to
which the parties agreed, among other things, to undertake certain actions to
facilitate the transfer from Ocwen to NRZ of Ocwen's legal title to certain of
its MSRs (the
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"Subject MSRs") and under which Ocwen will subservice mortgage loans underlying
the MSRs for an initial term of five years. NRZ can terminate its sub-servicing
agreement with Ocwen in exchange for the payment of a termination fee.
The existence or outcome of Ocwen regulatory matters or the termination of the
NRZ sub-servicing agreement with Ocwen may have significant adverse effects on
Ocwen's business and/or our continuing relationship with Ocwen. For example,
Ocwen may be required to alter the way it conducts business, including the
parties it contracts with for services, it may be required to seek changes to
its existing pricing structure with us, it may lose its non-GSE servicing rights
or subservicing arrangements or may lose one or more of its state servicing or
origination licenses. Additional regulatory actions or adverse financial
developments may impose additional restrictions on or require changes in Ocwen's
business that could require it to sell assets or change its business operations.
Any or all of these effects and others could result in our eventual loss of
Ocwen as a customer or a reduction in the number and/or volume of services they
purchase from us or the loss of other customers.
During the second quarter of 2020, Ocwen informed us that an MSR investor
instructed Ocwen to use a field services provider other than Altisource on
properties associated with certain MSRs. Based upon the impacted portfolios to
date and the designated service provider, Altisource believes that Ocwen
received these directions from NRZ. We believe Ocwen commenced using another
field services provider for these properties in July 2020 and continued to
transition services during the third quarter of 2020. We believe that the
transition to the replacement field service provider was largely completed as of
September 30, 2020 . We estimate that $0.2 million and $29.3 million of service
revenue from Ocwen for the three months ended March 31, 2021 and 2020,
respectively, was derived from Field Services referrals from the NRZ portfolios.
Ocwen also communicated to Altisource in the fourth quarter of 2020 that the
same investor instructed Ocwen to use a provider for default valuations and
certain default title services other than Altisource on properties associated
with such certain MSRs and commenced moving these referrals to other service
providers in the fourth quarter of 2020. We anticipate that the transition of
such default valuations and title services will continue during the course of
2021. We estimate that $1.0 million and $8.0 million of service revenue from
Ocwen for the three months ended March 31, 2021 and 2020, respectively, was
derived from default valuations and title services referrals from the NRZ
portfolios.
To address the reduction in revenue, Altisource is undertaking several measures
to further reduce its cost structure and strengthen its operations.
In addition, we entered into an agreement with Ocwen on May 5, 2021 (the
"Agreement") pursuant to which the term of the services agreements between us
and Ocwen were extended from August 2025 through August 2030 and the scope of
solutions we provide to Ocwen were expanded to, among other things, include the
opportunity to provide field services, first and second chance foreclosure
auctions, and title services on Ocwen's Federal Housing Administration , Veterans
Affairs and United States Department of Agriculture loans, subject to a process
to confirm Altisource's ability to meet reasonable performance requirements. The
Agreement established a framework for us to expand the foreclosure trustee
solutions we provide to Ocwen in additional states, and, as mutually agreed upon
by the parties, to deliver reverse mortgage related solutions to Ocwen, subject
to negotiation of appropriate statements of work or other agreements, a process
to confirm Altisource's ability to meet reasonable performance requirements, and
technical integrations, as may be applicable. The Agreement further resolved the
contractual dispute between the parties related to Ocwen's transfer to NRZ the
rights to designate service providers other than Altisource , including mutual
releases with respect to such dispute. The Agreement also addressed Ocwen's
rights in the event of certain change of control or sale of a business
transactions by us on or after September 1, 2028 .
In addition to expected reductions in our revenue from the transition of
referrals for default related services previously identified, if any of the
following events occurred, Altisource's revenue could be further significantly
reduced and our results of operations could be materially adversely affected,
including from the possible impairment or write-off of goodwill, intangible
assets, property and equipment, other assets and accounts receivable:
•Altisource loses Ocwen as a customer or there is an additional significant
reduction in the volume of services they purchase from us
•Ocwen loses, sells or transfers a significant portion of its GSE servicing
rights or subservicing arrangements or remaining non-GSE servicing rights or
subservicing arrangements and Altisource fails to be retained as a service
provider
•The contractual relationship between Ocwen and NRZ changes significantly and
this change results in a change in our status as a provider of services related
to the Subject MSRs
•Ocwen loses state servicing licenses in states with a significant number of
loans in Ocwen's servicing portfolio
•The contractual relationship between Ocwen and Altisource changes significantly
or there are significant changes to our pricing to Ocwen for services from which
we generate material revenue
•Altisource otherwise fails to be retained as a service provider
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Management cannot predict whether any of these events will occur or the amount
of any impact they may have on Altisource . However, we are focused on
diversifying and growing our revenue and customer base and we have a sales and
marketing strategy to support these efforts. Moreover, in the event one or more
of these events materially negatively impact Altisource , we believe the variable
nature of our cost structure would allow us to realign our cost structure to
address some of the impact to revenue and that current liquidity would be
sufficient to meet our working capital, capital expenditures, debt service and
other cash needs. There can be no assurance that our plans will be successful or
our operations will be profitable.
Factors Affecting Comparability
The following items impact the comparability of our results:
•The Company's financial performance in its default related businesses was
negatively impacted by the COVID-19 pandemic for the three months ended
March 31, 2021 . Governmental, and in some instances, servicer measures to
provide support to borrowers, including foreclosure and eviction moratoriums and
forbearance programs, reduced referral volumes and inflows of REO. COVID-19
pandemic related governmental restrictions and changing vendor and consumer
behavior also impacted financial performance. These impacts were partially
offset by stronger performance from the Company's origination related businesses
that benefited from lower interest rates, customer wins and new offerings for
the three months ended March 31, 2021 compared to the three months ended
March 31, 2020 . Across the Company's three core businesses, service revenue from
customers other than Ocwen, NRZ and RESI for the three months ended March 31,
2021 grew by 12% compared to the three months ended March 31, 2020 . Compared to
the three months ended March 31, 2020 , the increase is primarily from 68% growth
in our origination businesses partially offset by a 70% decline in our default
business. Service revenue from our default and other business was $30.5 million
and $101.3 million for the three months ended March 31, 2021 and 2020,
respectively, and service revenue from our origination business was $16.8
million and $10.0 million for the three months ended March 31, 2021 and 2020,
respectively.
•During the second quarter of 2020, Ocwen informed us that an MSR investor
instructed Ocwen to use a field services provider other than Altisource on
properties associated with certain MSRs. Based upon the impacted portfolios to
date and the designated service provider, Altisource believes that Ocwen
received these directions from NRZ. We believe Ocwen commenced using another
field services provider for these properties in July 2020 and continued to
transition services during the third quarter of 2020. We believe that the
transition to the replacement field service provider was largely completed as of
September 30, 2020 . We estimate that $0.2 million and $29.3 million of service
revenue from Ocwen for the three months ended March 31, 2021 and 2020,
respectively, was derived from Field Services referrals from the NRZ portfolios.
Ocwen also communicated to Altisource in the fourth quarter of 2020 that the
same investor instructed Ocwen to use a provider for default valuations and
certain default title services other than Altisource on properties associated
with such certain MSRs and commenced moving these referrals to other service
providers in the fourth quarter of 2020. We anticipate that the transition of
such default valuations and title services will continue during the course of
2021. We estimate that $1.0 million and $8.0 million of service revenue from
Ocwen for the three months ended March 31, 2021 and 2020, respectively, was
derived from default valuations and title services referrals from the NRZ
portfolios. To address the reduction in revenue, Altisource is undertaking
several measures to further reduce its cost structure and strengthen its
operations.
•During the three months ended March 31, 2020 , we recognized an unrealized loss
of $(1.3) million from the change in fair value on our investment in RESI in
other income (expense), net in the condensed consolidated statements of
operations and comprehensive loss from a change in the market value of RESI
common shares (no comparative amount for the three months ended March 31, 2021 ).
•In August 2018 , Altisource initiated Project Catalyst, a project intended to
optimize its operations and reduce costs to better align its cost structure with
its anticipated revenues and improve its operating margins (finalized in 2020).
During the three months ended March 31, 2020 , Altisource incurred $2.9 million
of severance costs, professional services fees, facility consolidation costs,
technology costs and business wind down costs related to the reorganization plan
(no comparative amount for the three months ended March 31, 2021 ).
•The Company recognized an income tax provision of $0.8 million and $2.4 million
for the three months ended March 31, 2021 and 2020, respectively. The income tax
provision for the three months ended March 31, 2021 was driven by income tax on
transfer pricing income from India , minimum tax in Luxembourg, no tax benefit on
the pretax loss from our Luxembourg operating company and tax on unrepatriated
earnings in India .
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RESULTS OF OPERATIONS
Summary Results
The following is a discussion of our results of operations for the periods
indicated.
The following table sets forth information on our consolidated results of
operations for the three months ended March 31 :
(in thousands, except per share data) 2021 2020 % Increase (decrease)
Service revenue $ 48,080 $ 113,176 (58)
Reimbursable expenses 2,013 7,845 (74)
Non-controlling interests 372 423 (12)
Total revenue 50,465 121,444 (58)
Cost of revenue 50,158 94,581 (47)
Gross profit 307 26,863 (99)
Operating expenses:
Selling, general and administrative expenses 18,886 28,093 (33)
Restructuring charges - 2,925 (100)
Loss from operations (18,579) (4,155) 347
Other income (expense), net
Interest expense (3,442) (4,716) (27)
Unrealized loss on investment in equity securities - (1,347) (100)
Other income (expense), net 949 1,094 (13)
Total other income (expense), net (2,493) (4,969) (50)
Loss before income taxes and non-controlling interests (21,072) (9,124) 131 Income tax provision (843) (2,421) (65) Net loss (21,915) (11,545) 90 Net income attributable to non-controlling interests (87) (105)
(17)
Net loss attributable to Altisource$ (22,002) $ (11,650)
89
Margins:
Gross profit/service revenue 1 % 24 % Loss from operations/service revenue (39) % (4) % Loss per share: Basic$ (1.40) $ (0.75) 86 Diluted$ (1.40) $ (0.75) 86 Weighted average shares outstanding: Basic 15,717 15,497 1 Diluted 15,717 15,497 1 30
-------------------------------------------------------------------------------- Table of Contents Revenue Revenue by line of business consists of the following for the three months endedMarch 31 : (in thousands) 2021
2020 % Increase (decrease)
Service revenue: Field Services$ 13,322 $ 54,913 (76) Marketplace 9,772 26,167 (63) Mortgage and Real Estate Solutions 24,259 30,276 (20) Earlier Stage Business 557 561 (1) Other 170 1,259 (86) Total service revenue 48,080 113,176 (58)
Reimbursable expenses:
Field Services 335 2,320 (86) Marketplace 991 4,230 (77) Mortgage and Real Estate Solutions 687 1,295 (47) Total reimbursable expenses 2,013 7,845 (74)
Non-controlling interests:
Mortgage and Real Estate Solutions 372 423 (12) Total revenue$ 50,465 $ 121,444 (58) We recognized service revenue of$48.1 million for the three months endedMarch 31, 2021 , a 58% decrease compared to the three months endedMarch 31, 2020 , primarily from COVID-19 pandemic related foreclosure and eviction moratoriums and borrower forbearance plans, an MSR investor's 2020 instructions to Ocwen to transition field services, title and valuation referrals historically provided toAltisource to the MSR investor's captive vendors. The decrease for the three months endedMarch 31, 2021 was partially offset by a 70% increase in revenue from customers other than Ocwen, NRZ andRESI in our Mortgage andReal Estate Solutions businesses from higher origination related volumes driven by a lower interest rate environment, customer wins and new offerings. We recognized reimbursable expense revenue of$2.0 million for the three months endedMarch 31, 2021 , a 74% decrease compared to the three months endedMarch 31, 2020 . The decrease in reimbursable expenses for the three months endedMarch 31, 2021 was consistent with the decline in service revenue discussed above. Certain of our revenues can be impacted by seasonality. More specifically, revenues from property sales, loan originations and certain property preservation services in Field Services typically tend to be at their lowest level during the fall and winter months and at their highest level during the spring and summer months. Cost of Revenue and Gross Profit 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, cost of real estate sold, reimbursable expenses, technology and telecommunications costs and depreciation and amortization of operating assets. Cost of revenue consists of the following for the three months endedMarch 31 : (in thousands) 2021
2020 % Increase (decrease)
Compensation and benefits $ 22,035 $ 25,916 (15)
Outside fees and services 18,723 48,140 (61)
Technology and telecommunications 6,587 9,232 (29)
Reimbursable expenses 2,013 7,845 (74)
Depreciation and amortization 800
3,448 (77)
Cost of revenue $ 50,158 $ 94,581 (47)
31-------------------------------------------------------------------------------- Table of Contents We recognized cost of revenue of$50.2 million for the three months endedMarch 31, 2021 , a 47% decrease compared to the three months endedMarch 31, 2020 . The decrease in outside fees and services were primarily driven by lower service revenue in Field Services and Marketplace businesses, discussed in the revenue section above. Compensation and benefits decreased primarily due to lower headcount in connection with cash cost savings measures taken in 2020 in response to the COVID-19 related decreases in service revenue and reduction in revenue from Ocwen discussed in the revenue section above. The Company also continued to reduce employee costs in the three months endedMarch 31, 2021 as a result of the extension of the expiration of foreclosure moratoriums and forbearance plans. The decreases in reimbursable expenses were consistent with the changes in reimbursable expense revenue discussed in the revenue section above. Gross profit decreased to$0.3 million , representing 1% of service revenue, for the three months endedMarch 31, 2021 compared to$26.9 million , representing 24% of service revenue, for the three months endedMarch 31, 2020 . Gross profit as a percentage of service revenue for the three months endedMarch 31, 2021 decreased compared to the three months endedMarch 31, 2020 primarily due to revenue mix with lower revenue from the higher margin Marketplace businesses and lower gross profit margin in the Field Services business. These decreases were partially offset by our COVID-19 cash cost savings measures. Selling, General and Administrative Expenses Selling, general and administrative ("SG&A") expenses include payroll for personnel employed in executive, sales and marketing, finance, law, compliance, human resources, vendor management, facilities and risk management roles. This category also includes professional services fees, occupancy costs, marketing costs, depreciation and amortization of non-operating assets and other expenses. SG&A expenses consist of the following for the three months endedMarch 31 : (in thousands) 2021 2020 % Increase (decrease) Compensation and benefits$ 7,852 $ 12,012 (35) Occupancy related costs 3,180 5,421 (41) Amortization of intangible assets 2,599 4,209 (38) Professional services 3,218 2,635 22 Marketing costs 474 1,437 (67) Depreciation and amortization 384 669 (43) Other 1,179 1,710 (31) Selling, general and administrative expenses$ 18,886 $ 28,093 (33) SG&A expenses for the three months endedMarch 31, 2021 of$18.9 million decreased by 33% compared to the three months endedMarch 31, 2020 . The decreases were primarily driven by lower compensation and benefits, occupancy related costs, amortization of intangible assets and marketing costs. Compensation and benefits decreased primarily due to lower headcount in connection with cash cost savings measures taken in 2020 in response to the COVID-19 related decreases in service revenue and reduction in revenue from Ocwen discussed in the revenue section above. The Company also continued to reduce compensation and benefits costs in the three months endedMarch 31, 2021 as a result of the extension of the expiration of foreclosure moratoriums and forbearance plans. The decreases in occupancy related costs primarily resulted from facility consolidation initiatives. The decrease in amortization of intangible assets was driven by the completion of the amortization period of certain intangible assets during 2020 and lower revenue generated from theHomeward Residential, Inc. andResidential Capital, LLC portfolios (revenue-based amortization) consistent with the reduction in the size of Ocwen's portfolio, discussed in the revenue section above. The decreases in marketing costs were primarily driven by COVID-19 cost savings measures and the decline in revenue. For the three months endedMarch 31, 2021 , Other expenses decreased primarily due to lower travel and entertainment costs driven by COVID-19 travel restrictions, lower billings toTransworld Systems Inc. for transition services in connection with theJuly 1, 2019 sale of the Financial Services Business and lower bad debt expense. Other Operating Expenses InAugust 2018 ,Altisource initiated Project Catalyst, a project intended to optimize its operations and reduce costs to better align its cost structure with its anticipated revenues and improve its operating margins (finalized in 2020). During the three months endedMarch 31, 2020 ,Altisource incurred$2.9 million of severance costs, professional services fees, facility consolidation costs, technology costs and business wind down costs related to the reorganization plan (no comparative amount for the three months endedMarch 31, 2021 ). 32 -------------------------------------------------------------------------------- Table of Contents Loss from Operations Loss from operations for the three months endedMarch 31, 2021 was$(18.6) million , representing (39)% of service revenue, compared to$(4.2) million , representing (4)% of service revenue, for the three months endedMarch 31, 2020 . Loss from operations as a percentage of service revenue increased for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 , primarily as a result of lower gross profit margins during the three months endedMarch 31, 2020 , partially offset by lower SG&A expenses and restructuring charges, as discussed above. Because Ocwen is our largest customer, 2021 declines in service revenue from Ocwen and the changes in mix of revenue from Ocwen have had a negative impact on our loss from operations. Other Income (Expense), net Other income (expense), net principally includes interest expense, unrealized loss on our investment inRESI common shares and other non-operating gains and losses. Other income (expense), net was$(2.5) million for the three months endedMarch 31, 2021 compared to$(5.0) million for the three months endedMarch 31, 2020 . The decrease in other expense for the three months endedMarch 31, 2021 was primarily driven by a$(1.3) million unrealized loss on our investment inRESI common shares for the three months endedMarch 31, 2020 (no comparative amount for the three months endedMarch 31, 2021 ). The decrease in other expense was partially offset by lower interest expense during the three months endedMarch 31, 2021 . Interest expense decreased primarily due to lower average outstanding balances of the senior secured term loan as a result of repayments during 2020 and lower interest rates. For the three months endedMarch 31, 2021 , the interest rate of the senior secured term loan was 5.00% compared to 5.94% for the three months endedMarch 31, 2020 . Income Tax Provision We recognized an income tax provision of$0.8 million and$2.4 million for the three months endedMarch 31, 2021 and 2020, respectively. The income tax provision for the three months endedMarch 31, 2021 was driven by income tax on transfer pricing income fromIndia , minimum tax in Luxembourg, no tax benefit on the pretax loss from our Luxembourg operating company and tax on unrepatriated earnings inIndia . LIQUIDITY AND CAPITAL RESOURCES Liquidity Our primary source of liquidity has historically been cash flow from operations, cash proceeds from sales of businesses and cash on hand. However, due to the COVID-19 pandemic and an MSR investor's instructions to Ocwen to transition field services, valuation and title services to the investor's captive service providers, revenue has declined significantly. The lower revenue, partially offset by cost savings initiatives, resulted in a negative operating cash flow from operations for three months endedMarch 31, 2021 . To address our current operating environment, we plan to continue our cost reduction initiatives to reduce cash burn. We are also evaluating options to increase our liquidity to provide a greater cushion. While we are in active discussions, there is no guaranty that we will be successful. We also anticipate that we will continue to grow our origination businesses and that referral volumes from delinquent mortgages will increase following the expiration of the pandemic related foreclosure moratoriums and other pandemic related borrower relief measures. We seek to deploy cash generated in a disciplined manner. Principally, we intend to use cash to develop and grow complementary services and businesses that we believe will generate attractive margins in line with our core capabilities and strategy. We use cash for repayments of our long-term debt and capital investments. In addition, from time to time, we consider and evaluate business acquisitions, dispositions, closures or other similar actions that are aligned with our strategy. Credit Agreement InApril 3, 2018 ,Altisource entered into the Credit Agreement pursuant to whichAltisource borrowed$412.0 million in the form of Term B Loans and obtained a$15.0 million revolving credit facility. The Term B Loans mature inApril 2024 and the revolving credit facility matures inApril 2023 . As ofMarch 31, 2021 ,$247.2 million of the Term B Loans were outstanding. Borrowings under the revolving credit facility are not permitted if our leverage ratio exceeds to 3.50 to 1.00. Our leverage ratio exceeded 3.50 to 1.00 for the twelve months endedMarch 31, 2021 . There were no borrowings outstanding under the revolving credit facility as ofMarch 31, 2021 . There are no mandatory repayments of the Term B Loans due until maturity inApril 2024 , except as otherwise described herein. All amounts outstanding under the Term B Loans will become due on the earlier of (i)April 3, 2024 , and (ii) the date 33 -------------------------------------------------------------------------------- Table of Contents 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 Credit Agreement; other capitalized terms, unless defined herein, are defined in the Credit Agreement) or as otherwise provided in the Credit Agreement upon the occurrence of any event of default. In addition to the scheduled principal payments, subject to certain exceptions, the Term B Loans are subject to mandatory prepayment upon issuances of debt, certain casualty and condemnation events and sales of assets, as well as from a percentage of Consolidated Excess Cash Flow if our leverage ratio as of each year-end computation date is greater than 3.00 to 1.00, as calculated in accordance with the provisions of the Credit Agreement (the percentage increases if our leverage ratio exceeds 3.50 to 1.00). Our leverage ratio exceeded 3.50 to 1.00 for the twelve months endedMarch 31, 2021 . The Company did not generate any Consolidated Excess Cash Flow during the three months endedMarch 31, 2021 . The interest rate on the Term B Loans as ofMarch 31, 2021 was 5.00%.Altisource may incur incremental indebtedness under the Credit Agreement from one or more incremental lenders, which may include existing lenders, in an aggregate incremental principal amount not to exceed$125.0 million , subject to certain conditions set forth in the Credit Agreement, including a sublimit of$80.0 million with respect to incremental revolving credit commitments and, after giving effect to the incremental borrowing, the Company's leverage ratio does not exceed 3.00 to 1.00. Our leverage ratio exceeded 3.00 to 1.00 for the twelve months endedMarch 31, 2021 . The lenders have no obligation to provide any incremental indebtedness. The Credit Agreement includes covenants that restrict or limit, among other things, our ability, subject to certain exceptions and baskets, to incur additional debt, pay dividends and repurchase shares of our common stock. In the event we require additional liquidity, our ability to obtain it may be limited by the Credit Agreement. Cash Flows The following table presents our cash flows for the three months endedMarch 31 : (in thousands) 2021 2020 % Increase (decrease) Net (loss) income adjusted for non-cash items$ (13,598) $ 4,586 (397) Changes in operating assets and liabilities (3,212) (6,234) (48) Net cash used in operating activities (16,810) (1,648) N/M Net cash provided by (used in) investing activities 2,533 (511) N/M Net cash used in financing activities (2,225) (1,516) 47
Net decrease in cash, cash equivalents and restricted cash
(16,502) (3,675) 349
Cash, cash equivalents and restricted cash at the
beginning of the period 62,096 86,583 (28)
Cash, cash equivalents and restricted cash at the end
of the period $ 45,594 $ 82,908 (45)
N/M - not meaningful.
Cash Flows from Operating Activities
Cash flows from operating activities generally consist of the cash effects of
transactions and events that enter into the determination of net loss. For the
three months ended March 31, 2021 , cash flows used in operating activities were
$(16.8) million , or approximately $(0.35) for every dollar of service revenue,
compared to cash flows used in operating activities of $(1.6) million , or
approximately $(0.01) for every dollar of service revenue for the three months
ended March 31, 2020 . During the three months ended March 31, 2021 , the increase
in cash used in operating activities was driven by an $18.2 million increase in
net loss, adjusted for non-cash items, partially offset by lower cash used for
changes in operating assets and liabilities of $3.0 million . The increase in net
loss, adjusted for non-cash items, was primarily due to lower gross profit
during the three months ended March 31, 2021 from lower service revenue driven
by the COVID-19 pandemic and the loss of certain services relating to one of
Ocwen's subservicing customers, partially offset by decreases in expenses as a
result of COVID-19 cash cost savings measures, the Project Catalyst cost
reduction initiatives and lower SG&A expenses. The decrease in cash used for
changes in operating assets and liabilities was primarily driven by a decrease
in accounts receivable of $2.2 million for the three months ended March 31, 2021
compared to an increase in accounts receivable of $0.3 million during the three
months ended March 31, 2020 , largely driven by the timing of collections.
Operating cash flows can be negatively impacted because of the nature of some of
our services and the mix of services provided. Certain services are performed
immediately following or shortly after the referral, but the collection of the
receivable does not occur until a specific event occurs (e.g., the foreclosure
is
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complete, the REO asset is sold, etc.). Furthermore, lower margin services
generate lower income and cash flows from operations. Consequently, our cash
flows from operations may be negatively impacted when comparing one period to
another.
Cash Flows from Investing Activities
Cash flows from investing activities for the three months ended March 31, 2021
and 2020 consisted of additions to premises and equipment and proceeds from the
sale of a business. Cash flows provided by (used in) investing activities were
$2.5 million and $(0.5) million for the three months ended March 31, 2021 and
2020, respectively. The change in cash provided by investing activities was
primarily driven by $3.0 million in proceeds received in connection with the
second installment from the August 2018 sale of the rental property management
business to RESI . In addition, we used $(0.5) million for the three months ended
March 31, 2021 and 2020, for additions to premises and equipment primarily
related to investments in the development of certain software applications and
facility improvements.
Cash Flows from Financing Activities
Cash flows from financing activities for the three months ended March 31, 2021
and 2020 primarily included payments of tax withholdings on issuance of
restricted share units and restricted shares and distributions to
non-controlling interests. Cash flows used in financing activities were $(2.2)
million and $(1.5) million for the three months ended March 31, 2021 and 2020,
respectively. During the three months ended March 31, 2021 and 2020, we made
payments of $(0.8) million and $(1.2) million , respectively, to satisfy employee
tax withholding obligations on the issuance of restricted share units and
restricted shares. These payments were made to tax authorities, at the
employees' direction, to satisfy the employees' tax obligations rather than
issuing a portion of vested restricted share units and restricted shares to
employees. In addition, during the three months ended March 31, 2021 and 2020,
we distributed $(1.4) million and $(0.3) million , respectively, to
non-controlling interests.
Liquidity Requirements after March 31, 2021
Our significant future liquidity obligations primarily pertain to long-term debt
repayments and interest expense under the Credit Agreement (see Liquidity
section above), lease payments and distributions to Lenders One members. During
the next 12 months, we expect to pay $12.4 million of interest expense (assuming
no further principal repayments and the March 31, 2021 interest rate) under the
Credit Agreement and make lease payments of $7.7 million .
We believe that our existing cash and cash equivalents balances, net of our
anticipated cash flows used in operations, will be sufficient to meet our
liquidity needs, including to fund operating expenses, required interest and
lease payments, for the next 12 months.
Contractual Obligations, Commitments and Contingencies
For the three months ended March 31, 2021 , there were no significant changes to
our contractual obligations from those identified in our Form 10-K for the
fiscal year ended December 31, 2020 and this Form 10-Q, other than those that
occur in the normal course of business. See Note 23 to the condensed
consolidated financial statements.
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND RECENT ACCOUNTING PRONOUNCEMENTS
We prepare our interim condensed consolidated financial statements in accordance
with accounting principles generally accepted in the United States of America .
In applying many of these accounting principles, we need to make assumptions,
estimates and judgments that affect the reported amounts of assets, liabilities,
revenue and expenses in our condensed consolidated financial statements. We base
our estimates and judgments on historical experience and other assumptions that
we believe are reasonable under the circumstances. These assumptions, estimates
and judgments, however, are often subjective. Actual results may be negatively
affected based on changing circumstances. If actual amounts are ultimately
different from our estimates, the revisions are included in our results of
operations for the period in which the actual amounts become known.
Our critical accounting policies are described in the MD&A section of our Form
10-K for the year ended December 31, 2020 filed with the SEC on March 11, 2021 .
There have been no material changes to our critical accounting policies during
the three months ended March 31, 2021 .
Recently Adopted and Future Adoption of New Accounting Pronouncements
See Note 1 to the condensed consolidated financial statements for a discussion
of recently issued accounting pronouncements, including pronouncements that were
adopted in the current period.
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