10-Q
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016

OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-34354
 
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
(Exact name of Registrant as specified in its Charter)
 
Luxembourg
98-0554932
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
40, avenue Monterey
L-2163 Luxembourg
Grand Duchy of Luxembourg
(Address of principal executive offices) (Zip Code)
 
(352) 24 69 79 00
(Registrant’s telephone number)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ  No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act):
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No þ

As of April 22, 2016, there were 18,479,374 outstanding shares of the registrant’s shares of beneficial interest (excluding 6,933,374 shares held as treasury stock).
 


Table of Contents

Table of Contents

ALTISOURCE PORTFOLIO SOLUTIONS S.A.

FORM 10-Q
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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Table of Contents

PART I.  FINANCIAL INFORMATION

Item 1.  Interim Condensed Consolidated Financial Statements (Unaudited)

ALTISOURCE PORTFOLIO SOLUTIONS S.A.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
 
March 31,
2016
 
December 31,
2015
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
159,705

 
$
179,327

Available for sale securities
30,417

 

Accounts receivable, net
97,645

 
105,023

Prepaid expenses and other current assets
26,721

 
21,751

Total current assets
314,488

 
306,101

 
 
 
 
Premises and equipment, net
116,937

 
119,121

Goodwill
82,801

 
82,801

Intangible assets, net
184,792

 
197,003

Deferred tax assets, net
3,330

 
3,619

Other assets
13,246

 
13,153

 
 
 
 
Total assets
$
715,594

 
$
721,798

 
 
 
 
LIABILITIES AND EQUITY
Current liabilities:
 
 
 
Accounts payable and accrued expenses
$
80,768

 
$
91,871

Current portion of long-term debt
5,945

 
5,945

Deferred revenue
12,634

 
15,060

Other current liabilities
18,276

 
16,266

Total current liabilities
117,623

 
129,142

 
 
 
 
Long-term debt, less current portion
521,185

 
522,233

Other non-current liabilities
14,821

 
18,153

 
 
 
 
Commitments, contingencies and regulatory matters (Note 22)


 


 
 
 
 
Equity:
 
 
 
Common stock ($1.00 par value; 25,413 shares authorized and issued and 18,603 outstanding as of March 31, 2016; 25,413 shares authorized and issued and 19,021 outstanding as of December 31, 2015)
25,413

 
25,413

Additional paid-in capital
98,198

 
96,321

Retained earnings
385,452

 
369,270

Accumulated other comprehensive income
699

 

Treasury stock, at cost (6,810 shares as of March 31, 2016 and 6,392 shares as of December 31, 2015)
(449,039
)
 
(440,026
)
Altisource equity
60,723

 
50,978

 
 
 
 
Non-controlling interests
1,242

 
1,292

Total equity
61,965

 
52,270

 
 
 
 
Total liabilities and equity
$
715,594

 
$
721,798


See accompanying notes to condensed consolidated financial statements.

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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except per share data)
 
 
Three months ended 
 March 31,
 
 
2016
 
2015
 
 
 
 
 
Revenue
 
$
250,132

 
$
240,482

Cost of revenue
 
168,863

 
172,826

 
 
 
 
 
Gross profit
 
81,269

 
67,656

Selling, general and administrative expenses
 
53,616

 
52,406

 
 
 
 
 
Income from operations
 
27,653

 
15,250

Other income (expense), net:
 
 
 
 
Interest expense
 
(6,541
)
 
(7,160
)
Other than temporary impairment loss on securities
 

 
(3,285
)
Other income (expense), net
 
(27
)
 
3

Total other income (expense), net
 
(6,568
)
 
(10,442
)
 
 
 
 
 
Income before income taxes and non-controlling interests
 
21,085

 
4,808

Income tax provision
 
(2,193
)
 
(400
)
 
 
 
 
 
Net income
 
18,892

 
4,408

Net income attributable to non-controlling interests
 
(398
)
 
(710
)
 
 
 
 
 
Net income attributable to Altisource
 
$
18,494

 
$
3,698

 
 
 
 
 
Earnings per share:
 
 
 
 
Basic
 
$
0.98

 
$
0.18

Diluted
 
$
0.92

 
$
0.18

 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
Basic
 
18,855

 
20,172

Diluted
 
20,040

 
20,995

 
 
 
 
 
Comprehensive income:
 
 
 
 
Net income
 
$
18,892

 
$
4,408

Other comprehensive income, net of tax:
 
 
 
 
Unrealized gain on securities, net of income tax expense of $289 and $0
 
699

 

 
 
 
 
 
Comprehensive income, net of tax
 
19,591

 
4,408

Comprehensive income attributable to non-controlling interests
 
(398
)
 
(710
)
 
 
 
 
 
Comprehensive income attributable to Altisource
 
$
19,193

 
$
3,698

 
See accompanying notes to condensed consolidated financial statements.

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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(in thousands)
 
Altisource Equity
Non-controlling
interests
 
 
 
Common stock
 
Additional
paid-in 
capital
 
Retained
earnings
 
Accumulated
other
comprehensive
income
 
Treasury 
stock,
at cost
 
 
Total
 
Shares
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2014
25,413

 
$
25,413

 
$
91,509

 
$
367,967

 
$

 
$
(444,495
)
 
$
1,049

 
$
41,443

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 
3,698

 

 

 
710

 
4,408

Other comprehensive income, net of tax

 

 

 

 

 

 

 

Distributions to non-controlling interest holders

 

 

 

 

 

 
(657
)
 
(657
)
Share-based compensation expense

 

 
443

 

 

 

 

 
443

Exercise of stock options

 

 

 
(1,701
)
 

 
1,904

 

 
203

Repurchase of shares

 

 

 

 

 
(3,959
)
 

 
(3,959
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, March 31, 2015
25,413

 
$
25,413

 
$
91,952

 
$
369,964

 
$

 
$
(446,550
)
 
$
1,102

 
$
41,881

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2015
25,413

 
$
25,413

 
$
96,321

 
$
369,270

 
$

 
$
(440,026
)
 
$
1,292

 
$
52,270

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 
18,494

 

 

 
398

 
18,892

Other comprehensive income, net of tax

 

 

 

 
699

 

 

 
699

Distributions to non-controlling interest holders

 

 

 

 

 

 
(448
)
 
(448
)
Share-based compensation expense

 

 
1,877

 

 

 

 

 
1,877

Exercise of stock options

 

 

 
(2,312
)
 

 
2,678

 

 
366

Repurchase of shares

 

 

 

 

 
(11,691
)
 

 
(11,691
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, March 31, 2016
25,413

 
$
25,413

 
$
98,198

 
$
385,452

 
$
699

 
$
(449,039
)
 
$
1,242

 
$
61,965

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to condensed consolidated financial statements.

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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Three months ended 
 March 31,
 
2016
 
2015
 
 
 
 
Cash flows from operating activities:
 

 
 

Net income
$
18,892

 
$
4,408

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 

 
 

Depreciation and amortization
9,208

 
8,826

Amortization of intangible assets
12,211

 
8,891

Other than temporary impairment loss on HLSS securities

 
3,285

Change in the fair value of acquisition related contingent consideration
96

 
148

Share-based compensation expense
1,877

 
443

Bad debt expense
876

 
607

Amortization of debt discount
116

 
127

Amortization of debt issuance costs
322

 
351

Deferred income taxes

 
(24
)
Gain on disposal of fixed assets
(10
)
 
(19
)
Changes in operating assets and liabilities:
 

 
 

Accounts receivable
6,502

 
(15,140
)
Prepaid expenses and other current assets
(4,970
)
 
2,413

Other assets
(109
)
 
127

Accounts payable and accrued expenses
(12,133
)
 
(27,559
)
Other current and non-current liabilities
(3,844
)
 
(2,822
)
Net cash provided by (used in) operating activities
29,034

 
(15,938
)
 
 
 
 
Cash flows from investing activities:
 

 
 

Additions to premises and equipment
(5,984
)
 
(3,931
)
Purchase of available for sale securities
(29,429
)
 
(29,966
)
Other investing activities
16

 
(4
)
Net cash used in investing activities
(35,397
)
 
(33,901
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Repayment of long-term debt
(1,486
)
 
(1,486
)
Proceeds from stock option exercises
366

 
203

Purchase of treasury stock
(11,691
)
 
(3,959
)
Distributions to non-controlling interests
(448
)
 
(657
)
Net cash used in financing activities
(13,259
)
 
(5,899
)
 
 
 
 
Net decrease in cash and cash equivalents
(19,622
)
 
(55,738
)
Cash and cash equivalents at the beginning of the period
179,327

 
161,361

 
 
 
 
Cash and cash equivalents at the end of the period
$
159,705

 
$
105,623

 
 
 
 
Supplemental cash flow information:
 

 
 

Interest paid
$
6,104

 
$
6,655

Income taxes paid, net
3,830

 
1,520

 
 
 
 
Non-cash investing and financing activities:
 

 
 

Increase (decrease) in payables for purchases of premises and equipment
$
1,030

 
$
(3,638
)

See accompanying notes to condensed consolidated financial statements.

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

NOTE 1 — ORGANIZATION AND BASIS OF PRESENTATION
Description of Business
Altisource Portfolio Solutions S.A., together with its subsidiaries (which may be referred to as “Altisource,” the “Company,” “we,” “us” or “our”), is a premier marketplace and transaction solutions provider for the real estate, mortgage and consumer debt industries. Altisource’s proprietary business processes, vendor and electronic payment management software and behavioral science-based analytics improve outcomes for marketplace participants.
We are incorporated under the laws of Luxembourg and are publicly traded on the NASDAQ Global Select Market under the symbol “ASPS.” 
We conduct our operations through three reportable segments: Mortgage Services, Financial Services and Technology Services.  In addition, we report our corporate related expenditures and eliminations separately (see Note 23 for a description of our business segments).
Basis of Accounting and Presentation 
The unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Securities and Exchange Commission (“SEC”) Regulation S-X. Accordingly, these financial statements do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, the interim data includes all normal recurring adjustments considered necessary to fairly state the results for the interim periods presented. The preparation of interim condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of our interim condensed consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Intercompany transactions and accounts have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to current year presentation.
Altisource consolidates three cooperative entities which are managed by the Mortgage Partnership of America, L.L.C. (“MPA”), a wholly-owned subsidiary of Altisource, Best Partners Mortgage Cooperative, Inc., doing business as the Lenders One® mortgage cooperative (“Lenders One”), Best Partners Mortgage Brokers Cooperative, Inc., doing business as the Wholesale One® mortgage cooperative (“Wholesale One”) and Best Partners Residential Investor Cooperative, Inc., doing business as the Residential Investor One™ cooperative (“Residential Investor One”). MPA provides services to Lenders One under a management agreement that ends on December 31, 2025 and to Wholesale One and Residential Investor One under management agreements that end on July 8, 2039 (with automatic renewals for three successive five-year periods) and March 12, 2040 (with automatic renewals for three successive five-year periods), respectively.
The management agreements between MPA and Lenders One, Wholesale One and Residential Investor One, pursuant to which MPA is the management company, represent variable interests in variable interest entities. MPA is the primary beneficiary of Lenders One, Wholesale One and Residential Investor One as it has the power to direct the activities that most significantly impact each of these cooperatives’ economic performance and the right to receive benefits from each of these cooperatives. As a result, Lenders One, Wholesale One and Residential Investor One are presented in the accompanying condensed consolidated financial statements on a consolidated basis with the interests of the members reflected as non-controlling interests. As of March 31, 2016, Lenders One had total assets of $2.1 million and total liabilities of $1.0 million.  As of December 31, 2015, Lenders One had total assets of $4.9 million and total liabilities of $3.7 million. As of March 31, 2016 and December 31, 2015, Wholesale One and Residential Investor One each had less than $0.1 million in total assets and less than $0.1 million in total liabilities.
These interim condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the SEC on March 15, 2016.



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



Fair Value Measurements
Fair value is defined as an exit price, representing the amount that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The three-tier hierarchy for inputs used in measuring fair value, which prioritizes the inputs used in the methodologies of measuring fair value for assets and liabilities, is as follows:
Level 1Quoted prices in active markets for identical assets and liabilities
Level 2 Observable inputs other than quoted prices included in Level 1
Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of assets or liabilities.
Financial assets and financial liabilities are classified based on the lowest level of input that is significant to the fair value measurements. Our assessment of the significance of a particular input to the fair value measurements requires judgment and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy.
Recently Adopted Accounting Pronouncements
On January 1, 2016, Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, became effective. As a result of this accounting change, the Company now presents debt issuance costs, net as a direct deduction from the related debt (see Note 12). Prior to January 1, 2016, debt issuance costs, net were included in other assets. We adopted the standard retrospectively; accordingly, prior period amounts were reclassified to conform to the current presentation.
Future Adoption of New Accounting Pronouncements
In May 2014, FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). This standard establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The core principle of the new standard is an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, in response to stakeholders’ requests to defer the effective date of ASU 2014-09 and in consideration of feedback received through extensive outreach with preparers, practitioners and users of financial statements, the FASB deferred the effective date for all entities by one year. This new standard will be effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted, although not prior to annual reporting periods beginning after December 15, 2016. The Company is currently evaluating the impact this new guidance may have on its results of operations and financial position.
In January 2016, FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This standard will require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. The standard also simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value. It also amends certain financial statement presentation and disclosure requirements associated with the fair value of financial instruments.  This standard will be effective for annual periods beginning after December 31, 2017, including interim periods within that reporting period.  Early adoption is not permitted.  The Company is currently evaluating the impact this new guidance may have on its results of operations and financial position.
In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842). This new standard introduces a new lessee model that brings substantially all leases on the balance sheet. The standard will require companies to recognize lease assets and lease liabilities on their balance sheets and disclose key information about leasing arrangements in their financial statements. This standard will be effective for annual periods beginning after December 15, 2018, including interim periods within that reporting period. Early application of this standard is permitted. The Company is currently evaluating the impact this new guidance may have on its results of operations and financial position.
In March 2016, FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). This new standard clarifies guidance on principal versus agent considerations in connection with revenue recognition. When another party is involved in providing goods or services to a customer, an entity is required to determine whether the nature of its promise is to provide the specified good or service itself (that is, the

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



entity is a principal) or to arrange for that good or service to be provided by the other party (that is, the entity is an agent). An entity is a principal if it controls the specified good or service before that good or service is transferred to a customer. The guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customer. This new standard will be effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted, although not prior to annual reporting periods beginning after December 15, 2016. The Company is currently evaluating the impact this new guidance may have on its results of operations and financial position.
In March 2016, FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This new standard simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows.  The standard will require companies to recognize all award-related excess tax benefits and tax deficiencies in their income statements, classify any excess tax benefits as an operating activity in their statements of cash flows, provide companies with the option of estimating forfeitures or recognizing forfeitures as they occur, modify the statutory tax withholding requirements and classify cash paid by employers when directly withholding shares for tax withholding purposes as an investing activity in their statements of cash flows.  This standard will be effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period. Early application of this standard is permitted. The Company is currently evaluating the impact this new guidance may have on its results of operations and financial position.
In April 2016, FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. This new standard provides guidance on identifying performance obligations in a contract with a customer and clarifying several licensing considerations, including whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time) and guidance on sales-based and usage-based royalties. This new standard will be effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted, although not prior to annual reporting periods beginning after December 15, 2016. The Company is currently evaluating the impact this new guidance may have on its results of operations and financial position.

NOTE 2 — CUSTOMER CONCENTRATION
Ocwen Financial Corporation together with its subsidiaries (“Ocwen”) is our largest customer. Ocwen purchases certain mortgage services and technology services from us under the terms of master services agreements and amendments to master services agreements (collectively, the “Service Agreements”) with terms extending through August 2025. Certain of the Service Agreements, among other things, contain a “most favored nation” provision and the parties to the Service Agreements have the right to renegotiate pricing. Certain agreements also prohibit Ocwen from establishing fee-based businesses that would directly or indirectly compete with Altisource’s services with respect to the Homeward Residential, Inc. and Residential Capital, LLC portfolios. In addition, Ocwen purchases certain origination services from Altisource under an agreement that extends through January 2017.
Revenue from Ocwen primarily consists of revenue earned directly from Ocwen and revenue earned from the loans serviced by Ocwen when Ocwen designates us as the service provider. Revenue from Ocwen as a percentage of segment and consolidated revenue was as follows for the three months ended March 31:
 
 
2016
 
2015
 
 
 
 
 
Mortgage Services
 
60
%
 
63
%
Financial Services
 
14
%
 
25
%
Technology Services
 
45
%
 
47
%
Consolidated revenue
 
56
%
 
59
%

For the three months ended March 31, 2016 and 2015, we generated revenue from Ocwen of $140.1 million and $141.4 million, respectively. Services provided to Ocwen during such periods and reported in the Mortgage Services segment included real estate asset management and sales, residential property valuation, trustee management services, property inspection and preservation and insurance services. Services provided to Ocwen and reported in the Financial Services segment included mortgage charge-off collections. Services provided to Ocwen and reported in the Technology Services segment included information technology infrastructure management and software applications. As of March 31, 2016, accounts receivable from Ocwen totaled $29.1 million, $16.5 million of which was billed and $12.7 million of which was unbilled. As of December 31, 2015, accounts receivable from Ocwen totaled $38.2 million, $20.4 million of which was billed and $17.8 million of which was unbilled.

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



We earn additional revenue related to the portfolios serviced by Ocwen when a party other than Ocwen selects Altisource as the service provider. For the three months ended March 31, 2016 and 2015, we recognized revenue of $46.6 million and $53.5 million, respectively, related to the portfolios serviced by Ocwen when a party other than Ocwen selected Altisource as the service provider. These amounts are not included in deriving revenue from Ocwen as a percentage of revenue in the table above.
NOTE 3 — TRANSACTIONS WITH RELATED PARTIES  
Through January 16, 2015, William C. Erbey served as our Chairman as well as the Executive Chairman of Ocwen and Chairman of each of Home Loan Servicing Solutions, Ltd. (“HLSS”), Altisource Residential Corporation (“Residential”) and Altisource Asset Management Corporation (“AAMC”).  Effective January 16, 2015, Mr. Erbey stepped down as the Executive Chairman of Ocwen and Chairman of each of Altisource, HLSS, Residential and AAMC and is no longer a member of the Board of Directors for any of these companies.  Consequently, these companies are no longer related parties of Altisource, as defined by FASB ASC Topic 850, Related Party Disclosures.  The disclosures in this note are limited to the periods that each of Ocwen, HLSS, Residential and AAMC were related parties of Altisource and are not necessarily reflective of current activities with these former related parties.
Ocwen 
Revenue
For the period from January 1, 2015 through January 16, 2015, we estimated that we generated revenue from Ocwen of $22.9 million. Services provided to Ocwen during such periods included real estate asset management and sales, residential property valuation, trustee management services, property inspection and preservation, insurance services, charge-off mortgage collections, information technology infrastructure management and software applications.
We record revenue we earn from Ocwen under the Service Agreements at rates we believe to be comparable market rates as we believe they are consistent with the fees we charge to other customers and/or fees charged by our competitors for comparable services.
Cost of Revenue and Selling, General and Administrative Expenses
At times, we have used Ocwen’s contractors and/or employees to support Altisource related services. Ocwen generally billed us for these contractors and/or employees based on their fully-allocated cost. Additionally, through March 31, 2015, we purchased certain data relating to Ocwen’s servicing portfolio in connection with a Data Access and Services Agreement. Based upon our previously provided notice, the Data Access and Services Agreement was terminated effective March 31, 2015. For the period from January 1, 2015 through January 16, 2015, we estimated that we incurred $1.9 million of expenses related to these items. These amounts are reflected as a component of cost of revenue in the condensed consolidated statements of operations and comprehensive income.
We provided certain other services to Ocwen and Ocwen provided certain other services to us in connection with Support Services Agreements. These services primarily included such areas as vendor management, corporate services and facilities related services. Billings for these services were generally based on the fully-allocated cost of providing the service based on an estimate of the time and expense of providing the service or estimates thereof. Of the January 2015 billings to Ocwen, we estimated that $0.1 million related to the period from January 1, 2015 through January 16, 2015. Of the January 2015 billings from Ocwen, we estimated that $0.3 million related to the period from January 1, 2015 through January 16, 2015. These amounts are reflected as a component of selling, general and administrative expenses in the condensed consolidated statements of operations and comprehensive income.
HLSS
Prior to April 2015, HLSS was a publicly traded company whose primary objective was the acquisition of mortgage servicing rights and related servicing advances, loans held for investment and other residential mortgage related assets. We provided HLSS certain finance, human resources, tax and facilities services and sold information technology services to HLSS under a support services agreement. For the period from January 1, 2015 through January 16, 2015, our billings to HLSS were immaterial.

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



Residential and AAMC
Residential is focused on acquiring and managing single family rental properties throughout the United States. AAMC’s primary business is to provide portfolio management and corporate governance services to investment vehicles that own real estate assets. Currently, AAMC’s primary client is Residential.
We have agreements, which extend through 2027, to provide Residential with renovation management, lease management, property management, real estate owned asset management, title insurance, settlement and valuation services. In addition, we have agreements with Residential and AAMC pursuant to which we may provide services such as finance, human resources, facilities, technology and insurance risk management. Further, we have separate agreements for certain services related to income tax matters, trademark licenses and technology products and services.
For the period from January 1, 2015 through January 16, 2015, we estimated that we generated revenue from Residential of $1.0 million. This amount is reflected in revenue in the condensed consolidated statements of operations and comprehensive income. This excludes revenue from services we provide to Residential’s loans serviced by Ocwen or other loan servicers where we were retained by Ocwen or Residential’s other loan servicers.
For the period from January 1, 2015 through January 16, 2015, our billings to AAMC were immaterial.
NOTE 4 — ACQUISITIONS

RentRange, Investability and Onit Solutions Acquisitions

On October 9, 2015, we acquired GoldenGator, LLC (doing business as RentRange®) (“RentRange”), REIsmart, LLC (doing business as Investability) (“Investability”) and Onit Solutions, LLC, a support company for RentRange and Investability (collectively “RentRange and Investability”). RentRange is a leading provider of rental home data and information to the financial services and real estate industries, delivering a wide assortment of address and geography level data, analytics, and rent-based valuation solutions for single and multi-family properties. Investability is an online residential real estate search and acquisition platform that utilizes data and analytics to allow real estate investors to access the estimated cash flow, capitalization rate, net yield and market value of properties for sale in the United States. The purchase price of $24.8 million was composed of $17.5 million in cash and 247 thousand shares of restricted common stock of the Company with a value of $7.3 million as of the closing date. Upon issuance, the restricted stock is subject to transfer restrictions and potential forfeiture provisions. These restrictions and forfeiture provisions will lapse over a four year period, subject to the recipients meeting certain continued employment conditions with the Company and the satisfaction of certain acquisition related escrow release conditions. RentRange and Investability are not material in relation to the Company’s results of operations or financial position.

The preliminary allocation of the purchase price is as follows:
(in thousands)
 
 
 
 
 
Cash
 
$
3

Accounts receivable, net
 
245

Premises and equipment, net
 
1,206

Other assets
 
199

Software
 
1,265

Trademarks and trade names
 
1,205

Databases/other
 
910

Non-compete agreements
 
330

Customer relationships
 
255

Goodwill
 
19,565

 
 
25,183

Accounts payable and accrued expenses
 
(391
)
 
 
 
Purchase price
 
$
24,792


CastleLine Acquisition

On July 17, 2015, we acquired CastleLine Holdings, LLC and its subsidiaries (“CastleLine”), a specialty risk management and insurance services firm. CastleLine provides financial products and services to parties involved in the origination, underwriting,

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



purchase and securitization of residential mortgages. The purchase consideration was composed of $12.3 million of cash at closing, $10.5 million of cash payable over four years from the acquisition date and 495 thousand shares of restricted common stock of the Company with a value of $14.4 million as of the closing date. Of the cash payable following acquisition, $3.8 million is contingent on certain future employment conditions of certain of the sellers, and therefore excluded from the purchase price. The CastleLine acquisition is not material in relation to the Company’s results of operations or financial position.

The preliminary allocation of the purchase price is as follows:
(in thousands)
 
 
 
 
 
Cash
 
$
1,088

Accounts receivable, net
 
510

Prepaid expenses
 
66

Restricted cash
 
2,501

Non-compete agreements
 
1,105

Databases/other
 
465

Customer relationships
 
395

Trademarks and trade names
 
150

Goodwill
 
28,125

 
 
34,405

Accounts payable and accrued expenses
 
(875
)
Deferred revenue
 
(87
)
 
 
 
Purchase price
 
$
33,443


NOTE 5 — AVAILABLE FOR SALE SECURITIES

During the three months ended March 31, 2016, we purchased 2.5 million shares of Residential common stock for $29.4 million in the open market.  This investment is classified as available for sale and reflected in the condensed consolidated balance sheets at fair value at the balance sheet date ($30.4 million as of March 31, 2016) (no comparative amount as of December 31, 2015). Unrealized gains and losses on available for sale securities are reflected in other comprehensive income, unless there is an impairment that is other than temporary.  In the event that a decline in market value is other than temporary, we would record a charge to earnings and a new cost basis in the investment would be established.

NOTE 6 — ACCOUNTS RECEIVABLE, NET
 
Accounts receivable, net consists of the following:
(in thousands)
 
March 31,
2016
 
December 31,
2015
 
 
 
 
 
Billed
 
$
63,950

 
$
67,021

Unbilled
 
53,026

 
56,458

 
 
116,976

 
123,479

Less: allowance for doubtful accounts
 
(19,331
)
 
(18,456
)
 
 
 
 
 
Total
 
$
97,645

 
$
105,023


Unbilled receivables consist primarily of certain asset management and default management services for which we generally recognize revenues over the service delivery period but bill following completion of the service. We also include in unbilled receivables amounts that are earned during a month and billed in the following month.


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



NOTE 7 — PREPAID EXPENSES AND OTHER CURRENT ASSETS
 
Prepaid expenses and other current assets consist of the following:
(in thousands)
 
March 31,
2016
 
December 31,
2015
 
 
 
 
 
Maintenance agreements, current portion
 
$
8,230

 
$
7,000

Income taxes receivable
 
1,942

 
633

Prepaid expenses
 
7,768

 
7,873

Other current assets
 
8,781

 
6,245

 
 
 
 
 
Total
 
$
26,721

 
$
21,751


NOTE 8 — PREMISES AND EQUIPMENT, NET
 
Premises and equipment, net consists of the following:
(in thousands)
 
March 31,
2016
 
December 31,
2015
 
 
 
 
 
Computer hardware and software
 
$
180,405

 
$
177,010

Office equipment and other
 
23,374

 
21,720

Furniture and fixtures
 
14,780

 
14,443

Leasehold improvements
 
36,362

 
35,503

 
 
254,921

 
248,676

Less: accumulated depreciation and amortization
 
(137,984
)
 
(129,555
)
 
 
 
 
 
Total
 
$
116,937

 
$
119,121

Depreciation and amortization expense amounted to $9.2 million and $8.8 million for the three months ended March 31, 2016 and 2015, respectively, and is included in cost of revenue for operating assets and in selling, general and administrative expenses for non-operating assets in the accompanying condensed consolidated statements of operations and comprehensive income.
NOTE 9 — GOODWILL AND INTANGIBLE ASSETS, NET
 
Goodwill
 
The following is a summary of goodwill by segment:
(in thousands)
 
Mortgage
Services
 
Financial
Services
 
Technology
Services
 
Total
 
 
 
 
 
 
 
 
 
Balance as of March 31, 2016 and December 31, 2015
 
$
80,423

 
$
2,378

 
$

 
$
82,801



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



Intangible Assets, net
Intangible assets, net consist of the following:
 
 
Weighted
average
estimated
useful life (in years)
 
Gross carrying amount
 
Accumulated amortization
 
Net book value
(in thousands)
 
 
March 31,
2016
 
December 31,
2015
 
March 31,
2016
 
December 31,
2015
 
March 31,
2016
 
December 31,
2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Definite lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trademarks and trade names
 
13
 
$
15,244

 
$
15,244

 
$
(6,822
)
 
$
(6,491
)
 
$
8,422

 
$
8,753

Customer related intangible assets
 
10
 
274,428

 
274,428

 
(124,881
)
 
(113,725
)
 
149,547

 
160,703

Operating agreement
 
20
 
35,000

 
35,000

 
(10,792
)
 
(10,354
)
 
24,208

 
24,646

Non-compete agreements
 
4
 
1,435

 
1,435

 
(219
)
 
(115
)
 
1,216

 
1,320

Intellectual property
 
10
 
300

 
300

 
(63
)
 
(55
)
 
237

 
245

Other intangible assets
 
5
 
1,375

 
1,375

 
(213
)
 
(39
)
 
1,162

 
1,336

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
 
 
$
327,782

 
$
327,782

 
$
(142,990
)
 
$
(130,779
)
 
$
184,792

 
$
197,003

 
Amortization expense for definite lived intangible assets was $12.2 million and $8.9 million for the three months ended March 31, 2016 and 2015, respectively. Expected annual definite lived intangible asset amortization for 2016 through 2020 is $35.7 million, $26.7 million, $23.6 million, $21.4 million and $19.5 million, respectively.
NOTE 10 — OTHER ASSETS
 
Other assets consist of the following:
(in thousands)
 
March 31,
2016
 
December 31,
2015
 
 
 
 
 
Security deposits
 
$
5,561

 
$
5,341

Maintenance agreements, non-current portion
 
1,713

 
1,570

Restricted cash
 
4,780

 
4,801

Other
 
1,192

 
1,441

 
 
 
 
 
Total
 
$
13,246

 
$
13,153


NOTE 11 — ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
 
Accounts payable and accrued expenses consist of the following:
(in thousands)
 
March 31,
2016
 
December 31,
2015
 
 
 
 
 
Accounts payable
 
$
16,961

 
$
11,644

Accrued expenses - general
 
28,623

 
30,347

Accrued salaries and benefits
 
30,792

 
46,564

Income taxes payable
 
4,392

 
3,316

 
 
 
 
 
Total
 
$
80,768

 
$
91,871


Other current liabilities consist of the following:
(in thousands)
 
March 31,
2016
 
December 31,
2015
 
 
 
 
 
Unfunded cash account balances
 
$
6,533

 
$
6,395

Other
 
11,743

 
9,871

 
 
 
 
 
Total
 
$
18,276

 
$
16,266



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



NOTE 12 — LONG-TERM DEBT
 
Long-term debt consists of the following:
(in thousands)
 
March 31,
2016
 
December 31,
2015
 
 
 
 
 
Senior secured term loan
 
$
535,112

 
$
536,598

Less: debt issuance costs, net
 
(5,862
)
 
(6,184
)
Less: unamortized discount, net
 
(2,120
)
 
(2,236
)
Net long-term debt
 
527,130

 
528,178

Less: current portion
 
(5,945
)
 
(5,945
)
 
 
 
 
 
Long-term debt, less current portion
 
$
521,185

 
$
522,233


On November 27, 2012, Altisource Solutions S.à r.l., a wholly-owned subsidiary of Altisource Portfolio Solutions S.A., entered into a senior secured term loan agreement with Bank of America, N.A., as administrative agent, and certain lenders. Altisource Portfolio Solutions S.A. and certain wholly-owned subsidiaries are guarantors of the term loan (collectively, the “Guarantors”). We subsequently amended the senior secured term loan agreement to increase the principal amount of the senior secured term loan and, among other changes, re-establish the $200.0 million incremental term loan facility accordion, lower the interest rate, extend the maturity date by approximately one year and increase the maximum amount of Restricted Junior Payments (as defined in the senior secured term loan agreement; other capitalized terms, unless defined herein, are defined in the senior secured term loan agreement).
After giving effect to the third amendment entered into on August 1, 2014, the term loan must be repaid in equal consecutive quarterly principal installments of $1.5 million, which commenced on September 30, 2014, with the balance due at maturity. All amounts outstanding under the senior secured term loan agreement will become due on the earlier of (i) December 9, 2020 and (ii) the date on which the loans are declared to be due and owing by the administrative agent at the request (or with the consent) of the Required Lenders or as otherwise provided in the loan agreement upon the occurrence of any event of default under the senior secured term loan agreement.
In addition to the scheduled principal payments, subject to certain exceptions, the term loan is subject to mandatory prepayment upon issuances of debt, casualty and condemnation events and sales of assets, as well as from a percentage of Consolidated Excess Cash Flow if the leverage ratio is greater than 3.00 to 1.00, as calculated in accordance with the provisions of the senior secured term loan (the percentage increases if the leverage ratio exceeds 3.50 to 1.00).  No mandatory prepayments were owed for the three months ended March 31, 2016
In April 2016, we repurchased a portion of our senior secured term loan with a par value of $28.0 million at a 13.1% discount. After the April 2016 repurchase, net long-term debt was $499.5 million. The early extinguishment of a portion of the debt will be recorded in the second quarter of 2016.
The term loan bears interest at rates based upon, at our option, the Adjusted Eurodollar Rate or the Base RateAdjusted Eurodollar Rate loans bear interest at a rate per annum equal to the sum of (i) the greater of (x) the Adjusted Eurodollar Rate for the applicable interest period and (y) 1.00% plus (ii) a 3.50% margin.  Base Rate loans bear interest at a rate per annum equal to the sum of (i) the greater of (x) the Base Rate and (y) 2.00% plus (ii) a 2.50% margin. The interest rate at March 31, 2016 was 4.50%.
Term loan payments are guaranteed by the Guarantors and are secured by a pledge of all equity interests of certain subsidiaries as well as a lien on substantially all of the assets of Altisource Solutions S.à r.l. and the Guarantors, subject to certain exceptions.
The senior secured term loan agreement includes covenants that restrict or limit, among other things, our ability to: create liens and encumbrances; incur additional indebtedness; sell, transfer or dispose of assets; make Restricted Junior Payments including share repurchases, dividends and repayment of junior indebtedness; change lines of business; amend material debt agreements or other material contracts; engage in certain transactions with affiliates; enter into sale/leaseback transactions; grant negative pledges or agree to such other restrictions relating to subsidiary dividends and distributions; make changes to our fiscal year and engage in mergers and consolidations.
The senior secured term loan agreement contains certain events of default, including (i) failure to pay principal when due or interest or any other amount owing on any other obligation under the senior secured term loan agreement within five days of becoming due, (ii) material incorrectness of representations and warranties when made, (iii) breach of covenants, (iv) failure to pay principal

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



or interest on any other debt that equals or exceeds $40.0 million when due, (v) default on any other debt that equals or exceeds $40.0 million that causes, or gives the holder or holders of such debt the ability to cause, an acceleration of such debt, (vi) occurrence of a Change of Control, (vii) bankruptcy and insolvency events, (viii) entry by a court of one or more judgments against us in an amount in excess of $40.0 million that remain unbonded, undischarged or unstayed for a certain number of days after the entry thereof, (ix) the occurrence of certain ERISA events and (x) the failure of certain Loan Documents to be in full force and effect.  If any event of default occurs and is not cured within applicable grace periods set forth in the senior secured term loan agreement or waived, all loans and other obligations could become due and immediately payable and the facility could be terminated.
As of March 31, 2016, debt issuance costs were $5.9 million, net of $4.4 million of accumulated amortization.  As of December 31, 2015, debt issuance costs were $6.2 million, net of $4.1 million of accumulated amortization.
Interest expense on the term loans totaled $6.5 million and $7.2 million for the three months ended March 31, 2016 and 2015, respectively.
NOTE 13 — OTHER NON-CURRENT LIABILITIES
 
Other non-current liabilities consist of the following:
(in thousands)
 
March 31,
2016
 
December 31,
2015
 
 
 
 
 
Acquisition related contingent consideration
 
$
882

 
$
3,932

Other non-current liabilities
 
13,939

 
14,221

 
 
 
 
 
Total
 
$
14,821

 
$
18,153


NOTE 14 — FAIR VALUE
Fair Value Measurements on a Recurring Basis
In accordance with ASC Topic 805, Business Combinations, liabilities for contingent consideration are reflected at fair value and adjusted each reporting period with the change in fair value recognized in earnings. Liabilities for acquisition related contingent consideration were recorded in connection with the acquisitions of certain assets and assumed certain liabilities of Mortgage Builder Software, Inc. and Owners Advantage, LLC in 2014. The total fair value of the liabilities for acquisition related contingent consideration was $4.0 million and $3.9 million as of March 31, 2016 and December 31, 2015, respectively. We measure the liabilities for acquisition related contingent consideration using Level 3 inputs as they are determined based on the present value of future estimated payments, which include sensitivities pertaining to discount rates and financial projections.
Available for sale securities are carried at fair value and consist of 2.5 million shares of Residential common stock as of March 31, 2016 (no comparative amount as of December 31, 2015).  As of March 31, 2016, the fair value of available for sale securities was $30.4 million (no comparative amount as of December 31, 2015).  Available for sale securities are measured using Level 1 inputs as these securities have quoted prices in active markets.
There were no transfers between different levels during the periods presented.

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



Fair Value of Financial Instruments
The following table presents the carrying amount and estimated fair value of financial instruments held by the Company as of March 31, 2016 and December 31, 2015. The following fair values are estimated using market information and what the Company believes to be appropriate valuation methodologies under GAAP are as follows:
 
 
March 31, 2016
 
December 31, 2015
(in thousands)
 
Carrying amount
 
Fair value
 
Carrying amount
 
Fair value
 
 
 
 
Level 1
 
Level 2
 
 
 
Level 1
 
Level 2
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
159,705

 
$
159,705

 
$

 
$
179,327

 
$
179,327

 
$

Restricted cash
 
4,780

 
4,780

 

 
4,801

 
4,801

 

Long-term debt
 
535,112

 

 
476,250

 
536,598

 

 
469,523

Our financial assets and financial liabilities primarily include cash and cash equivalents, restricted cash and long-term debt. Cash and cash equivalents and restricted cash are carried at amounts that approximate their fair value due to the short-term nature of these instruments and were measured using Level 1 inputs. The fair value of our long-term debt is based on quoted market prices. Based on the frequency of trading, we do not believe that there is an active market for our debt. Therefore, the quoted prices are considered Level 2 inputs.
NOTE 15 — SHAREHOLDERS’ EQUITY AND SHARE-BASED COMPENSATION 
Stock Repurchase Plan
On May 20, 2015, our shareholders approved a new share repurchase program, which replaced the previous share repurchase program. Under the new program, we are authorized to purchase up to 3.0 million shares of our common stock, based on a limit of 15% 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.  This is in addition to amounts previously purchased under prior programs.  Under the existing and prior programs, we purchased 0.5 million shares of common stock at an average price of $25.17 per share during the three months ended March 31, 2016 and 0.2 million shares at an average price of $23.44 per share during the three months ended March 31, 2015. As of March 31, 2016, approximately 1.0 million shares of common stock remain available for repurchase under the new program. Our senior secured term loan limits the amount we can spend on share repurchases and may prevent repurchases in certain circumstances. As of March 31, 2016, approximately $333 million was available to repurchase our common stock under our senior secured term loan.
Share-Based Compensation 
We issue share-based awards in the form of stock options and certain other equity-based awards for certain employees and officers.  We recorded share-based compensation expense of $1.9 million and $0.4 million for the three months ended March 31, 2016 and 2015, respectively. As of March 31, 2016, estimated unrecognized compensation costs related to share-based awards amounted to $10.4 million, which we expect to recognize over a weighted average remaining requisite service period of approximately 2.65 years.
Stock Options 
Stock option grants are composed primarily of a combination of service-based and market-based options. 
Service-Based Options.  These options generally vest over three or four years with equal annual cliff-vesting and expire on the earlier of ten years after the date of grant or following termination of service. A total of 1.2 million service-based awards were outstanding at March 31, 2016
Market-Based Options.  These option grants generally have two components, each of which vests only upon the achievement of certain criteria. The first component, which we refer to internally as “ordinary performance” grants, consists of two-thirds of the market-based grant and begins to vest if the stock price is at least double the exercise price, as long as the stock price realizes a compounded annual gain of at least 20% over the exercise price. The remaining third of the market-based options, which we refer to internally as “extraordinary performance” grants, begins to vest if the stock price is at least triple the exercise

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Notes to Condensed Consolidated Financial Statements (Continued)



price, as long as the stock price realizes a compounded annual gain of at least 25% over the exercise price. The vesting schedule for substantially all market-based awards is 25% upon achievement of the criteria and thereafter the remaining 75% in three equal annual installments. Market-based options generally expire on the earlier of ten years after the date of grant or following termination of service, unless the performance criteria is met prior to termination of service or in the final three years of the option term, in which case vesting will generally continue in accordance with the provisions of the award agreement. A total of 2.0 million market-based awards were outstanding at March 31, 2016.
The Company granted 0.1 million stock options (at a weighted average exercise price of $27.48 per share) and less than 0.1 million stock options (at a weighted average exercise price of $26.42 per share) during the three months ended March 31, 2016 and 2015, respectively.
The fair value of the service-based options was determined using the Black-Scholes option pricing model and the fair value of the market-based options was determined using a lattice (binomial) model. The following assumptions were used to determine the fair value as of the grant date:
 
 
Three months ended 
 March 31, 2016
 
Three months ended 
 March 31, 2015
 
 
Black-Scholes
 
Binomial
 
Black-Scholes
 
Binomial
 
 
 
 
 
 
 
 
 
Risk-free interest rate (%)
 
1.25% - 1.89%

 
0.23% - 1.97%

 
1.67
%
 
0.02% - 2.01%

Expected stock price volatility (%)
 
59.75% - 62.14%

 
59.76% - 62.14%

 
55.06
%
 
55.06
%
Expected dividend yield
 

 

 

 

Expected option life (in years)
 
6.25

 
4.55 - 4.88

 
6.25

 
4.45 - 4.92

Fair value
 
$11.15 - $16.30
 
$11.06 - $15.73
 
$11.69
 
$10.68 - $11.93
We determined the expected option life of all service-based stock option grants using the simplified method. We use the simplified method because we believe that our historical data does not provide a reasonable basis upon which to estimate expected option life.
The following table summarizes the weighted average grant date fair value of stock options granted per share, the total intrinsic value of stock options exercised and the grant date fair value of stock options that vested during the period presented:
 
 
Three months ended March 31,
(in thousands, except per share amounts)
 
2016
 
2015
 
 
 
 
 
Weighted average grant date fair value of stock options granted per share
 
$
15.77

 
$
11.56

Intrinsic value of options exercised
 
601

 
176

Grant date fair value of stock options that vested
 
187

 
264


The following table summarizes the activity related to our stock options:
 
Number of
options
 
Weighted
average
exercise
price
 
Weighted
average
contractual
term
(in years)
 
Aggregate
intrinsic value
(in thousands)
 
 
 
 
 
 
 
 
Outstanding at December 31, 2015
3,163,125

 
$
20.13

 
4.94
 
$
35,842

Granted
66,000

 
27.48

 
 
 
 
Exercised
(40,000
)
 
9.14

 
 
 
 

Forfeited
(24,968
)
 
24.25

 
 
 
 

 
 
 
 
 
 
 
 
Outstanding at March 31, 2016
3,164,157

 
20.40

 
4.57
 
26,028

 
 
 
 
 
 
 
 
Exercisable at March 31, 2016
2,181,083

 
14.70

 
2.70
 
24,063


Other Share-Based Awards
The Company’s other share-based and similar types of awards are composed of restricted shares and Equity Appreciation Rights (“EARs”).

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



The restricted shares are service-based awards that vest over one to four years with either annual cliff-vesting, vesting of all of the restricted shares at the end of the vesting period or vesting beginning after two years of service. No restricted shares were granted during the three months ended March 31, 2016. A total of 0.3 million unvested service-based restricted shares were outstanding at March 31, 2016.
The following table summarizes the activity related to our restricted shares:
 
Number of
restricted shares
 
 
Outstanding at December 31, 2015
272,326

Issued
(5,600
)
Forfeited
(2,500
)
 
 
Outstanding at March 31, 2016
264,226

EARs provide participating employees of certain divisions of the Company with the potential to receive a percentage of the increase in the value of the applicable division during the term of the EARs. The Company has established EAR plans for three divisions: Consumer Analytics, Document Solutions and Marketplace Solutions. These EAR plans allow for the issuance of EARs representing up to 15% of each of these divisions. The EARs consist of service-based awards and performance-based awards. Service-based EARs generally vest in equal installments on the first, second, third and fourth anniversaries of the grant date. Performance-based EARs generally begin to vest on the date certain performance criteria are achieved by the applicable division of the Company.

The participating employee will have the opportunity at certain times specified in the award agreement to exercise EARs that have vested and in exchange will receive share equivalency units, the number of which will be based on the increase in value of the division and the amount of EARs awarded to the participating employee that are exercised. After a holding period of six months and one day, the Company, the applicable division or an affiliate of the Company may redeem the share equivalency units for a payment equal to the then fair market value of the share equivalency units. At the Company’s option, the share equivalency units may be redeemed for cash, shares of Altisource’s common stock under its shareholder approved equity incentive plan, a subordinated note payable or, under certain circumstances where the division has been converted into a company form, shares of that company. Upon the occurrence of certain corporate transactions, including the sale of the division, a qualified initial public offering of the equity of the division or a spin-off of the division, the Company will have the right to repurchase and cancel any outstanding share equivalency units or shares of the division that have been issued in payment of redeemed share equivalency units, and the applicable plan administrator will have the discretion to adjust the terms of the applicable division EAR plan and any outstanding EARs.

There were no EARs granted during the three months ended March 31, 2016.

The following table reflects outstanding EARs (expressed as a percentage of each of the divisions):
 
 
Consumer Analytics
 
Document Solutions
 
Marketplace Solutions
 
 
 
 
 
 
 
Outstanding at December 31, 2015 and March 31, 2016
 
5.6
%
 
5.6
%
 
5.3
%

Share-based compensation expense for stock options, restricted shares and EARs is recorded net of estimated forfeiture rates ranging from 0% to 40%.


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



NOTE 16 — REVENUE

Revenue includes service revenue, reimbursable expenses and non-controlling interests. 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, but we pass such costs directly on to our customers without any additional markup. Non-controlling interests represent the earnings of Lenders One, Wholesale One and Residential Investor One, consolidated entities not owned by Altisource, and are included in revenue and reduced from net income to arrive at net income attributable to Altisource (see Note 1). The components of revenue were as follows for the three months ended March 31:
(in thousands)
 
2016
 
2015
 
 
 
 
 
Service revenue
 
$
234,280

 
$
207,816

Reimbursable expenses
 
15,454

 
31,956

Non-controlling interests
 
398

 
710

 
 
 
 
 
Total
 
$
250,132

 
$
240,482


NOTE 17 — COST OF REVENUE
 
Cost of revenue principally includes payroll and employee benefits associated with personnel employed in customer service and operations roles, fees paid to external providers related to the provision of services, reimbursable expenses, technology and telecommunications costs as well as depreciation and amortization of operating assets. The components of cost of revenue were as follows for the three months ended March 31:
(in thousands)
 
2016
 
2015
 
 
 
 
 
Compensation and benefits
 
$
65,063

 
$
69,326

Outside fees and services
 
71,803

 
53,247

Reimbursable expenses
 
15,454

 
31,956

Technology and telecommunications
 
9,940

 
11,893

Depreciation and amortization
 
6,603

 
6,404

 
 
 
 
 
Total
 
$
168,863

 
$
172,826


NOTE 18 — SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
 
Selling, general and administrative expenses include payroll and employee benefits associated with personnel employed in executive, finance, law, compliance, human resources, vendor management, risk, sales and marketing roles.  This category also includes occupancy costs, professional fees, marketing costs, depreciation and amortization of non-operating assets and other expenses.  The components of selling, general and administrative expenses were as follows for the three months ended March 31:
(in thousands)
 
2016
 
2015
 
 
 
 
 
Compensation and benefits
 
$
13,991

 
$
12,763

Occupancy related costs
 
9,083

 
10,654

Amortization of intangible assets
 
12,211

 
8,891

Professional services
 
6,740

 
7,990

Marketing costs
 
6,492

 
5,353

Depreciation and amortization
 
2,605

 
2,422

Other
 
2,494

 
4,333

 
 
 
 
 
Total
 
$
53,616

 
$
52,406

 
NOTE 19 — OTHER THAN TEMPORARY IMPAIRMENT LOSS ON SECURITIES

During March 2015, we purchased 1.6 million shares of HLSS common stock in the open market for $30.0 million (1,613,125 shares at an average price per share of $18.58).  This investment was classified as available for sale.  On April 6, 2015, HLSS completed the sale of substantially all of its assets to New Residential Investment Corp. (“NRZ”) and adopted a plan of complete

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



liquidation and dissolution.  Based on HLSS’ sale of substantially all of its assets to NRZ, we determined that our investment in HLSS was other than temporarily impaired.  Accordingly, we recognized an other than temporary impairment loss on HLSS equity securities of $3.3 million in the accompanying condensed consolidated statements of operations and comprehensive income during the three months ended March 31, 2015. This amount reflected the difference between the cost and fair value of the HLSS equity securities as of March 31, 2015 (based on 1,613,125 shares at $16.54 per share) (no comparative amount in 2016).

NOTE 20 — OTHER INCOME (EXPENSE), NET
 
Other income (expense), net consists of the following for the three months ended March 31:
(in thousands)
 
2016
 
2015
 
 
 
 
 
Interest income
 
$
11

 
$
31

Other, net
 
(38
)
 
(28
)
 
 
 
 
 
Total
 
$
(27
)
 
$
3


NOTE 21 — EARNINGS PER SHARE
 
Basic earnings per share (“EPS”) is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period.  Diluted EPS reflects the assumed conversion of all dilutive securities using the treasury stock method.
 
Basic and diluted EPS are calculated as follows for the three months ended March 31:
(in thousands, except per share data)
 
2016
 
2015
 
 
 
 
 
Net income attributable to Altisource
 
$
18,494

 
$
3,698

 
 
 
 
 
Weighted average common shares outstanding, basic
 
18,855

 
20,172

Dilutive effect of stock options and restricted shares
 
1,185

 
823

 
 
 
 
 
Weighted average common shares outstanding, diluted
 
20,040

 
20,995

 
 
 
 
 
Earnings per share:
 
 
 
 
Basic
 
$
0.98

 
$
0.18

 
 
 
 
 
Diluted
 
$
0.92

 
$
0.18


For the three months ended March 31, 2016 and 2015, 0.4 million options and 0.7 million options, respectively, that were anti-dilutive have been excluded from the computation of diluted EPS.  These options were anti-dilutive and excluded from the computation of diluted EPS because their exercise price was greater than the average market price of our common stock. Also excluded from the computation of diluted EPS are 0.3 million options and 0.2 million options for the three months ended March 31, 2016 and 2015, respectively, granted for shares that are issuable upon the achievement of certain market and performance criteria related to our common stock price and an annualized rate of return to investors that have not yet been met.

NOTE 22 — COMMITMENTS, CONTINGENCIES AND REGULATORY MATTERS 
Litigation 
From time to time, we are involved in legal and administrative proceedings arising in the course of our business. We record a liability for these matters if an unfavorable outcome is probable and the amount of loss can be reasonably estimated, including expected insurance coverage. For proceedings where the reasonable estimate of loss is a range, we record a best estimate of loss within the range.
On September 8, 2014, the West Palm Beach Firefighters’ Pension Fund filed a putative securities class action suit against Altisource Portfolio Solutions S.A. and certain of its current or former officers and directors in the United States District Court for the Southern District of Florida alleging violations of the Securities Exchange Act of 1934 and Rule 10b-5 with regard to disclosures concerning

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



pricing and transactions with related parties that allegedly inflated Altisource Portfolio Solutions S.A. share prices. The Court subsequently appointed the Pension Fund for the International Union of Painters and Allied Trades District Council 35 and the Annuity Fund for the International Union of Painters and Allied Trades District Council 35 as Lead Plaintiffs. On January 30, 2015, Lead Plaintiffs filed an amended class action complaint which added Ocwen Financial Corporation as a defendant, and seeks a determination that the action may be maintained as a class action on behalf of purchasers of Altisource Portfolio Solutions S.A. securities between April 25, 2013 and December 21, 2014 and an unspecified amount of damages. Altisource Portfolio Solutions S.A. moved to dismiss the suit on March 23, 2015. On September 4, 2015, the Court granted the defendants’ motion to dismiss, finding that the Lead Plaintiffs’ amended complaint failed to state a claim as to any of the defendants, but permitting the Lead Plaintiffs to file another amended complaint. Lead Plaintiffs subsequently filed second and third amended complaints with substantially similar claims and theories. Altisource Portfolio Solutions S.A. moved to dismiss the third amended complaint on October 22, 2015. On December 22, 2015, the Court issued an order dismissing with prejudice all claims against Ocwen Financial Corporation and certain claims against Altisource Portfolio Solutions S.A. and the officer and director defendants, but denying the motion to dismiss as to other claims. Altisource Portfolio Solutions S.A. intends to continue to vigorously defend this suit.

On February 11, 2015, W.A. Sokolowski, an alleged shareholder of Ocwen Financial Corporation, filed an amended shareholder derivative complaint in the United States District Court for the Southern District of Florida against Ocwen Financial Corporation (as a nominal defendant), certain of its current or former officers and directors, Altisource Portfolio Solutions S.A. and other companies. The suit seeks recovery of an unspecified amount of damages for alleged breaches of fiduciary duty by Ocwen Financial Corporation’s officers and directors, which were allegedly aided and abetted by Altisource Portfolio Solutions S.A. and other defendants. Altisource Portfolio Solutions S.A. filed a motion to dismiss the complaint on November 9, 2015. While that motion was pending, additional lawsuits alleging similar claims for alleged breaches of fiduciary duties by current or former Ocwen Financial Corporation officers and directors were filed in or transferred to the Court. The Court subsequently consolidated these actions and denied Altisource Portfolio Solutions S.A.’s motion to dismiss the Sokolowski complaint without prejudice to re-file following appointment of lead counsel for the consolidated action and the filing or designation of an operative complaint. Lead counsel for plaintiffs filed their Consolidated Verified Shareholder Derivative Complaint (the “Consolidated Complaint”) on March 8, 2016. The Consolidated Complaint alleges claims that Altisource Portfolio Solutions S.A., its subsidiary Beltline Road Insurance Agency, Inc. and other defendants aided and abetted alleged breaches of fiduciary duties by Ocwen Financial Corporation officers and directors and/or were unjustly enriched in connection with business dealings with Ocwen Financial Corporation. The Consolidated Complaint also seeks contribution from Altisource Portfolio Solutions S.A., its subsidiary Beltline Road Insurance Agency, Inc. and other defendants for amounts Ocwen Financial Corporation paid in connection with a settlement with the New York State Department of Financial Services. The current deadline for defendants to respond to the Consolidated Complaint is May 13, 2016. Altisource Portfolio Solutions S.A. and Beltline Road Insurance Agency, Inc. intend to vigorously defend the lawsuit and to move to dismiss all claims against them.

On March 26, 2015, Robert Moncavage, an alleged shareholder of Ocwen Financial Corporation, filed an amended shareholder derivative complaint in the Circuit Court of the Fifteenth Judicial Circuit in and for Palm Beach County, Florida against Ocwen Financial Corporation (as a nominal defendant), certain of its current or former officers and directors, Altisource Portfolio Solutions S.A. and other companies. The suit seeks recovery of an unspecified amount of damages for alleged breaches of fiduciary duties by the current or former Ocwen Financial Corporation officers and directors, which were allegedly aided and abetted by Altisource Portfolio Solutions S.A. and other defendants. On November 9, 2015, the Court entered an order staying all proceedings in the case pending further order of the Court. If the litigation proceeds, Altisource Portfolio Solutions S.A. intends to vigorously defend the lawsuit and to move to dismiss all claims against it.

Altisource is unable to predict the outcomes of these lawsuits or reasonably estimate the potential loss, if any, arising from the suits, given that the forthcoming motions to dismiss in the second and third cases have not yet been adjudicated, a stay has been entered in the third case and significant legal and factual issues remain to be determined in all three cases.

In addition to the matters referenced above, we are involved in legal actions in the course of our business, some of which seek monetary damages. We do not believe that the outcome of these proceedings, both individually and in the aggregate, will have a material impact on our financial condition, results of operations or cash flows.

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

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



Ocwen Related Matters

Ocwen is our largest customer and 56% of our revenue for the three months ended March 31, 2016 was from Ocwen. Additionally, 19% of our revenue for the three months ended March 31, 2016 was earned on the portfolios serviced by Ocwen, when a party other than Ocwen 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, requests for information and other actions and is subject to pending legal proceedings that have or could result in adverse regulatory or other actions against Ocwen. While not all inclusive, regulatory actions to date have included subjecting Ocwen to independent oversight of its operations and placing certain restrictions on its ability to acquire servicing rights. Ocwen may become subject to future federal and state regulatory investigations, inquiries, requests for information and legal proceedings, any of which could also result in adverse regulatory or other actions against Ocwen.

As a result of the sale of substantially all of the assets of HLSS to NRZ in April of 2015, NRZ owns the rights to approximately 78% of Ocwen’s non-government-sponsored enterprise (“non-GSE”) servicing rights as of December 31, 2015. Under an agreement between NRZ and Ocwen, NRZ has the right (not necessarily the ability) to transfer servicing away from Ocwen if Ocwen fails to achieve and maintain certain minimum servicer ratings on or after April 6, 2017.

Ocwen has also disclosed that in 2015 certain bondholders of Ocwen-serviced residential mortgage-backed securities (“RMBS”) alleged that Ocwen, as servicer defaulted on these servicing agreements. Ocwen has further disclosed that it has been directed by the trustee for two of the RMBS trusts to transfer servicing to another loan servicing company based on rating downgrades. Additional bondholders of RMBS may attempt to replace Ocwen as servicer as a result of such ratings downgrades or the alleged defaults.

All of the foregoing may have significant adverse effects on Ocwen’s business and our continuing relationships with Ocwen. For example, Ocwen may be required to alter the way it conducts business, including the parties it contracts with for services (including information technology and software services), it may be required to seek changes to its existing pricing structure with us, it may lose or sell some or all of its non-GSE servicing rights or subservicing arrangements or may lose one or more of its state servicing licenses. Additional regulatory actions 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 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.

If any of the following events occurred, Altisource’s revenue would be significantly lower and our results of operations would 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 a significant reduction in the volume of services they purchase from us
Ocwen loses or sells a significant portion or all of its non-GSE servicing rights or subservicing arrangements and Altisource fails to be retained as a service provider
Ocwen loses state servicing licenses in states with a significant number of loans in Ocwen’s servicing portfolio
Altisource fails to be retained as a service provider
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

Management cannot predict the outcome of the Ocwen Related Matters or the impact they may have on Altisource. However, in the event these Ocwen Related Matters materially negatively impact Altisource, we believe the impact to Altisource would occur over an extended period of time and the variable nature of our cost structure would allow us to realign our cost structure in line with remaining revenue.

In this regard, we have a plan that we believe would allow us to efficiently execute on this realignment. We believe that transfers of Ocwen’s servicing rights to a successor servicer(s) would take an extended period of time because of the approval required from many parties, including regulators, rating agencies, RMBS trustees, lenders and others. During this period of time, we believe we would continue to generate revenue from the services we provide to the transferred portfolio. Additionally, we have several growth initiatives that focus on diversifying and growing our revenue and customer base. Our major growth initiatives include:

Continue to grow our Servicer Solutions business

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



Continue to grow our Origination Solutions business
Continue to grow our Consumer Real Estate Solutions business
Continue to grow our Real Estate Investor Solutions business

We have an established sales and marketing strategy to support each of these initiatives.

Management believes our plans, together with current liquidity and cash flows from operations will be sufficient to meet working capital, capital expenditures, debt service and other cash needs. However, there can be no assurance that our plans would be successful or our operations would be profitable.

Escrow and Trust Balances 

We hold customers’ assets in escrow and trust accounts at various financial institutions pending completion of certain real estate activities.  We also hold cash in trust accounts at various financial institutions where contractual obligations mandate maintaining dedicated bank accounts for our Financial Services segment’s collections.  These amounts are held in escrow and trust accounts for limited periods of time and are not included in the condensed consolidated balance sheets.  Amounts held in escrow and trust accounts were $63.8 million and $66.6 million at March 31, 2016 and December 31, 2015, respectively.

NOTE 23 — SEGMENT REPORTING

Our business segments are based upon our organizational structure, which focuses primarily on the services offered, and are consistent with the internal reporting used by our Chief Executive Officer (our Chief Operating Decision Maker) to evaluate operating performance and to assess the allocation of our resources.
We classify our businesses into three reportable segments. The Mortgage Services segment provides services that span the mortgage and real estate lifecycle and are typically outsourced by loan servicers, loan originators, home investors and other sellers and buyers of single family homes. The Financial Services segment provides collection and customer relationship management services primarily to debt originators and servicers (e.g., credit card, auto lending, retail credit and mortgage) and the utility, insurance and hotel industries. The Technology Services segment provides a portfolio of software, data analytics and information technology infrastructure management services that support the management of mortgage and real estate activities and marketplace transactions across the lifecycle. In addition, Corporate Items and Eliminations include eliminations of transactions between the reportable segments, interest expense and costs related to corporate support functions including executive, finance, law, compliance, human resources, vendor management, risk and sales and marketing costs not allocated to the business units. Intercompany transactions primarily consist of information technology infrastructure management services.


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



Financial information for our segments is as follows:
 
 
Three months ended March 31, 2016
(in thousands)
 
Mortgage
Services
 
Financial
Services
 
Technology
Services
 
Corporate
Items and
Eliminations
 
Consolidated
Altisource
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
198,986

 
$
20,104

 
$
40,647

 
$
(9,605
)
 
$
250,132

Cost of revenue
 
121,518

 
14,258

 
41,893

 
(8,806
)
 
168,863

Gross profit (loss)
 
77,468

 
5,846

 
(1,246
)
 
(799
)
 
81,269

Selling, general and administrative expenses
 
26,969

 
4,309

 
6,558

 
15,780

 
53,616

Income (loss) from operations
 
50,499

 
1,537

 
(7,804
)
 
(16,579
)
 
27,653

Other income (expense), net
 
14

 
13

 
7

 
(6,602
)
 
(6,568
)
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before income taxes and non-controlling interests
 
$
50,513

 
$
1,550

 
$
(7,797
)
 
$
(23,181
)
 
$
21,085


 
 
Three months ended March 31, 2015
(in thousands)
 
Mortgage
Services
 
Financial
Services
 
Technology
Services
 
Corporate
Items and
Eliminations
 
Consolidated
Altisource
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
177,006

 
$
22,354

 
$
51,970

 
$
(10,848
)
 
$
240,482

Cost of revenue
 
114,804

 
15,103

 
52,723

 
(9,804
)
 
172,826

Gross profit (loss)
 
62,202

 
7,251

 
(753
)
 
(1,044
)
 
67,656

Selling, general and administrative expenses
 
20,561

 
4,715

 
7,315

 
19,815

 
52,406

Income (loss) from operations
 
41,641

 
2,536

 
(8,068
)
 
(20,859
)
 
15,250

Other income (expense), net
 
(4
)
 
(12
)
 
1

 
(10,427
)
 
(10,442
)
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before income taxes and non-controlling interests
 
$
41,637

 
$
2,524

 
$
(8,067
)
 
$
(31,286
)
 
$
4,808

(in thousands)
 
Mortgage
Services
 
Financial
Services
 
Technology
Services
 
Corporate
Items and
Eliminations
 
Consolidated
Altisource
 
 
 
 
 
 
 
 
 
 
 
Total assets:
 
 

 
 

 
 

 
 

 
 

March 31, 2016
 
$
307,913

 
$
48,492

 
$
206,167

 
$
153,022

 
$
715,594

December 31, 2015
 
325,461

 
53,757

 
165,778

 
176,802

 
721,798


Our services are provided to customers primarily located in the United States.  Premises and equipment, net consist of the following, by country:
(in thousands)
 
March 31,
2016
 
December 31,
2015
 
 
 
 
 
United States
 
$
84,107

 
$
85,021

India
 
19,287

 
21,187

Luxembourg
 
10,842

 
9,944

Philippines
 
2,424

 
2,664

Uruguay
 
277

 
305

 
 
 
 
 
Total
 
$
116,937

 
$
119,121



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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
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, 2015 filed with the Securities and Exchange Commission (“SEC”) on March 15, 2016.

FORWARD-LOOKING STATEMENTS
 
Certain statements in this Form 10-Q regarding anticipated financial outcomes, business and market conditions, outlook and other similar statements related to Altisource’s future financial and operational performance are “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by the use of terminology such as “anticipate,” “intend,” “expect,” “may,” “could,” “should,” “would,” “plan,” “estimate,” “believe,” “predict,” “potential” or “continue” or the negative of these terms and other comparable terminology. 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 the 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;
expectations regarding collection rates and placements in our Financial Services segment;
assumptions regarding the impact of seasonality;
estimates regarding the calculation of 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, 2015 and include the following:
if, as a result of difficulties faced by Ocwen Financial Corporation and its subsidiaries (“Ocwen”), we were to lose Ocwen as a customer or there is a significant reduction in the volume of services they purchase from us;
our ability to execute on our strategic initiatives;
our ability to retain our existing customers, expand relationships and attract new customers;
the level of loan delinquencies and charge-offs;
the level of origination volume;
technology failures;
the trend toward outsourcing;
our ability to raise debt;
our ability to retain our directors, executive officers and key personnel;
our ability to integrate acquired businesses;
our ability to comply with and burdens imposed by governmental regulations and policies and any changes in such regulations and policies; and
significant changes in the Luxembourg tax regime or interpretations of the Luxembourg tax regime.

We caution you 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.


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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 wholly-owned subsidiaries.
We are a premier marketplace and transaction solutions provider for the real estate, mortgage and consumer debt industries. Altisource’s proprietary business processes, vendor and electronic payment management software and behavioral science-based analytics improve outcomes for marketplace participants.
We classify our businesses into the following three reportable segments:
Mortgage Services: Provides services that span the mortgage and real estate lifecycle and are typically outsourced by loan servicers, loan originators, home investors and other sellers and buyers of single family homes. We provide most of these services primarily for loan portfolios serviced by Ocwen. We also have longstanding relationships with commercial banks, insurance companies, mortgage bankers and other companies involved in the mortgage industry. Within the Mortgage Services segment, we provide the following services:
Asset management services - Asset management services principally include property preservation, property inspection, real estate owned (“REO”) asset management, the Hubzu® and Owners.com® consumer real estate portals and real estate brokerage services. We also provide property management, lease management and renovation management services for single family rental properties. Through RentRange and Investability, we provide rental home data and information to the financial services and real estate industries and an online residential real estate investor search and acquisition platform.
Insurance services - Insurance services principally include an array of insurance services including pre-foreclosure, REO and refinance title searches, title insurance agency services, settlement and escrow services and loss draft claims processing. Through CastleLine, we provide financial products (including insurance) and services to parties involved in the origination, underwriting, purchase and securitization of residential mortgages.
Residential property valuation services - Residential property valuation services principally include traditional appraisal products through our licensed appraisal management company and alternative valuation products, some of which are provided through our network of real estate professionals. We generally provide these services for residential loan servicers, residential lenders and investors in single family homes.
Default management services - Default management services principally include foreclosure trustee services for loan servicers and non-legal processing and related services for and under the supervision of foreclosure, bankruptcy and eviction attorneys.
Origination management services - Origination management services principally include products, services and solutions utilized in the origination, underwriting and purchase of primarily residential mortgages. Through the Mortgage Partnership of America, L.L.C. (“MPA”) and our Altisource Origination Services business, which provides loan due diligence, fulfillment, contract underwriting and quality control services, we are focused largely on the residential mortgage market. MPA serves as the manager of Best Partners Mortgage Cooperative, Inc., doing business as the Lenders One® mortgage cooperative (“Lenders One”), Best Partners Mortgage Brokers Cooperative, Inc., doing business as the Wholesale One® mortgage cooperative (“Wholesale One”) and Best Partners Residential Investor Cooperative, Inc., doing business as the Residential Investor One cooperative (“Residential Investor One”). Lenders One is a national end-to-end marketplace for mortgage bankers and other mortgage market participants that provides its members with opportunities to: (i) expand revenue, (ii) reduce loan underwriting costs, (iii) increase operational efficiency and (iv) receive education and training. Wholesale One assists mortgage brokers and other third party originators with tools to improve their businesses and obtain better access to the capital markets. Residential Investor One was formed to deliver savings and efficiencies to individual and institutional residential real estate investors. We provide other origination related services in the residential property valuation business and insurance services businesses.



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Financial Services: Provides collection and customer relationship management services primarily to debt originators and servicers (e.g., credit card, auto lending, retail credit and mortgage) and the utility, insurance and hotel industries. Within the Financial Services segment, we provide the following services:
Asset recovery management - Asset recovery management principally includes post-charge-off debt collection services on a contingency fee basis.
Customer relationship management - Customer relationship management principally includes customer care, technical support and early stage collections services as well as insurance call center services and administrative support.
Technology Services: Provides a portfolio of software, data analytics and infrastructure management services that support the management of mortgage and real estate activities and marketplace transactions across the mortgage and real estate lifecycles. We currently provide our information technology (“IT”) infrastructure management services to Ocwen, Altisource Residential Corporation (“Residential”) and Altisource Asset Management Corporation (“AAMC”) through managed services agreements, and our other segments in a shared services model. Our software and analytics solutions primarily include the following software solutions, as described briefly below:
REALServicing® - An enterprise residential mortgage loan servicing platform that offers a platform for loan servicing, including loss mitigation and loan modifications. This solution spans the loan servicing lifecycle from loan boarding to satisfaction including automation for collections, borrower communications, payment processing and reporting.
REALSynergy® - A commercial real estate and multi-family loan servicing application that provides servicing and asset management capabilities.
REALResolution - A technology platform that provides servicers with an automated default management and home retention solution for delinquent and defaulted loans.
REALTrans® - A patented electronic services marketplace platform that automates vendor selection and the ordering, tracking and fulfilling of vendor provided services principally related to real estate and mortgage marketplaces. This technology solution, whether accessed through the web or integrated into existing business processing applications, connects to a marketplace of services through a single platform and delivers a method for managing a large scale network of vendors.
REALRemit® - A patented electronic invoicing and payment system that provides vendors with the ability to submit invoices electronically, provides payors with the ability to automatically adjudicate invoices according to user defined rules and for electronic payments to be fulfilled subject to approval review rules and workflows.
REALDoc® - An automated document management platform that consists of three primary modules: REALDoc Capture, which converts document images into processable data, indexes documents and provides customizable workflows based on data attributes; REALDoc Correspondence, which provides a scalable correspondence generation, management and delivery platform; and REALDoc Vault, which provides a scalable and distributed storage platform and secure document viewer.
Equator® - An integrated real estate management platform consisting of the following modules: EQ Workstation®, EQ Marketplace®, EQ Midsource® and EQ Portal that can be used separately or together as an end-to-end solution. EQ Workstation provides comprehensive, end-to-end workflow and transaction services to manage real estate and foreclosure related activities. EQ Marketplace provides a coordinated means of purchasing a variety of real estate services from vendors including real estate brokerage, title, closing, inspection and valuation. EQ Midsource allows users of EQ Workstation to outsource all or specific components of real estate related activities. EQ Portal provides realtors direct access to process real estate transactions with secure exchange of data and documents along with realtor marketing, training and certification.
Mortgage Builder® - A loan origination platform consisting of the following modules: Architect®, Surveyance®, Colonnade® and LoanXEngine™ for mortgage banks, community banks, credit unions and other financial institutions. The Architect platform is a cloud-based, all-inclusive origination platform that manages loans from prequalification through interim servicing and delivery. The Surveyance platform is a mobile origination solution that provides originators with the ability to service their clients remotely. The Colonnade platform is a loan servicing solution and the LoanXEngine platform provides customer relationship management and product pricing and eligibility solutions.

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REALAnalytics - A data analytics and delivery platform that utilizes advanced econometric modeling and behavioral economics to assist mortgage and real estate service providers in optimizing risk management, value measurement, loss mitigation and consumer behavior outcomes across the mortgage and real estate lifecycle.
Pointillist - A cloud-based customer intelligence platform that empowers marketers to identify critical customer paths to purchase, upsell and satisfaction. The Pointillist marketing analytics platform is designed to reveal how consumer experiences drive business outcomes and analyze customer behavior to drive results across channels and over time.
Corporate Items and Eliminations: Includes interest expense and costs related to corporate support functions including executive, finance, law, compliance, human resources, vendor management, risk and sales and marketing costs not allocated to the business units, and also includes eliminations of transactions between the reportable segments. Corporate Items and Eliminations also include the cost of certain facilities.
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, but we pass such costs directly on to our customers without any additional markup. Non-controlling interests represent the earnings of Lenders One, Wholesale One and Residential Investor One, consolidated entities not owned by Altisource, and are included in revenue and reduced from net income to arrive at net income attributable to Altisource. 
Stock Repurchase Plan 
On May 20, 2015, our shareholders approved a new share repurchase program, which replaced the previous share repurchase program. Under the new program, we are authorized to purchase up to 3.0 million shares of our common stock, based on a limit of 15% 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. This is in addition to amounts previously purchased under prior programs.  Under the existing and prior programs, we purchased 0.5 million shares of common stock at an average price of $25.17 per share during the three months ended March 31, 2016 and 0.2 million shares at an average price of $23.44 per share during the three months ended March 31, 2015. As of March 31, 2016, approximately 1.0 million shares of common stock remain available for repurchase under the new program. Our senior secured term loan limits the amount we can spend on share repurchases and may prevent repurchases in certain circumstances. As of March 31, 2016, approximately $333 million was available to repurchase our common stock under our senior secured term loan.
Altisource’s Vision and Growth Initiatives
Altisource provides a suite of mortgage, real estate and consumer debt services, leveraging our technology platform and global operations. Altisource is focused on becoming the premier provider of real estate and mortgage marketplaces and related services to a broad and diversified customer base. Within the real estate and mortgage markets, we facilitate transactions and provide products, solutions and services related to home sales, home purchases, home rentals, home maintenance, mortgage origination and mortgage servicing.
Strategically, we are focused on (1) our four key business initiatives, (2) continuing to strengthen our compliance management system and (3) maintaining strong performance and relationships with our strategic customers.
Each of our four key business initiatives position Altisource to grow and diversify our customer and revenue base. We believe these initiatives address very large markets and directly leverage our core competencies and distinct competitive advantages. Our four strategic growth initiatives and a brief description of each are as follows:
Mortgage market:
1.
Continue to grow our Servicer Solutions business (the products, services and technologies typically used or licensed by loan servicers): We are focused on expanding services purchased by our existing customer base and attracting new customers. Even as delinquencies return to historical norms, we believe there is a very large addressable market for the services we provide, as well as a strong and increasing customer focus on regulatory compliance and operational quality. We are one of only a few service providers with a comprehensive offering of services and technologies on a national scale. We believe we are well positioned to gain market share as customers consolidate to larger, full-service vendors and continue to outsource services that have historically been performed in-house.

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