Notes to Condensed Consolidated Financial Statements
June 30, 2022
(Unaudited)
1. Organization and Basis of Presentation
Altisource Asset Management Corporation (“we,” “our,” “us,” or the “Company”) was incorporated in the U.S. Virgin Islands (“USVI”) on March 15, 2012 (our “inception”) and commenced operations on December 21, 2012.Our primary business was to provide asset management and certain corporate governance services to institutional investors. In October 2013, we applied for and were granted registration by the Securities and Exchange Commission (the “SEC”) as a registered investment adviser under Section 203(c) of the Investment Advisers Act of 1940. We historically operated in a single segment focused on providing asset management and certain corporate governance services to investment vehicles. Our primary client was Front Yard Residential Corporation (“Front Yard”), a public real estate investment trust (“REIT”) focused on acquiring and managing quality, affordable single-family rental (“SFR”) properties throughout the United States.
On August 13, 2020, we entered into a Termination and Transition Agreement (the “Termination Agreement”) with Front Yard and Front Yard Residential L.P. (“FYR LP”) to terminate the Amended and Restated Asset Management Agreement, dated as of May 7, 2019 (the “Amended AMA”), by and among Front Yard, FYR LP and AAMC, and to provide for a transition plan to facilitate the internalization of Front Yard’s asset management function (the “Transition Plan”). The Termination Agreement was effective on December 31, 2020, the date that the parties mutually agreed that the Transition Plan had been satisfactorily completed (the “Termination Date”) and the Amended AMA was terminated in its entirety.
As disclosed in our public filings, the Company’s prior business operations ceased in the first week of 2021. During 2021, the Company engaged in a comprehensive search to acquire an operating company with the proceeds received from the sale of its operations in accordance with the Termination Agreement. A range of industries were included in the search, including, but not limited to, real estate lending, cryptocurrency, block-chain technology and insurance operations. Outside professional firms, including among others, Cowen and Company, LLC, an investment bank, and Norton Rose Fulbright LLP, a global law practice, were engaged to provide due diligence, legal and valuation expertise to assist in our search.
In March 2022, AAMC created the Alternative Lending Group (ALG). The Company has committed $50 million to grow the operations of the ALG to perform the following:
•Build out a niche origination platform as well as a loan acquisition team;
•Fund the originated or acquired alternative loans from a combination of Company equity and future lines of credit;
•Sell the originated and acquired alternative loans through forward commitment and repurchase contracts;
•Leverage senior management’s expertise in this space; and
•Utilize AAMC’s existing operations in India to drive controls and cost efficiencies.
ALG's primary sources of income will be derived from mortgage banking activities generated through the origination and acquisition of loans, and their subsequent sale or securitization as well as net interest income from loans while held on the balance sheet for investment.
In addition to ALG operations, AAMC has also committed to $2.0 million of initial capital to invest into a Crypto ATM business through its Right of First Refusal Agreement with the cryptocurrency company, ForumPay, with the intent to deploy crypto enabled ATMs worldwide. The Crypto ATMs using ForumPay's software will generally allow users to purchase multiple cryptocurrencies such as Bitcoin, Ethereum and Litecoin, using fiat currency, sell the same cryptocurrencies and eventually remit payments globally either in cryptocurrency or the local fiat currency. The Company will earn revenue by charging fees for utilizing the ATMs for exchange between cryptocurrency and local fiat currency. We will initially invest $2.0 million and plan to invest more as the opportunity warrants.
Basis of presentation and use of estimates
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). All wholly owned subsidiaries are included, and all intercompany accounts and transactions have been eliminated.
The Company changed its balance sheet presentation from classified (distinguishing between short-term and long-term accounts) to unclassified (no such distinction) in the second quarter of 2022. This change was prompted by the Company's strategic decision to launch an alternative lending operation, ALG, in March 2022, as described above. The presentation of an unclassified balance sheet is consistent with that of the Company’s peers within the lending industry. Further, the previous classified presentation was not utilized to derive any metric by which the Company is measured or will be measured on a prospective basis. As the Company is now presenting an unclassified balance sheet, reclassification adjustments have been made to the historical Condensed Consolidated Balance Sheet at December 31, 2021 in order for it to conform with the current unclassified presentation.
In management's opinion, the unaudited interim condensed consolidated financial statements contain all adjustments that are of a normal recurring nature and are necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods. The interim results are not necessarily indicative of results for a full year. We have omitted certain notes and other information from the interim condensed consolidated financial statements presented in this Quarterly Report on Form 10-Q as permitted by SEC rules and regulations. These condensed consolidated financial statements should be read in conjunction with our annual consolidated financial statements included within our Annual Report on Form 10-K for the year ended December 31, 2021.
Use of estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Loans held for investment or sale, carried at fair market value
We will both originate and purchase alternative loans. These loans will either be classified as held for investment or held for sale depending upon the determination of management. We have elected to measure these alternative loans at fair value on a loan by loan basis. This option is available when we first recognize a financial asset. Subsequent changes in the fair value of these loans will be recorded in our condensed consolidated statements of operations in the period of the change. Purchased loans, also known as correspondent loans, can be bought with a net strip interest component in that the seller of the loan will receive an agreed upon percentage of the coupon interest generated from the sold loan. This strip component is reflected as service and asset management expense on the condensed consolidated statements of operations.
A fair value measurement represents the price at which an orderly transaction would occur between willing market participants at the measurement date. We will estimate the fair values of the loans held for investment or sale based on available inputs from the marketplace. The market for the loans that we have or will invest in is generally illiquid. Establishing fair values for illiquid assets is inherently subjective and is often dependent upon our estimates and modeling assumptions. In circumstances where relevant market inputs cannot be obtained, increased analysis and management judgment are required to estimate fair value. This generally requires us to establish internal assumptions about future cash flows and appropriate risk-adjusted discount rates. Regardless of the valuation inputs we apply, the objective of fair value measurement for assets is unchanged from what it would be if markets were operating at normal activity levels and/or transactions were orderly; that is, to determine the current exit price.
See Note 3 for further discussion on fair value measurements.
Interest for these loans is recognized as revenue when earned and deemed collectible or until a loan becomes more than 90 days past due, at which point the loan is placed on nonaccrual status and any accrued interest is reversed against interest income. When a seriously delinquent loan previously placed on nonaccrual status has been cured, meaning all delinquent principal and interest have been remitted by the borrower, the loan will be placed back on accrual status.
Redeemable Preferred stock
Issuance of Series A Convertible Preferred Stock in 2014 Private Placement
During the first quarter of 2014, we issued 250,000 shares of convertible preferred stock for $250.0 million (“Series A Shares”) to institutional investors. Under the Certificate of Designations of the Series A Shares (the “Certificate”), we have the option to redeem all of the Series A Shares on March 15, 2020 and on each successive five-year anniversary of March 15, 2020 thereafter. In connection with these same redemption dates, each holder of our Series A Shares has the right to give notice requesting us to redeem all of the Series A Shares held by such holder out of legally available funds. In accordance with the terms of the Certificate, if we have legally available funds to redeem all, but not less than all, of the Series A Shares requested to be redeemed on a redemption date, we will deliver to those holders who have requested redemption in accordance with the Certificate a notice of redemption. If we do not have legally available funds to redeem all, but not less than all, of the Series A Shares requested to be redeemed on a redemption date, we will not provide a notice of redemption. The redemption right will be exercisable in connection with each redemption date every five years until the mandatory redemption date in 2044. If we are required to redeem all of the holder's Series A Shares, we are required to do so for cash at a price equal to $1,000 per share (the issuance price) out of funds legally available therefor. Due to the redemption provisions of the Series A Preferred Stock, we classify these shares as mezzanine equity, outside of permanent stockholders' equity.
The holders of our Series A Shares are not entitled to receive dividends with respect to their Series A Shares. The Series A Shares are convertible into shares of our common stock at a conversion price of $1,250 per share (or an exchange rate of 0.8 shares of common stock for Series A Share), subject to certain anti-dilution adjustments.
Upon certain change of control transactions or upon the liquidation, dissolution or winding up of the Company, holders of the Series A Shares will be entitled to receive an amount in cash per Series A Share equal to the greater of:
(i) $1,000 plus the aggregate amount of cash dividends paid on the number of shares of common stock into which such Series A Shares were convertible on each ex-dividend date for such dividends; and
(ii) The number of shares of common stock into which the Series A Shares are then convertible multiplied by the then-current market price of the common stock.
The Certificate confers no voting rights to holders, except with respect to matters that materially and adversely affect the voting powers, rights or preferences of the Series A Shares or as otherwise required by applicable law.
With respect to the distribution of assets upon the liquidation, dissolution or winding up of the Company, the Series A Shares rank senior to our common stock and on parity with all other classes of preferred stock that may be issued by us in the future.
The Series A Shares are recorded net of issuance costs, which were amortized on a straight-line basis through the first potential redemption date in March 2020.
Between January 31, 2020 and February 3, 2020, we received purported notices from all of the holders of our Series A Shares requesting us to redeem an aggregate of $250.0 million liquidation preference of our Series A Shares on March 15, 2020. We did not have legally available funds to redeem all of the Series A Shares on March 15, 2020. As a result, we do not believe, under the terms of the Certificate, that we were obligated to redeem any of the Series A Shares under the Certificate.
Current Litigation
–Luxor (plaintiff) v. AAMC (defendant)
On February 3, 2020, Luxor filed a complaint in the Supreme Court of the State of New York, County of New York, against AAMC for breach of contract, specific performance, unjust enrichment, and related damages and expenses. The complaint alleges that AAMC’s position that it will not redeem any of Luxor’s Series A Shares on the March 15, 2020 redemption date is a material breach of AAMC’s redemption obligations under the Certificate. Luxor seeks an order requiring AAMC to redeem its Series A Shares, recovery of no less than $144,212,000 in damages, which is equal to the amount Luxor would receive if AAMC redeemed all of Luxor’s Series A Shares at the redemption price of $1,000 per share set forth in the Certificate, as well as payment of its costs and expenses in the lawsuit. In the alternative, Luxor seeks a return of its initial purchase price of $150,000,000 for the Series A Shares, as well as payment of its costs and expenses in the lawsuit. On May 25, 2020, Luxor’s complaint was amended to add Putnam Equity Spectrum Fund and Putnam Capital Spectrum Fund (collectively, “Putnam”), which also invested in the Series A Shares, as plaintiff. On June 12, 2020, AAMC moved to dismiss the Amended Complaint in
favor of AAMC’s first-filed declaratory judgment action in the U.S. Virgin Islands. On August 4, 2020, the court denied AAMC’s motion to dismiss. On February 17, 2021, in accordance with the terms of the Putnam Agreement described below, Putnam agreed to discontinue all claims against AAMC with prejudice related to the Series A shares. Luxor and AAMC have completed discovery in the action. AAMC and Luxor each filed summary judgment motions on July 18, 2022.
–Luxor Books and Records Demand
On April 26, 2021, Luxor, sent a letter to the Company demanding, under the common law of the USVI, the right to inspect certain books and records of the Company (the “Demand”). According to Luxor, the purpose of the Demand is to investigate whether the Company’s Board of Directors may have considered or engaged in transactions with or at the direction of a significant shareholder of the Company or whether the Company’s Board of Directors and/or Company management may have mismanaged the Company or engaged in wrongdoing, may not have properly discharged their fiduciary duties, or may have conflicts of interest. Luxor further alleges that it seeks an inspection of the Company books and records to determine whether the current directors should continue to serve on the Company’s board or whether a derivative suit should be filed.
On May 10, 2021, the Company sent a letter responding to the Demand and declining to provide the Company’s books and records for inspection (the “Response”). The Response states that Luxor does not have a credible basis for the Demand, which is required under the USVI common law; that, as preferred shareholders with no voting rights, Luxor’s purpose for the Demand is not reasonably related to Luxor’s interests as shareholders of the Company because Luxor cannot vote in connection with Board elections or business transactions of the Company; and that Luxor’s Demand serves only to personally benefit Luxor in its private suit against the Company.
AAMC intends to continue to pursue its strategic business initiatives despite this litigation. If Luxor were to prevail in its lawsuit, our liquidity could be materially and adversely affected.
Settlement Activities
On February 17, 2021, the Company entered into a settlement agreement dated as of February 17, 2021 (the “Putnam Agreement”) with Putnam. Pursuant to the Putnam Agreement, AAMC and Putnam exchanged all of Putnam’s 81,800 Series A Shares for 288,283 shares of AAMC’s common stock. Additionally, AAMC paid Putnam $1,636,000 within three business days of the effective date of the Putnam Agreement and $1,227,000 on the one-year anniversary of the effective date of the Putnam Agreement, and in return Putnam released AAMC from all claims related to the Series A Shares and enter into a voting rights agreement as more fully described in the Putnam Agreement. Finally, AAMC granted to Putnam a most favored nations provision with respect to future settlements of the Series A Shares. As a result of this settlement, we recognized a one-time gain directly to Additional paid in capital of $71.9 million in the first quarter of 2021.
On July 18, 2022, the Company entered into an agreement (the "Purchase Agreement") with Putnam in which the Company repurchased 286,873 shares of common stock of the Company owned by Putnam (the "Putnam Shares"). The aggregate purchase price of the Putnam Shares was $2,868,730, or $10 per share.
Pursuant to the Purchase Agreement, the Company and Putnam also agreed to terminate the most favored nation clause granted to Putnam in the Putnam Agreement. The Company and Putnam also agreed to terminate all of Putnam's shareholder voting obligations included in the Putnam Agreement.
On August 27, 2021, the Company entered into a settlement agreement (the “Wellington Agreement”) with certain funds managed by Wellington Management Company LLP (collectively, “Wellington”). Under the Wellington Agreement, the Company paid Wellington $2,093,000 in exchange for 18,200 Series A Shares ($18.2 million of liquidation preference) held by Wellington, and in return Wellington agreed to release AAMC from all claims related to the Series A Shares. As a result of this settlement, we recognized a one-time gain directly to Additional paid in capital of $16.1 million gain in the third quarter of 2021.
On January 6, 2022, the Company entered into a settlement agreement (the "Settlement Agreement") with two institutional investors. Under the Settlement Agreement, the Company paid the institutional investors approximately $665 thousand in cash in exchange for 5,788 Series A shares ($5.79 million of liquidation preference) held by the institutional investors. As a result of this settlement, the Company recognized a one-time gain directly to Additional paid in capital of approximately $5.1 million in the first quarter of 2022.
Recently issued accounting standards
Recently issued accounting standards adopted
In December 2019, the FASB issued ASU 2019-12, Income Taxes - Simplifying the Accounting for Income Taxes (Topic 740), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. Our adoption of this standard in the first quarter of 2022 did not have a material impact on our financial statements.
Recently issued accounting standards not yet adopted
In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting,” which provides practical expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The expedients and exceptions provided by the amendments in this update apply only to contracts, hedging relationships, and other transactions that reference the London interbank offered rate (“LIBOR”) or another reference rate expected to be discontinued as a result of reference rate reform. These amendments are not applicable to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. ASU No. 2020-04 is effective as of March 12, 2020 through December 31, 2022 and may be applied to contract modifications and hedging relationships from the beginning of an interim period that includes or is subsequent to March 12, 2020. We will adopt this standard when LIBOR is discontinued. We are evaluating the impact the new standard will have on our consolidated financial statements and related disclosures, but do not anticipate a material impact.
2. Discontinued Operations
Our primary client prior to December 31, 2020 had been Front Yard Residential Corporation (“Front Yard”), a public real estate investment trust (“REIT”) focused on acquiring and managing quality, affordable single-family rental (“SFR”) properties throughout the United States. All of our revenue for all periods presented prior to December 31, 2021 was generated through our asset management agreements with Front Yard.
On August 13, 2020, AAMC and Front Yard entered into a Termination and Transition Agreement (the “Termination Agreement”), pursuant to which the Company and Front Yard have agreed to effectively internalize the asset management function of Front Yard. The Termination Agreement provided that the Amended AMA would terminate following a transition period to enable the internalization of Front Yard’s asset management function, allow for the assignment of certain vendor contracts and implement the transfer of certain employees to Front Yard and the training of required replacement employees at each company. In addition, Front Yard acquired the equity interests of AAMC's Indian subsidiary, the equity interests of AAMC's Cayman Islands subsidiary, the right to solicit and hire designated AAMC employees that oversaw the management of Front Yard's business and other assets of AAMC that were used in connection with the operation of Front Yard's business.
The transition period ended at the close of business, December 31, 2020, the time that AAMC and Front Yard mutually agreed that all required transition activities had been successfully completed (the “Termination Date”). On the Termination Date, the Amended AMA terminated, and the Company completed the assignment of our lease in Charlotte, North Carolina to Front Yard. Additionally, on December 31, 2020, we completed the sale of our Cayman Islands subsidiary. On January 1, 2021, in connection with the Termination Agreement, the Company completed the sale of our India subsidiary.
The Company had no assets and liabilities related to our discontinued operations that constituted the Disposal Group at June 30, 2022 and December 31, 2021.
Discontinued operations includes (i) the management fee revenues generated under our asset management agreements with Front Yard, (ii) expense reimbursements from Front Yard and the underlying expenses, (iii) the results of operations of our India and Cayman Islands subsidiaries, (iv) the employment costs associated with certain individuals wholly dedicated to Front Yard and (v) the costs associated with our lease in Charlotte, North Carolina, that was assumed by Front Yard on December 31, 2020. The operating results of these items are presented in our consolidated statements of operations as discontinued operations for all periods presented and revenues and expenses directly related to discontinued operations were eliminated from our ongoing operations.
The following condensed table details the components comprising net income from our discontinued operations for the six months ended June 30, 2021. No income was received in the three months ended June 30, 2021. ($ in thousands)
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| | | | | | Six months ended June 30, 2021 |
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| Other income from discontinued operations: | | | | | | | | |
| Gain on disposal | | | | | | | | 7,485 | |
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| Total other income from discontinued operations | | | | | | | | 7,485 | |
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| Net income from discontinued operations before income taxes | | | | | | | | 7,485 | |
| Income tax expense | | | | | | | | 1,272 | |
| Net income from discontinued operations | | | | | | | | $ | 6,213 | |
The following table details cash flow information related to our discontinued operations for the six months ended June 30, 2021 ($ in thousands):
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| | | Six months ended June 30, 2021 |
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| Total operating cash flows from discontinued operations | | | $ | 5,439 | |
| Total investing cash flows from discontinued operations | | | 511 | |
| Total financing cash flows from discontinued operations | | | 80 | |
3. Loans Held for Investment at Fair Value
Our loan portfolio consists of business purpose loans secured by single family, multifamily and commercial real estate that were acquired from third part originators. The composition of the loan portfolio as of June 30, 2022 and December 31, 2021, is summarized below:
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| | | June 30, 2022 | | December 31, 2021 |
| Total loan commitments | $45,229 | | $— |
| Less: construction holdbacks | (12,923) | | — |
| Total principal outstanding | 32,306 | | — |
| Valuation reserve | (325) | | — |
| Loans held for investment, at fair value | $31,981 | | $— |
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The loan portfolio consists of 43 loans at June 30, 2022, with a weighted average coupon of 8.7%, of which the Company receives a net yield of 6.7% after taking into account the strip interest to the sellers of the loans. The weighted average life of the portfolio is approximately 12 months. 9 loans represent 63% of the total principal outstanding at June 30, 2022. There were no loans on nonaccrual status or 90 days or more past due at June 30, 2022.
The composition of the total loan commitment by state as of June 30, 2022 is summarized below ($ in thousands):
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| State | | | Commitment | | Percent of Portfolio |
| Florida | $17,219 | | 38.1 | % |
| California | 9,699 | | 21.4 | % |
| New York | 8,012 | | 17.7 | % |
| Texas | 4,630 | | 10.2 | % |
| New Jersey | 2,523 | | 5.6 | % |
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| Other | 3,146 | | 7.0 | % |
| Total | $45,229 | | 100.0 | % |
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For financial reporting purposes of our alternative loans, we follow a fair value hierarchy established under GAAP that is used to determine the fair value of financial instruments. This hierarchy prioritizes relevant market inputs in order to determine an "exit price" at the measurement date, or at the price at which an asset could be sold or a liability could be transferred in an orderly process that is not a forced liquidation or distressed sale. Level 1 inputs are observable inputs that reflect quoted prices for identical assets or liabilities in active markets. Level 2 inputs are observable inputs other than quoted prices for an assets or liabilities that are obtained through corroboration with observable market data. Level 3 inputs are unobservable inputs (e.g., our own data or assumptions) that are used when there is little, if any, relevant market activity for the asset or liability required to be measured at fair value.
In certain cases, inputs used to measure fair value fall into different levels of the fair value hierarchy. In such cases, the level at which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. Our assessment of the significance of a particular input requires judgment and considers factors specific to the asset or liability being measured.
The following table presents the assets that are reported at fair value on a recurring basis as of June 30, 2022, as well as the fair value of hierarchy of the valuation inputs used to measure fair value. We did not have any assets that were reported at fair value as of December 31, 2021. We did not have any liabilities to report as of June 30, 2022 and December 31, 2021.
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| June 30, 2022 | | Carrying | | Fair Value Measurements Using |
| (In thousands) | | Value | | Level 1 | | Level 2 | | Level 3 |
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| Loans held for investment | | $ | 31,981 | | | $ | — | | | $ | — | | | $ | 31,981 | |
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The estimated fair value for our business purpose loans is determined using discounted cash flow modeling (DCF) for both performing and nonaccrual loans. For performing loans, the DCF is based on the future expected cash flows of each loan in accordance with its contractual terms net of the strip component. Cash flows for performing loans with construction holdbacks incorporate the draws to complete the required improvements to the underlying property securing the loan. For nonaccrual loans, the estimated cash flows are based on the current fair value of the collateral of the loans, in which the Company will utilize a third-party appraisal to determine the fair value (Level 3). At June 30, 2022 the Company had no nonaccrual loans.
The discount rate utilized for the DCF applied to the net yield to be received by the Company was 7.8%, which is greater than the overall yield on the portfolio of 6.7%, resulting in the decrease in value of the portfolio at June 30, 2022. The determination of the discount rate was based on analysis of the current interest rates charged for business purpose loans in conjunction with the increase in rates for other underlying base rates such as the 10-year U.S. treasury bond and the 30 day Secured Overnight Financing Rate (SOFR) (Level 3).
As of June 30, 2022, the Company had no securities outstanding. We did not transfer any assets from one level to another level during the year ended December 31, 2021.
4. Equity Securities
Investment gains/losses in the six months ended of 2022 and 2021 are summarized as follows ($ in thousands):
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| Three months ended June 30, | | Six months ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Equity securities: | | | | | | | |
| Change in unrealized gains (losses) during the period on securities held at the end of the end of the period | $ | — | | | $ | (2,411) | | | $ | — | | | $ | 3,310 | |
| Investment gains on securities sold during the period | — | | | 6,360 | | | — | | | 6,360 | |
| — | | | 3,949 | | | — | | | 9,670 | |
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| Front Yard common stock: | | | | | | | |
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| Investment gains on securities sold during the period | — | | | — | | | — | | | 146 | |
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| Total change in fair value of equity securities and Front Yard common stock | $ | — | | | $ | 3,949 | | | $ | — | | | $ | 9,816 | |
Investment gains and losses include unrealized gains and losses from changes in fair values during the period on positions that we owned in 2021, as well as gains and losses on positions sold during the period. As reflected in the condensed consolidated statements of cash flows, we received proceeds from sales of Front Yard common stock of $47.5 million in the six months ended June 30, 2021. No proceeds were received in six months ended June 30, 2022 because no investments were held. In the preceding table, investment gains/losses on equity securities sold during the period reflect the difference between the sales proceeds and the fair value of the equity securities sold at the beginning of the applicable quarterly period.
5. Borrowings
In 2021, the Company began borrowing under a standard margin arrangement with our banking institution. The margin account is secured by the securities held in our brokerage account with this institution. We paid interest on all of our borrowings each month when a balance was owed. All indebtedness on the margin agreement was paid off as of December 31, 2021. The Company had no borrowings outstanding at June 30, 2022 or December 31, 2021.
6. Leases
We lease office space under operating leases in Christiansted, St. Croix, U.S. Virgin Islands, and Bengaluru, India. Effective July 1, 2022, the Company entered into a new lease for office space in Tampa, Florida that expires on February 28, 2024.
As of June 30, 2022 and December 31, 2021, our weighted average remaining lease term, including applicable extensions, was 4.6 years and 5.1 years, respectively. We determine the discount rate for each lease to be either the discount rate stated in the lease agreement or our estimated rate that we would be charged to finance real estate assets.
During the three and six months ended June 30, 2022, we recognized rent expense of $49,000 and $98,000, related to long-term operating leases, respectively. During the three and six months ended June 30, 2021, we recognized rent expense of $50,000 and $100,000, related to long-term operating leases, respectively. We had no short-term rent expense during the three and six months ended June 30, 2022 and 2021. We include rent expense as a component of general and administrative expenses in the condensed consolidated statements of operations. We had no finance leases during the three and six months ended June 30, 2022 and 2021.
The following table presents our future lease obligations under our operating leases as of June 30, 2022 ($ in thousands):
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| Operating Lease Liabilities | | |
| 2022 (1)(2) | $ | 97 | | | |
| 2023 (2) | 200 | | | |
| 2024 | 204 | | | |
| 2025 | 203 | | | |
| 2026 | 131 | | | |
| Thereafter | 75 | | | |
| Total lease payments | 910 | | | |
| Less: interest | 131 | | | |
| Lease liabilities | $ | 779 | | | |
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(1)Excludes the six months ended June 30, 2022.
(2)Does not include the Tampa, Florida lease executed July 1, 2022 in which the total lease obligation is approximately $293 thousand less $16 thousand interest, netting a total lease liability of $277 thousand.
7. Commitments and Contingencies
Litigation, claims and assessments
Information regarding reportable legal proceedings is contained in the “Commitments and Contingencies” note in the financial statements provided in our Annual Report on Form 10-K for the year ended December 31, 2021. We establish reserves for specific legal proceedings when we determine that the likelihood of an outcome is probable and the amount of loss can be reasonably estimated. We do not currently have any reserves for our legal proceedings. The following updates and restates the description of the previously reported matters:
Litigation regarding Luxor Capital Group, LP and certain of its managed funds and accounts ("Luxor")
Please refer to Note 1 – Section Series A Convertible Preferred Stock in 2014 Private Placement.
Executive Arbitrations
Former Chief Executive Officer, Indroneel Chatterjee
On May 3, 2021, Mr. Chatterjee, commenced an arbitration against the Company and each of its directors. The arbitration complaint alleges that the Company’s April 16, 2021 for cause termination of Mr. Chatterjee was in breach of Mr. Chatterjee’s Amended and Restated Employment Agreement and made extra contractual claims against the Company for not affording Mr. Chatterjee a “fair procedure” and placed him in a “false light” by disclosing Mr. Chatterjee’s termination in its public announcement of the for cause termination. In addition, the arbitration complaint also asserts a tort claim against each of the Company’s directors relating to that termination and against the Company for its April 16, 2021 public announcement of the for cause termination. Mr. Chatterjee’s arbitration complaint seeks unspecified damages for his contract claims including for loss
of income, stock and bonus, and punitive damages on his tort claims. On June 10, 2021, the Company and its directors responded to the arbitration complaint and advanced counterclaims against Mr. Chatterjee. On October 20, 2021, the arbitrator granted the Company’s motion to dismiss with respect to Mr. Chatterjee’s “fair procedure” and “false light” claims, but denied the motion to dismiss the tort claim against each of the directors. On July 11, 2022, the Company moved for summary judgment seeking dismissal of Mr. Chatterjee's remaining claims, and further seeking entry of judgment on the majority of the Company's counterclaims. Mr. Chatterjee's response to the Company's motion for summary judgment is due August 31, 2022. To the extent the matter is not concluded during summary judgment, the arbitrator has set a trial date for October 24-28, 2022. The Company and the directors intend to vigorously defend the claims.
Erbey Holding Corporation et al. v. Blackrock Management Inc., et al.
On April 12, 2018, a partial stockholder derivative action was filed in the Superior Court of the Virgin Islands, Division of St. Croix under the caption Erbey Holding Corporation, et al. v. Blackrock Financial Management Inc., et al. The action was filed by Erbey Holding Corporation (“Erbey Holding”), John R. Erbey Family Limited Partnership (“JREFLP”), by its general partner Jupiter Capital, Inc., Salt Pond Holdings, LLC (“Salt Pond”), Munus, L.P. (“Munus”), Carisma Trust (“Carisma”), by its trustee, Venia, LLC, and Tribue Limited Partnership (collectively, the “Plaintiffs”) each on its own behalf and Salt Pond and Carisma derivatively on behalf of AAMC. The action was filed against Blackrock Financial Management, Inc., Blackrock Investment Management, LLC, Blackrock Investments, LLC, Blackrock Capital Management, Inc., Blackrock, Inc. (collectively, “Blackrock”), Pacific Investment Management Company LLC, PIMCO Investments LLC (collectively, “PIMCO”) and John and Jane Does 1-10 (collectively with Blackrock and PIMCO, the “Defendants”). The action alleges a conspiracy by Blackrock and PIMCO to harm Ocwen Financial Corporation (“Ocwen”) and AAMC and certain of their subsidiaries, affiliates and related companies and to extract enormous profits at the expense of Ocwen and AAMC by attempting to damage their operations, business relationships and reputations. The complaint alleges that Defendants’ conspiratorial activities, which included short-selling activities, were designed to destroy Ocwen and AAMC, and that the Plaintiffs (including AAMC) suffered significant injury, including but not limited to lost value of their stock and/or stock holdings. The action seeks, among other things, an award of monetary damages to AAMC, including treble damages under Section 605, Title IV of the Virgin Islands Code related to the Criminally Influenced and Corrupt Organizations Act, punitive damages and an award of attorney’s and other fees and expenses.
Defendants have moved to dismiss the first amended verified complaint. Plaintiffs and AAMC have moved for leave to file a second amended verified complaint to include AAMC as a direct plaintiff, rather than as a derivative party. On March 27, 2019, the Court held oral argument on Defendants' motions to dismiss the first amended verified complaint and Plaintiffs' motion for leave to file the second amended verified complaint. The Court held additional oral argument on the pending motions on October 25, 2021. The Court has not yet decided the pending motions.
At this time, we are not able to predict the ultimate outcome of this matter, nor can we estimate the range of possible damages to be awarded to AAMC, if any. As such, we have not recorded a liability for this matter at June 30, 2022 or December 31, 2021.
COVID-19 Pandemic
Due to the current COVID-19 pandemic in the United States and globally, our business, our employees and the economy as a whole could be adversely impacted. The magnitude and duration of the COVID-19 pandemic and its impact on our cash flows and future results of operations could potentially be significant and will largely depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the COVID-19 pandemic, the success of actions taken to contain or treat the pandemic, and reactions by consumers, companies, governmental entities and capital markets.
The COVID-19 pandemic has had significant effects on global markets, supply chains, businesses and communities. As a result of increased COVID-19 vaccination rates and significant reopening of the economy, related risks appear to have decreased. Nevertheless, the Company has taken appropriate actions to mitigate the negative impact the virus has on the Company by reducing employee travel, allowing employees to work remotely, and canceling in-person meetings when possible.
8. Share-Based Payments
On May 12, 2022, we granted 22,500 shares of restricted stock to management with a weighted average grant date fair value per share of $9.89. The restricted stock units will vest in three equal annual installments on May 2023, 2024, and 2025 subject to forfeiture or acceleration.
On September 20, 2021, we granted 3,000 shares of restricted stock to management with a weighted average grant date fair value per share of $24.83. The restricted stock units will vest in three equal annual installments on September 20, 2022, 2023 and 2024 subject to forfeiture or acceleration.
On June 28, 2021, we granted 5,000 shares of restricted stock to management with a weighted average grant date fair value per share of $19.64. 1,667 shares of this grant vested on June 28, 2022. The remaining restricted stock units will vest in two equal annual installments on June 28, 2023 and 2024 subject to forfeiture or acceleration.
On February 24, 2021, we granted 82,671 shares of restricted stock to members of management with a weighted average grant date fair value per share of $26.25. The restricted stock units immediately vested.
On October 15, 2020, we granted 10,000 shares of restricted stock to former members of management with a weighted average grant date fair value per share of $19.29. The restricted stock units were to vest in three equal annual installments, on October 15, 2021, 2022, and 2023. These shares were forfeited in April 2021 upon their resignations.
On January 30, 2020, in order to induce our former Chief Executive Officer to join the Company, we granted 60,000 shares of restricted stock and 60,000 stock options to our former Chief Executive Officer. The restricted stock and stock options had a weighted average grant date fair value of $13.11 and $10.61, respectively. The restricted stock units were scheduled to vest in three equal annual installments on January 30, 2021, 2022, and 2023. On April 16, 2021, the former Chief Executive Officer was terminated for cause, and as a result, 40,000 unvested restricted stock units and 60,000 unvested options were forfeited at that date.
Our independent Directors each receive annual grants of restricted stock equal to $60,000 based on the market value of our common stock at the time of the annual stockholders meeting. These shares of restricted stock vest and are issued after a one-year service period, subject to each independent Director attending at least 75% of the Board and committee meetings. During 2021, we granted 7,236 shares of stock pursuant to our Equity Incentive Plans with a weighted average grant date fair value per share of $24.88.
We recorded $0.08 million and $0.15 million of compensation expense related to our share-based compensation for the three and six months ended June 30, 2022. We recorded $(0.6) million and $1.9 million of compensation expense related to our share-based compensation for the three and six months ended June 30, 2021. As of June 30, 2022 and December 31, 2021, we had an aggregate $0.2 million and $0.3 million, respectively, of total unrecognized share-based compensation cost to be recognized over a weighted average remaining estimated term of 1.5 years and 1.2 years, respectively.
9. Income Taxes
We are domiciled in the USVI and are obligated to pay taxes to the USVI on our income. We applied for tax benefits from the USVI Economic Development Commission (“EDC”) and received our certificate of benefits (the “Certificate”), effective as of February 1, 2013. Pursuant to the Certificate, as long as we comply with its provisions, we will receive a 90% tax credit on our USVI-sourced income taxes until 2043. By letter dated July 13, 2022, the EDC approved an extension of the temporary full-time employment waiver (the “Waiver”) of the Company’s minimum employment requirements to five full-time USVI employees for the period from January 1, 2022 through June 30, 2022. The Company will request an extension of the Waiver period to December 31, 2022.
At June 30, 2022, the Company had one less USVI employees than what is required under the provisions of the Waiver. The Company's Chief Financial Officer and General Counsel relocated to the USVI in 2021. The Company's Chief Financial Officer became an eligible USVI employee in June, 2022 and the General Counsel will be eligible in September, 2022. The Company hired Jason Kopcak as President and Chief Operating Officer, now Chief Executive Officer, in May 2022. Mr. Kopcak has relocated to the USVI and will also be an eligible USVI employee after one year of residency. While we expect to meet the requirements of the Waiver in 2022, with the extension, the Company continues to seek to hire USVI employees when possible.
As of June 30, 2022 and December 31, 2021, we accrued no interest or penalties associated with any unrecognized tax benefits, nor did we recognize any interest expense or penalties during the six months ended June 30, 2022 and 2021.
The Company recorded tax expense of $7 thousand on a book loss of $4.1 million in the second quarter of 2022. The material differences between the effective tax rate and the statutory tax rate are the EDC benefit discussed above and the fact that the USVI EDC is in a full valuation allowance position and incurred a current quarter loss.
10. Earnings Per Share
The following table sets forth the components of basic and diluted earnings (loss) per share (in thousands, except share and per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, | | |
| 2022 | | 2021 | | 2022 | | 2021 | | |
| Numerator | | | | | | | | | |
| Continuing operations: | | | | | | | | | |
| Net loss from continuing operations | $ | (4,132) | | | $ | 2,228 | | | $ | (7,829) | | | $ | 1,871 | | | |
| | | | | | | | | |
| Gain on preferred stock transaction | — | | | — | | | 5,122 | | | $ | 71,883 | | | |
| Numerator for basic and diluted EPS from continuing operations – net income from continuing operations attributable to common stockholders | $ | (4,132) | | | $ | 2,228 | | | $ | (2,707) | | | $ | 73,754 | | | |
| | | | | | | | | |
| Discontinued operations: | | | | | | | | | |
| Numerator for basic and diluted EPS from discontinued operations - net gain from discontinued operations | $ | — | | | $ | — | | | $ | — | | | $ | 6,213 | | | |
| | | | | | | | | |
| Total: | | | | | | | | | |
| Net (loss) income | $ | (4,132) | | | $ | 2,228 | | | $ | (7,829) | | | $ | 8,084 | | | |
| | | | | | | | | |
| Gain on preferred stock transaction | — | | | — | | | $ | 5,122 | | | $ | 71,883 | | | |
| Numerator for basic and diluted EPS – net income attributable to common stockholders | $ | (4,132) | | | $ | 2,228 | | | $ | (2,707) | | | $ | 79,967 | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Denominator | | | | | | | | | |
| Weighted average common stock outstanding – basic | 2,063,078 | | | 2,050,786 | | | 2,059,872 | | | 1,948,070 | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Weighted average common stock outstanding – diluted | 2,063,078 | | | 2,195,806 | | | 2,059,872 | | | 2,137,513 | | | |
| | | | | | | | | |
| Earnings per share of common stock – Basic: | | | | | | | | | |
| Continuing operations | $ | (2.00) | | | $ | 1.09 | | | $ | (1.31) | | | $ | 37.86 | | | |
| Discontinued operations | — | | | 0.00 | | | — | | | 3.19 | | | |
| Total | $ | (2.00) | | | $ | 1.09 | | | $ | (1.31) | | | $ | 41.05 | | | |
| | | | | | | | | |
| Earnings per share of common stock – Diluted: | | | | | | | | | |
| Continuing operations | $ | (2.00) | | | $ | 1.01 | | | $ | (1.31) | | | $ | 34.50 | | | |
| Discontinued operations | — | | | — | | | — | | | 2.91 | | | |
| Total | (2.00) | | | $ | 1.01 | | | $ | (1.31) | | | $ | 37.41 | | | |
11. Segment Information
Our primary business prior to December 31, 2020 was to provide asset management and certain corporate governance services to institutional investors. Because substantially all of our revenue was derived from the services we provided to Front Yard, we operated as a single segment focused on providing asset management and corporate governance services.
Currently, ALG is our primary segment which we will be growing in 2022.
12. Subsequent Events
Management has evaluated the impact of all subsequent events through the issuance of these interim condensed consolidated financial statements and the following events have occurred.
•On July 1, 2022, the Company entered into an operating lease agreement for approximately 7,000 square feet of office space in Tampa, Florida through February 28, 2024.
•On July 18, 2022 the Company repurchased the Putnam Shares for $2.87 million, refer to Footnote 1, for further discussion.
•On August 2, 2022, the Company entered into a Master Repurchase Agreement with Flagstar Bank FSB ("Flagstar"), a federal savings bank, as a buyer and administrative agent. The Company will use the proceeds from the Line to fund the acquisition and origination of business purpose loans (the “Loans”) secured by residential, multifamily and certain commercial properties. Flagstar will have a security interest in the Loans subject to a transaction under the Line. The Line's maturity is 364 days from the execution date.
The Line accrues price differential at a base 1-Month Term SOFR rate plus a spread dependent upon the type of Loan subject to a transaction. Price differential is payable monthly. The Line also charges a fee on the unused portion of the $50 million if the average outstanding balance of the Line is less than a threshold level of the total commitment.
The Line provides for certain affirmative and negative covenants applicable to the Company and its subsidiaries. The Company is required to maintain financial covenants including specified levels of: 1) quarter-end tangible net worth; 2) quarter-end liquidity; and 3) a quarter-end ratio of total liabilities to tangible net worth. The Line also contains events of default (subject to certain materiality thresholds and grace periods), including payment defaults, breaches of covenants and representations and warranties, cross defaults, bankruptcy or insolvency proceedings and other events of default which are customary for this type of transaction. The remedies for such events of default include the acceleration of the principal amount outstanding under the Line and the liquidation of Loans subject to a transaction.