Notes to Condensed Consolidated Financial Statements
March 31, 2021
(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. We have been a registered investment adviser under Section 203(c) of the Investment Advisers Act of 1940 since October 2013.
Our primary client has 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 prior periods presented was generated through our asset management agreements with Front Yard.
Asset Management Agreements and Termination Agreement with Front Yard
On May 7, 2019, we entered into the Amended and Restated Asset Management Agreement (the “Amended AMA”) with Front Yard and Front Yard Residential L.P. (“FYR LP”), under which we were provided to be the exclusive asset manager for Front Yard for an initial term of five years. The Amended AMA had the option to renew automatically each year thereafter for an additional one-year term, subject in each case to certain termination provisions. The Amended AMA provided for a fee structure in which we were entitled to a Base Management Fee and a potential Incentive Fee.
On August 13, 2020, AAMC, Front Yard and FYR LP entered into a Termination and Transition Agreement (the “Termination Agreement”), under which, on December 31, 2020 (the “Termination Date”):
•Front Yard agreed to acquire on January 1, 2021, the equity interests of AAMC's India subsidiary. Additionally, Front Yard acquired the equity interests of AAMC's Cayman Islands subsidiary, the right to solicit and hire designated AAMC employees that had oversight of 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 “Disposal Group”) for an aggregate purchase price of $8.2 million.
•In satisfaction of the amounts payable in Front Yard stock, we received 1,298,701 shares of Front Yard common stock. We recorded a nominal gain on the shares received.
•AAMC assigned its office lease in Charlotte, North Carolina. Certain assets related to the lease, primarily office and employee-related equipment were written off, none of which were individually material, and were recorded through other income (loss).
•Two business days prior to the Termination Date, Mr. Ellison resigned as Co-Chief Executive Officer of AAMC.
We have concluded that the Disposal Group met the held-for-sale criteria and have therefore classified the Disposal Group as held for sale on our condensed consolidated balance sheets. The termination of the Amended AMA and the sale of the Disposal Group also represents a significant strategic shift that will have a major effect on our operations and financial results. Therefore, we have classified the results of operations related to Front Yard as discontinued operations in our condensed consolidated statements of operations.
On January 1, 2021, we completed the sale of our India subsidiary and recognized a one-time gain before tax of $7.5 million on the disposal. Following the sale of the Disposal Group on January 1, 2021, no further activity has been recognized as discontinued operations in our condensed consolidated financial results. For further information, please see Note 2.
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 unaudited interim condensed consolidated financial statements and accompanying unaudited condensed consolidated financial information, in our opinion, 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 2020 Annual Report on Form 10-K, which was filed with the SEC on March 3, 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.
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 shares of 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.
Between January 31, 2020 and February 3, 2020, we received purported notices from 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 (or are) obligated to redeem any of the Series A Shares under the Certificate, and, consistent with the exclusive forum provisions of our Third Amended and Restated Bylaws, on January 27, 2020, we filed a claim for declaratory relief in the Superior Court of the Virgin Islands, Division of St. Croix, against Luxor Capital Group, LP and certain of its funds and managed accounts (collectively, “Luxor”) to confirm our interpretation of the Certificate. Luxor has removed the action to the U.S District Court for the Virgin Islands, and, on March 24, 2020, AAMC moved to remand the action back to the Superior Court of the Virgin Islands, Division of St. Croix. That motion is fully briefed and pending. On May 15, 2020, Luxor moved to dismiss AAMC's declaratory judgment complaint. That motion has been fully briefed and submitted to the Court as of July 29, 2020.
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. Putnam held 81,800 Series A Shares. Collectively, Luxor and Putnam seek a recovery of no less than $226,012,000 in damages, which is equal to the amount Luxor and Putnam would receive if AAMC redeemed all of Luxor’s and Putnam’s Series A Shares at the redemption price of $1,000 per share set forth in the Certificate, as well as payment of their costs and expenses in the lawsuit. In the alternative, Luxor and Putnam seek a return of the initial purchase price of $231,800,000 for the Series A Shares, as well as payment of their costs and expenses in the lawsuit. 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, 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 agreed to exchange all of Putnam’s 81,800 Series A Shares for 288,283 shares of AAMC’s common stock. AAMC agreed to pay to 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 agreed to release 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. For more information, please see Exhibit 10.3. As a result of the transaction, we recognized a one-time gain directly to Additional paid in capital of $71.9 million.
AAMC intends to continue to pursue its strategic business initiatives despite this litigation. If Luxor were to prevail in its lawsuit, we may need to cease or curtail our business initiatives and our liquidity could be materially and adversely affected.
The holders of Series A Preferred Stock are not entitled to receive dividends with respect to the Series A Preferred Stock. The shares of Series A Preferred Stock are convertible into shares of our common stock at a conversion price of $1,250 per share (or an exchange ratio of 0.8 shares of common stock for each share of Series A Preferred Stock), 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 Preferred Stock will be entitled to receive an amount in cash per Series A Preferred Stock 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 shares of Series A Preferred Stock was convertible on each ex-dividend date for such dividends; and
(ii) the number of shares of common stock into which the Series A Preferred Stock is 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 Preferred Stock 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 Preferred Stock ranks 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 Preferred Stock is recorded net of issuance costs, which were amortized on a straight-line basis through the first potential redemption date in March 2020.
2016 Employee Preferred Stock Plan
On May 26, 2016, the 2016 Employee Preferred Stock Plan (the “Employee Preferred Stock Plan”) was approved by our stockholders. Pursuant to the Employee Preferred Stock Plan, the Company may grant one or more series of non-voting preferred stock, par value $0.01 per share, in the Company to induce certain employees to become employed and remain employees of the Company in the USVI, and any of its future USVI subsidiaries, to encourage ownership of shares in the Company by such USVI employees and to provide additional incentives for such employees to promote the success of the Company’s business.
Pursuant to our stockholder approval of the Employee Preferred Stock Plan, on December 29, 2016, the Company authorized 14 additional series of preferred stock of the Company, consisting of Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock, Series G Preferred Stock, Series H Preferred Stock,
Series I Preferred Stock, Series J Preferred Stock, Series K Preferred Stock, Series L Preferred Stock, Series M Preferred Stock, Series N Preferred Stock and Series O Preferred Stock, and each series shall consist of up to an aggregate of 1,000 shares.
We have issued shares of preferred stock under the Employee Preferred Stock Plan to certain of our USVI employees. These shares of preferred stock are mandatorily redeemable by us in the event of such employee's termination of service with the Company for any reason. At March 31, 2021 and December 31, 2020, we had 1,100 and 1,100 shares outstanding, respectively, and we included the redemption value of these shares of $11,000 and $11,000, respectively, within accounts payable and accrued liabilities in our condensed consolidated balance sheets. In January 2021,our Board of Directors declared and paid an aggregate of $1.6 million (in relation to the 2020 fiscal year) of dividends on these shares of preferred stock. Such dividends are included in salaries and employee benefits in our condensed consolidated statements of operations.
Recently issued accounting standards
Adoption of recent accounting standards
In January 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments, which amends the guidance on measuring credit losses on financial assets held at amortized cost. ASU 2016-13, as amended, is intended to address the issue that the previous “incurred loss” methodology was restrictive for an entity's ability to record credit losses based on not yet meeting the “probable” threshold. The new language requires these assets to be valued at amortized cost presented at the net amount expected to be collected with a valuation provision. This ASU is effective for fiscal years beginning after December 15, 2019. The amendments in ASU 2016-13 should be applied on a modified retrospective transition basis. We adopted this standard on January 1, 2020, and our adoption of the standard did not have a material impact on our consolidated financial statements.
Recently issued accounting standards not yet 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. ASU 2019-12 is effective for fiscal years beginning after December 15, 2021. We are currently evaluating the impact of this standard.
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.
Recent accounting pronouncements pending adoption not discussed above are either not applicable or will not have, or are not expected to have a material impact on our consolidated financial position, results of operations, or cash flows.
2. Discontinued Operations
On August 13, 2020, AAMC and Front Yard entered into Termination and Transition Agreement, pursuant to which they agreed to effectively internalize the asset management function of Front Yard. Pursuant to the agreement, Front Yard has acquired the equity interests of AAMC's India subsidiary, the equity interests of AAMC's Cayman Islands subsidiary, the right to solicit and hire designated AAMC employees that currently oversee the management of Front Yard's business and other assets of AAMC that are used in connection with the operation of Front Yard's business.
On December 31, 2020, in connection with the Termination Agreement, 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 carrying value of major classes of assets and liabilities related to our discontinued operations that constitute the Disposal Group at March 31, 2021 and December 31, 2020 were as follows ($ in thousands):
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March 31, 2021
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December 31, 2020
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|
(unaudited)
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|
Current assets held for sale:
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|
Cash and cash equivalents
|
$
|
—
|
|
|
$
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184
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|
Short-term investments
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—
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|
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|
Prepaid expenses and other assets
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—
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710
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Total current assets held for sale
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—
|
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|
894
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|
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|
Non-current assets held for sale:
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Right-of-use lease assets
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—
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1,612
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Other non-current assets
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—
|
|
|
367
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|
Total non-current assets held for sale
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—
|
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|
1,979
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Total assets held for sale
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$
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—
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|
|
$
|
2,873
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|
|
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|
Current liabilities held for sale:
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Accrued salaries and employee benefits
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$
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—
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|
$
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910
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Accounts payable and accrued liabilities
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—
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|
|
300
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Short-term lease liabilities
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—
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|
|
128
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Total current liabilities held for sale
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—
|
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1,338
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Non-current liabilities held for sale:
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Non-current lease liabilities
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—
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1,599
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Total non-current liabilities held for sale
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—
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|
|
1,599
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Total liabilities held for sale
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$
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—
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|
|
$
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2,937
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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 table details the components comprising net income from our discontinued operations ($ in thousands):
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Three months ended March 31,
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2021
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2020
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Revenues from discontinued operations:
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Management fees from Front Yard
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$
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—
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$
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3,584
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Expense reimbursements from Front Yard
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—
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368
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Total revenues from discontinued operations
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—
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3,952
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Expenses from discontinued operations:
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Salaries and employee benefits
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—
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1,450
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Legal and professional fees
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—
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54
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|
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General and administrative
|
—
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|
|
509
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|
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Total expenses from discontinued operations
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—
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|
|
2,013
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|
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|
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Other income from discontinued operations:
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|
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Gain on disposal
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7,485
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|
|
—
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|
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|
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Other income
|
—
|
|
|
19
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|
|
|
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Total other income from discontinued operations
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7,485
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|
|
19
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|
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|
|
|
|
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|
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|
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Net income from discontinued operations before income taxes
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7,485
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|
|
1,958
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|
|
|
|
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Income tax expense
|
1,272
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|
|
61
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|
|
|
|
|
|
Net income from discontinued operations
|
$
|
6,213
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|
|
$
|
1,897
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|
|
|
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|
|
The following table details cash flow information related to our discontinued operations for the periods indicated ($ in thousands):
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Three months ended March 31,
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2021
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2020
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Total operating cash flows from discontinued operations
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$
|
5,439
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|
|
$
|
1,646
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|
Total investing cash flows from discontinued operations
|
511
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|
|
491
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Total financing cash flows from discontinued operations
|
80
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|
|
29
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3. Fair Value of Financial Instruments
The following table sets forth the carrying amount and the fair value of our financial assets by level within the fair value hierarchy as of the dates indicated ($ in thousands):
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Level 1
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Level 2
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Level 3
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Carrying Amount
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Quoted Prices in Active Markets
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Observable Inputs Other Than Level 1 Prices
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Unobservable Inputs
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March 31, 2021
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Recurring basis (assets):
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Equity securities
|
$
|
102,672
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|
|
$
|
102,672
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|
|
$
|
—
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|
|
$
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—
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Front Yard common stock
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—
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—
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|
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—
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|
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—
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December 31, 2020
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Recurring basis (assets):
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Equity securities
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$
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—
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$
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—
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$
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—
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$
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—
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Front Yard common stock
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47,355
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47,355
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—
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—
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We did not transfer any assets from one level to another level during the three months ended March 31, 2021 or during the year ended December 31, 2020.
The fair value of our holdings in both equity securities and Front Yard common stock are based on unadjusted quoted prices from active markets. The fair values of equity securities are classified as Level 1 in the fair value hierarchy because we use quoted prices for identical assets in active markets.
At December 31, 2020, we held 2,923,166 shares of Front Yard's common stock representing approximately 4.9% of Front Yard's then-outstanding common stock. We previously acquired 1,624,465 shares of Front Yard's common stock in open market transactions, and on December 31, 2020, we received 1,298,701 shares of Front Yard's common stock in connection with the transactions contemplated in the Termination Agreement with Front Yard. On January 11, 2021, Front Yard completed its previously announced merger, and all 2,923,166 shares were sold.
Investment gains/losses in the first quarter of 2021 and 2020 are summarized as follows ($ in thousands):
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Three months ended March 31,
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2021
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2020
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Equity securities:
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Change in unrealized gains (losses) during the period on securities held at the end of the end of the period
|
$
|
5,721
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$
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—
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Investment gains (losses) on securities sold during the period
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—
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|
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—
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|
5,721
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|
|
—
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|
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Front Yard common stock:
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Change in unrealized gains (losses) during the period on securities held at the end of the end of the period
|
—
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|
(634)
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Investment gains (losses) on securities sold during the period
|
146
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|
—
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146
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(634)
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Total change in fair value of equity securities and Front Yard common stock
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$
|
5,867
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|
$
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(634)
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Investment gains and losses include unrealized gains and losses from changes in fair values during the period on positions that we still own, 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 $47.5 million in the first quarter of 2021 and zero in the first three months of 2020. In the preceding table, investment gains/losses on equity securities sold during
the period reflect the difference between the sales proceeds and the fair value of the equity securities sold at the beginning of the applicable quarterly period.
A summary of the cost basis, fair value and the corresponding amounts of gross unrealized gains and losses recognized as of the dates indicated are presented in the table below ($ in thousands):
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Cost
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Gross Unrealized Gains
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Gross Unrealized Losses
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Fair Value
|
March 31, 2021
|
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Equity securities
|
$
|
96,951
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|
|
$
|
5,721
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|
|
$
|
—
|
|
|
$
|
102,672
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|
Front Yard common stock
|
—
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|
|
—
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|
|
—
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|
|
—
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|
|
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|
|
|
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|
|
December 31, 2020
|
|
|
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|
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|
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Equity securities
|
$
|
—
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|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Front Yard common stock
|
41,635
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|
|
5,720
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|
|
—
|
|
|
47,355
|
|
4. 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 pay interest on all of our borrowings each month. As of March 31, 2021, the average annualized interest rate on borrowings under our borrowing agreements was 1.11%. The margin account is carried at its unpaid principal balance.
The following table sets forth data with respect to our margin loan facility as of March 31, 2021 and December 31, 2020 ($ in thousands):
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity Date
|
|
|
Interest Rate
|
|
Amount Outstanding
|
|
|
|
|
|
Book Value of Collateral
|
March 31, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
UBS Financial Services Margin Loan
|
4/1/2021
|
(1)
|
|
1-month LIBOR + 1.00%
|
|
$
|
28,407
|
|
|
|
|
|
|
$
|
102,672
|
|
|
|
|
|
|
|
$
|
28,407
|
|
|
|
|
|
|
$
|
102,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
UBS Financial Services Margin Loan
|
1/1/2021
|
(1)
|
|
1-month LIBOR + 1.00%
|
|
$
|
—
|
|
|
|
|
|
|
$
|
—
|
|
|
|
|
|
|
|
$
|
—
|
|
|
|
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Subject to a 1-month LIBOR floor of 0.00%
5. Leases
We lease office space under operating leases in Christiansted, U.S. Virgin Islands, and Bengaluru, India.
As of March 31, 2021 and December 31, 2020, our weighted average remaining lease term, including applicable extensions, was 5.8 years and 7.5 years, respectively, and we applied a discount rate of 7.0% and 7.0%, respectively, to our office leases. 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 months ended March 31, 2021 and 2020, we recognized rent expense of $0.1 million and $0.2 million, respectively, related to long-term operating leases. We include rent expense as a component of general and administrative expenses.
The following table presents our future lease obligations under our operating leases as of March 31, 2021 ($ in thousands):
|
|
|
|
|
|
|
|
|
Operating Lease Liabilities
|
|
|
2021 (1)
|
$
|
140
|
|
|
|
2022
|
195
|
|
|
|
2023
|
206
|
|
|
|
2024
|
210
|
|
|
|
2025
|
207
|
|
|
|
Thereafter
|
207
|
|
|
|
Total lease payments
|
1,165
|
|
|
|
Less: interest
|
209
|
|
|
|
Lease liabilities
|
$
|
956
|
|
|
|
_____________
(1)Excludes the three months ended March 31, 2021.
6. 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, 2020. 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:
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 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. We have determined that there is no contingent liability related to this matter for AAMC.
Altisource Asset Management Corporation v. Luxor Capital Group, LP, et al.
On January 27, 2020, AAMC filed a complaint for declaratory judgment relief in the Superior Court of the Virgin Islands, Division of St. Croix, against Luxor Capital Group, LP and certain of its funds and managed accounts (collectively, “Luxor”) regarding AAMC’s redemption obligations under the Certificate of Designations (the “Certificate”) of AAMC’s Series A Convertible Preferred Stock (the “Series A Shares”). Under the Certificate, holders of the Series A Shares are permitted on March 15, 2020 and on each successive five-year anniversary of March 15, 2020 to request AAMC, upon not less than 15 nor more than 30 business days’ prior notice, to redeem all but not less than all of their Series A Shares out of legally available funds. AAMC seeks a declaration that AAMC is not required to redeem any of Luxor’s Series A Shares on a redemption date if AAMC does not have legally available funds to redeem all of Luxor’s Series A Shares on such redemption date. Luxor has removed the action to the U.S District Court for the Virgin Islands, and, on March 24, 2020, AAMC moved to remand the action back to the Superior Court of the Virgin Islands, Division of St. Croix. That motion is fully briefed and pending decision. On May 15, 2020, Luxor moved to dismiss AAMC's declaratory judgment complaint. That motion has been fully briefed and submitted to the Court as of July 29, 2020.
Luxor Capital Group, LP, et al. v. Altisource Asset Management Corporation
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 would 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 plaintiffs. Putnam held 81,800 Series A Shares. Collectively, Luxor and Putnam seek a recovery of no less than $226,012,000 in damages, which is equal to the amount Luxor and Putnam would receive if AAMC redeemed all of Luxor’s and Putnam’s Series A Shares at the redemption price of $1,000 per share set forth in the Certificate, as well as payment of their costs and expenses in the lawsuit. In the alternative, Luxor and Putnam seek a return of the initial purchase price of $231,800,000 for the Series A Shares, as well as payment of their costs and expenses in the lawsuit. 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, the Company entered into the Putnam Agreement. See Note 1 for more information on the Putnam Agreement.
Luxor Books and Records Demand
On April 26, 2021, Luxor, which holds 144,212 shares of Series A Shares, 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.
Indroneel Chatterjee Arbitration
On May 3, 2021, Indroneel Chatterjee, the Company’s former Chief Executive Officer, 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 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. The date for the Company’s and the directors’ response to the arbitration complaint has not yet been set but the Company and the directors intend to vigorously defend the claims.
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. Although COVID-19 to date has not adversely impacted our revenues, the prolonged duration and impact of the COVID-19 pandemic on our ability to complete our transition obligations to Front Yard, or on any our new businesses in development, could cause or result in office closures and other related disruptions that could materially adversely impact our business operations and impact our financial performance.
7. Share-Based Payments
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 management with a weighted average grant date fair value per share of $19.29. The restricted stock units will vest in three equal annual installments, on October 15, 2021, 2022, and 2023, subject to forfeiture or acceleration.
On January 30, 2020, in order to induce our former Co-Chief Executive Officer to join the Company, we granted 60,000 shares of restricted stock and 60,000 stock options to our former Co-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 will vest in three equal annual installments on each of January 30, 2021, 2022, and 2023, subject to forfeiture and acceleration. On April 16, 2021, the former Co-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 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 Director attending at least 75% of the Board and committee meetings. During 2020, we granted 8,622 shares of stock pursuant to our Equity Incentive Plans with a weighted average grant date fair value per share of $20.87.
We recorded $2.4 million and $0.5 million of compensation expense related to our share-based compensation for the three months ended March 31, 2021 and 2020, respectively. As of March 31, 2021 and December 31, 2020, we had an aggregate $0.8 million and $1.0 million, respectively, of total unrecognized share-based compensation cost to be recognized over a weighted average remaining estimated term of 1.5 years and 0.9 years, respectively.
On September 11, 2020, the Board of Directors adopted, subject to stockholder approval, the Altisource Asset Management Corporation 2020 Equity Incentive Plan (the “2020 Equity Incentive Plan”). The 2020 Equity Incentive Plan supersedes our prior equity incentive plans and makes available 185,000 shares of our common stock for the granting of awards under compensatory arrangements and incentives permitted by the 2020 Equity Incentive Plan. On October 12, 2020, the 2020 Equity Incentive Plan was approved by our stockholders.
8. 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 reduction on our USVI-sourced income taxes until 2043.
In the first quarter of 2021, the Company had two less USVI employees than what is required under the provisions of the Certificate, and subsequent to March 31, 2021, with the resignations described in Note 11, the Company currently has three fewer USVI employees than what is required under the provisions of the Certificate. The Company is seeking to hire USVI employees to cure these deficiencies.
As of March 31, 2021 and December 31, 2020, we accrued no interest or penalties associated with any unrecognized tax benefits, nor did we recognize any interest expense or penalties during the three months ended March 31, 2021 and 2020.
The following table sets forth the components of our deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
December 31, 2020
|
Deferred tax assets:
|
|
|
|
|
Stock compensation
|
|
$
|
120
|
|
|
$
|
64
|
|
Accrued expenses
|
|
32
|
|
|
171
|
|
Net operating losses (1)
|
|
171
|
|
|
285
|
|
Lease liabilities
|
|
15
|
|
|
491
|
|
|
|
|
|
|
Other
|
|
—
|
|
|
44
|
|
Gross deferred tax assets
|
|
338
|
|
|
1,055
|
|
Deferred tax liability:
|
|
|
|
|
Right-of-use lease assets
|
|
15
|
|
|
459
|
|
Front Yard common stock
|
|
2,902
|
|
|
1,547
|
|
Depreciation
|
|
—
|
|
|
2
|
|
Other
|
|
4
|
|
|
5
|
|
Gross deferred tax liabilities
|
|
2,921
|
|
|
2,013
|
|
Net deferred tax asset (liability) before valuation allowance
|
|
(2,583)
|
|
|
(958)
|
|
Valuation allowance
|
|
(215)
|
|
|
(69)
|
|
Deferred tax asset (liability), net
|
|
$
|
(2,798)
|
|
|
$
|
(1,027)
|
|
(1) Net operating loss (“NOL”) carry-forwards for tax years prior to 2018 expire in 2037. Beginning with 2018, NOLs are carried forward indefinitely.
9. Earnings Per Share
The following table sets forth the components of diluted earnings (loss) per share (in thousands, except share and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
|
|
|
2021
|
|
2020
|
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
Continuing operations:
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
$
|
(357)
|
|
|
$
|
(5,654)
|
|
|
|
|
|
|
|
Amortization of preferred stock issuance costs
|
—
|
|
|
(42)
|
|
|
|
|
|
|
|
Gain on preferred stock transactions
|
71,883
|
|
|
—
|
|
|
|
|
|
|
|
Numerator for basic and diluted EPS from continuing operations – net income (loss) from continuing operations attributable to common stockholders
|
$
|
71,526
|
|
|
$
|
(5,696)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted EPS from discontinued operations - net gain from discontinued operations
|
$
|
6,213
|
|
|
$
|
1,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
5,856
|
|
|
$
|
(3,757)
|
|
|
|
|
|
|
|
Amortization of preferred stock issuance costs
|
—
|
|
|
(42)
|
|
|
|
|
|
|
|
Gain on preferred stock transactions
|
71,883
|
|
|
—
|
|
|
|
|
|
|
|
Numerator for basic and diluted EPS – net income (loss) attributable to common stockholders
|
$
|
77,739
|
|
|
$
|
(3,799)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
Weighted average common stock outstanding – basic
|
1,844,212
|
|
|
1,615,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common stock outstanding – diluted
|
2,078,077
|
|
|
1,615,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share - basic
|
|
|
|
|
|
|
|
|
|
Continuing operations – basic
|
$
|
38.78
|
|
|
$
|
(3.52)
|
|
|
|
|
|
|
|
Discontinued operations – basic
|
3.37
|
|
1.17
|
|
|
|
|
|
|
|
Earnings (loss) per basic common share
|
$
|
42.15
|
|
|
$
|
(2.35)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share - diluted
|
|
|
|
|
|
|
|
|
|
Continuing operations – diluted
|
$
|
34.42
|
|
|
$
|
(3.52)
|
|
|
|
|
|
|
|
Discontinued operations – diluted
|
2.99
|
|
|
1.17
|
|
|
|
|
|
|
|
Earnings (loss) per diluted common share
|
$
|
37.41
|
|
|
$
|
(2.35)
|
|
|
|
|
|
|
|
We excluded the items presented below from the calculation of diluted earnings per share as they were antidilutive to loss per share from continuing operations for the periods indicated ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
|
2021
|
|
2020
|
|
|
|
|
Numerator
|
|
|
|
|
|
|
|
Reversal of amortization of preferred stock issuance costs
|
—
|
|
|
$
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
Stock options
|
5,879
|
|
|
11,110
|
|
|
|
|
|
Restricted stock
|
59,252
|
|
|
50,033
|
|
|
|
|
|
Preferred stock, if converted
|
168,734
|
|
|
200,000
|
|
|
|
|
|
10. Segment Information
Our primary business is to provide asset management and certain corporate governance services to institutional investors.
Because all of our revenue was derived from the services we provide to Front Yard, we operated as a single segment focused on providing asset management and corporate governance services. Prior to 2020, we reported all activity of the Company in a single segment and activity from continuing operations. In connection with the termination of the Amended AMA and subsequent sale of the Disposal Group to Front Yard, we have reclassified the Disposal Group activity as a discontinued operation effective as of the end of the third quarter of 2020. The results of operations, cash flows, and assets and liabilities of our discontinued operations and continued operations, for all periods presented in the accompanying financial statements, have been reclassified to conform to the current year presentation.
11. Subsequent Events
Management has evaluated the impact of all subsequent events through the issuance of these interim condensed consolidated financial statements. Management has determined that there were no subsequent events requiring adjustment or disclosure in the financial statements, except as follows:
Departure of Chief Executive Officer
On April 16, 2021, the Board of Directors (the “Board”) terminated the Company’s Chief Executive Officer, Indroneel Chatterjee, for cause, effective immediately. This action reflects the results of an independent inquiry by counsel to the Board into Mr. Chatterjee’s conduct. Under Mr. Chatterjee’s employment agreement with the Company, he was also deemed to have simultaneously resigned from his positions as Chairman of the Board and a director of the Company, and the Board accepted his resignations.
Information concerning the payments and benefits due to Mr. Chatterjee from, and the obligations imposed on Mr. Chatterjee as a result of, a termination for cause are set forth in Exhibit 10.7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 3, 2021.
Mr. Chatterjee has initiated an arbitration proceeding against us in response to his termination. For further information, see Note 6.
Departure of Chief Financial Officer
On April 24, 2021, the Chief Financial Officer, Christopher Moltke-Hansen, resigned.
Information concerning the payments and benefits due to Mr. Moltke-Hansen, and the obligations imposed on Mr. Moltke-Hansen, as a result of his resignation are set forth in Exhibit 10.9 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 3, 2021.
Departure of General Counsel
On April 23, 2021, the General Counsel, P. Graham Singer, resigned.
Information concerning the payments and benefits due to Mr. Singer, and the obligations imposed on Mr. Singer, as a result of his resignation are set forth in Exhibit 10.10 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 3, 2021.
Departure of Controller
On May 12, 2021, the Controller, David Evans, notified the Company of his final decision to resign effective May 14, 2021. While the Company’s Board did not appoint Mr. Evans as the principal accounting officer, after the resignation of our Chief Financial Officer, and in connection with the preparation of this Quarterly Report on Form 10-Q, Mr. Evans functioned as the principal accounting officer.