Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s discussion and analysis of financial condition and results of operations (“MD&A”) is a supplement to the accompanying consolidated financial statements and is intended to provide a reader of our financial statements with a narrative from the perspective of management on our businesses, current developments, financial condition, results of operations and liquidity. Significant sections of the MD&A are as follows:
Overview. This section, beginning below, provides a description of recent developments we believe are important in understanding our results of operations and financial condition as well as understanding anticipated future trends. It also provides a brief description of significant transactions and events that affect the comparability of financial results and a discussion of the progress being made on our strategic initiatives.
Consolidated Results of Operations. This section, beginning on page 37 , provides an analysis of our consolidated results of operations for the two years ended December 31, 2023 and 2022.
Segment Results of Operations. This section, beginning on page 40 , provides analysis of our business segments’ results of operations for the years ended December 31, 2023 and 2022.
Liquidity and Capital Resources . This section, beginning on page 45 , provides an analysis of our cash flows for the two years ended December 31, 2023 and 2022. We also discuss restrictions on cash movements, future commitments and capital resources.
Critical Accounting Policies, Estimates and Recent Accounting Pronouncements. This section, beginning on page 48 , identifies those accounting principles we believe are most important to our financial results and that require significant judgment and estimates on the part of management in application. We provide all of our significant accounting policies in Note 2 to the accompanying consolidated financial statements.
Other Matters. This section, beginning on page 50 , provides a discussion of customer concentration.
OVERVIEW
Our Business
We are an integrated service provider and marketplace for the real estate and mortgage industries. Combining operational excellence with a suite of innovative services and technologies, Altisource helps solve the demands of the ever-changing markets we serve.
We conduct our operations through two reportable segments: Servicer and Real Estate and Origination . In addition, we report Corporate and Others separately.
The Servicer and Real Estate segment provides loan servicers and real estate investors with solutions and technologies that span the mortgage and real estate lifecycle. Within the Servicer and Real Estate segment we provide:
Solutions
Our Solutions business includes property preservation and inspection services, title insurance (as an agent) and settlement services, real estate valuation services, foreclosure trustee services, and residential and commercial construction inspection and risk mitigation services.
Marketplace
Our Marketplace business includes the Hubzu online real estate auction platform and real estate auction, real estate brokerage and asset management services.
Technology and SaaS Products
Our Technology and SaaS Products business includes Equator (a SaaS-based technology to manage REO, short sales, foreclosure, bankruptcy and eviction processes), Vendorly Invoice (a vendor invoicing and payment system), RentRange (a single and multi-family rental data, analytics and rent-based valuation solution), REALSynergy (a commercial loan servicing platform), and NestRange (an automated valuation model and analytics solution).
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The Origination segment provides originators with solutions and technologies that span the mortgage origination lifecycle. Within the Origination segment we provide:
Solutions
Our Solutions business includes title insurance (as an agent) and settlement services, real estate valuation services, and loan fulfillment, certification and certification insurance services.
Lenders One
Our Lenders One business includes management services provided to the Best Partners Mortgage Cooperative, Inc., doing business as Lenders One, and certain loan manufacturing and capital markets services provided to the members of the Lenders One cooperative.
Technology and SaaS Products
Our Technology and SaaS Products business includes Vendorly Monitor (a vendor management platform), LOLA (a marketplace to order services and a tool to automate components of the loan manufacturing process), TrelixAI (technology to manage the workflow and automate components of the loan fulfillment, pre and post-close quality control and service transfer processes), and ADMS (a document management and data analytics delivery platform).
Corporate and Others includes interest expense and costs related to corporate functions including executive, infrastructure and certain technology groups, finance, law, compliance, human resources, vendor management, facilities, risk management and eliminations between reportable segments.
We classify revenue in three categories: service revenue, revenue from reimbursable expenses and non-controlling interests. In evaluating our performance, we focus on service revenue. Service revenue consists of amounts attributable to our fee-based services. Reimbursable expenses and non-controlling interests are pass-through items for which we earn no margin. Reimbursable expenses consist of amounts we incur on behalf of our customers in performing our fee-based services that we pass directly on to our customers without a markup. Non-controlling interests represent the earnings of Lenders One. Lenders One is a mortgage cooperative managed, but not owned, by Altisource. The Lenders One members’ earnings are included in revenue and reduced from net income to arrive at net income attributable to Altisource.
Strategy and Core Businesses
We are focused on becoming the premier provider of mortgage and real estate marketplaces and related technology enabled solutions to a broad and diversified customer base of residential real estate and loan investors, servicers, and originators. The real estate and mortgage marketplaces represent very large markets, and we believe our scale and suite of offerings provide us with competitive advantages that could support our growth. As we navigate the continuing unsettled nature of the housing and mortgage servicing markets in the wake of governmental mandates taken in connection with the COVID-19 pandemic and other macro-economic trends, we continue to evaluate our strategy and core businesses and seek to position our businesses to provide long term value to our customers and shareholders.
Each of our business segments provides Altisource the potential to grow and diversify our customer and revenue base. We believe these business segments address very large markets and directly leverage our core competencies and distinct competitive advantages. Our business segments and strategic initiatives follow:
Servicer and Real Estate:
Through our offerings that support residential real estate and loan investors and forward and reverse servicers, we provide a suite of solutions and technologies intended to meet their growing and evolving needs. We are focused on growing referrals from our existing customer base and attracting new customers to our offerings. We have a customer base that includes GSEs, asset managers, and several large bank and non-bank servicers including Ocwen and Rithm. We believe we are one of only a few providers with a broad suite of solutions, nationwide coverage and scalability. Further, we believe we are well positioned to gain market share from existing and new customers if they consolidate to larger, full-service providers or outsource services that have historically been performed in-house.
Origination:
Through our offerings that support mortgage loan originators (or other similar mortgage market participants), we provide a suite of solutions and technologies to meet the evolving and growing needs of lenders, mortgage purchasers and securitizers. We are focused on growing business from our existing customer base, attracting new customers to our offerings and developing new
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offerings. We have a customer base that includes the Lenders One cooperative members, which includes independent mortgage bankers, credit unions, and banks, as well as bank and non-bank loan originators. We believe our suite of services, technologies and unique access to the members of the Lenders One mortgage cooperative position us to grow our relationships with our existing customer base by growing membership of Lenders One, increasing member adoption of existing solutions and developing and cross-selling new offerings. Further, we believe we are well positioned to gain market share from existing and new customers as customers and prospects look to Lenders One to help them improve their profitability and better compete.
Corporate and Others includes interest expense and costs related to corporate functions including executive, infrastructure and certain technology groups, finance, law, compliance, human resources, vendor management, facilities, risk management and eliminations between reportable segments.
COVID-19 Pandemic Impacts
Actions taken by federal, state and local governments, GSEs and mortgage servicers in connection with the COVID-19 pandemic continue to have a profound impact on our business, our customers, and the industries in which we operate. Despite the expiration of certain such measures, we believe servicers are proceeding slowly with foreclosure initiations for borrowers in default and foreclosure initiations may not convert to foreclosure sales and REO at the same pace as prior to the pandemic due to improved home equity and borrower relief options. The decline in foreclosure initiations and foreclosure sales throughout the pandemic, partially offset by the restart of the default market, significantly decreased default related referrals to Altisource and continues to negatively impact virtually all of Altisource’s default related services revenue.
While we cannot predict whether the default market will return to a pre-pandemic operating environment, we believe the demand for our Default business will grow. We estimate that in today’s environment it typically takes on average two years to convert foreclosure initiations to foreclosure sales and six months to market and sell the REO. The foreclosure timelines could vary significantly based upon, for example, upon the state where the property is located and whether the foreclosure is contested. The REO sale timelines could also vary significantly based upon, for example, the local real estate market, whether the home is located in a redemption state and whether the home is occupied post foreclosure.
During 2022 and 2023, to address lower revenue, we worked to (1) reduce our cost structure, (2) maintain the infrastructure to deliver default related services for our customer base and support the anticipated increase in demand following the expiration of the moratoriums and forbearance plans and CFPB’s rules on temporary loss mitigation measures, and (3) add new Lenders One members, launch new solutions and increase customer adoption of our solutions to accelerate the growth of our origination business.
Share Repurchase Program
On May 16, 2023, our shareholders approved the renewal and amendment of the share repurchase program previously approved by the shareholders on May 15, 2018. Under the program, we are authorized to purchase up to 3.1 million shares of our common stock, based on a limit of 15% of the outstanding shares of common stock on the date of approval, at a minimum price of $1.00 per share and a maximum price of $25.00 per share, for a period of five years from the date of approval. As of December 31, 2023, approximately 3.1 million shares of common stock remain available for repurchase under the program. There were no purchases of shares of common stock during the years ended December 31, 2023 and 2022. Luxembourg law limits share repurchases to the balance of Altisource Portfolio Solutions S.A. (unconsolidated parent company) retained earnings, less the value of shares repurchased. As of December 31, 2023, we can repurchase up to approximately $116 million of our common stock under Luxembourg law. Under the Amended Credit Agreement, we are not permitted to repurchase shares except for limited circumstances.
Ocwen Related Matters
During the year ended December 31, 2023, Ocwen was our largest customer, accounting for 44% of our total revenue. Additionally, 6% of our revenue for the year ended December 31, 2023 was earned on the loan portfolios serviced by Ocwen, when a party other than Ocwen or the MSR owner selected Altisource as the service provider.
Ocwen has disclosed that it is subject to a number of ongoing regulatory examinations, consent orders, inquiries, subpoenas, civil investigative demands, requests for information and other actions and is subject to pending and threatened legal proceedings, some of which include claims against Ocwen for substantial monetary damages. Previous regulatory actions against Ocwen have subjected Ocwen to independent oversight of its operations and placed certain restrictions on its ability to acquire servicing rights or proceed with default-related actions on the loans it services. Existing or future similar matters could result in adverse regulatory or other actions against Ocwen. In addition to the above, Ocwen may become subject to future adverse regulatory or other actions.
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Ocwen has disclosed that Rithm is a significant client of Ocwen’s. As of December 31, 2023, Ocwen reported that approximately 16% of loans serviced and subserviced by Ocwen (measured in UPB) and approximately 67% of all delinquent loans that Ocwen services were related to Rithm MSRs or rights to MSRs.
The existence or outcome of Ocwen regulatory matters or the termination of Ocwen’s sub-servicing agreements with Rithm or other significant Ocwen clients may have significant adverse effects on Ocwen’s business. For example, Ocwen may be required to alter the way it conducts business, including the parties it contracts with for services, it may be required to seek changes to its existing pricing structure with us, it may lose its non-GSE servicing rights or subservicing arrangements or may lose one or more of its state servicing or origination licenses. Additional regulatory actions or adverse financial developments may impose additional restrictions on or require changes in Ocwen’s business that could require it to sell assets or change its business operations. Any or all of these effects and others could result in our eventual loss of Ocwen as a customer or a reduction in the number and/or volume of services it purchases from us or the loss of other customers.
If any of the following events occurred, Altisource’s revenue could be significantly reduced and our results of operations could be materially adversely affected, including from the possible impairment or write-off of goodwill, intangible assets, property and equipment, other assets and accounts receivable:
• Altisource loses Ocwen as a customer or there is a significant reduction in the volume of services it purchases from us
• Ocwen loses, sells or transfers a significant portion of its GSE or Federal Housing Administration servicing rights or subservicing arrangements or remaining other servicing rights or subservicing arrangements and Altisource fails to be retained as a service provider
• The contractual relationship between Ocwen and Rithm changes significantly, including Ocwen’s sub-servicing arrangement with Rithm expiring without renewal, and this change results in a change in our status as a provider of services related to the Subject MSRs
• Ocwen loses state servicing licenses in states with a significant number of loans in Ocwen’s servicing portfolio
• Ocwen is subject to stays, moratoriums, suspensions or other restrictions that limit or delay default-related actions on the loans it services
• The contractual relationship between Ocwen and Altisource changes significantly or there are significant changes to our pricing to Ocwen for services from which we generate material revenue
• Altisource otherwise fails to be retained as a service provider and/or there is a reduction in referral volumes
The foregoing list is not intended to be exhaustive. Management cannot predict whether any of these events or other events will occur or the amount of any impact they may have on Altisource. We are seeking to diversify and grow our revenue and customer base and we have a sales and marketing strategy to support these efforts. Moreover, in the event one or more of these events materially negatively impact Altisource, we believe the variable nature of our cost structure would allow us to realign our cost structure to address some of the impact to revenue and that current liquidity would be sufficient to meet our working capital, capital expenditures, debt service and other cash needs. There can be no assurance that our plans will be successful or our operations will be profitable.
Factors Affecting Comparability
The following items impact the comparability of our results:
• Industrywide foreclosure initiations were 4% lower in 2023, compared to 2022, and 31% lower than the same pre-COVID-19 period in 2019
• Industrywide foreclosure sales were 8% higher in 2023, compared to 2022, and 46% lower than the same pre-COVID-19 period in 2019
• The interest rate on the Company’s senior secured term loans was 14.24% for the year ended December 31, 2023, compared to 7.67% for the same period in 2022
• On February 14, 2023, Altisource Portfolio Solutions S.A. and its wholly-owned subsidiary, Altisource S.à r.l., entered into Amendment No. 2 to the Credit Agreement. In connection with Amendment No. 2, the Company paid $3.4 million to advisors and recorded these payments as other expense in the consolidated statements of operations and comprehensive loss
• The Company recognized an income tax provision of $3.7 million for the year ended December 31, 2023. The income tax provision for the year ended December 31, 2023 was driven primarily by income tax expense on transfer pricing income from India and the United States, reduction in deferred tax assets related to intangible assets, no tax benefit on the pretax loss from our Luxembourg operating company and uncertain tax positions
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• The Company recognized an income tax provision of $5.3 million for the year ended December 31, 2022. The income tax provision for the year ended December 31, 2022 was driven by income tax expense on transfer pricing income from India, no tax benefit on the pretax loss from our Luxembourg operating company, uncertain tax positions and anticipated withholding tax on current year earnings in India
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CONSOLIDATED RESULTS OF OPERATIONS
The following is a discussion of our consolidated results of operations for the years ended December 31, 2023 and 2022. For a more detailed discussion of the factors that affected the results of our business segments in these periods, see “Segment Results of Operations” below.
The following table sets forth information on our consolidated results of operations for the years ended December 31:
(in thousands, except per share data) 2023 % Increase (decrease) 2022
Service revenue
Servicer and Real Estate $ 107,779 (4) $ 112,132
Origination
28,786 (11) 32,364
Total service revenue 136,565 (5) 144,496
Reimbursable expenses 8,273 3 8,039
Non-controlling interests 228 (61) 585
Total revenue 145,066 (5) 153,120
Cost of revenue 115,414 (12) 131,305
Gross profit 29,652 36 21,815
Operating expense (income):
Selling, general and administrative expenses 46,420 (15) 54,755
Loss on sale of business — (100) 242
Loss from operations (16,768) 49 (33,182)
Other income (expense), net:
Interest expense (36,103) 117 (16,639)
Change in fair value of warrant liability
1,145 N/M —
Debt amendment costs
(3,410) N/M —
Other income (expense), net 2,788 24 2,254
Total other income (expense), net (35,580) (147) (14,385)
Loss before income taxes and non-controlling interests (52,348) (10) (47,567)
Income tax provision (3,714) (29) (5,266)
Net loss (56,062) (6) (52,833)
Net income attributable to non-controlling interests
(228) (61) (585)
Net loss attributable to Altisource $ (56,290) (5) $ (53,418)
Margins:
Gross profit / service revenue 22 % 15 %
Loss from operations / service revenue (12) % (23) %
Loss per share:
Basic $ (2.51) 24 $ (3.32)
Diluted $ (2.51) 24 $ (3.32)
Weighted average shares outstanding:
Basic 22,418 40 16,070
Diluted 22,418 40 16,070
_____________________________________
N/M — not meaningful.
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Revenue
We recognized service revenue of $136.6 million for the year ended December 31, 2023, a 5% decrease compared to the year ended December 31, 2022. The decrease in service revenue for the year ended December 31, 2023 is driven by lower revenue in both segments. Revenue was lower in the Servicer and Real Estate segment from the exit of a low margin customer care business in the fourth quarter 2022 and the apparent decline in a customer’s propensity to order services in two of our lower margin Solutions businesses within the Servicer and Real Estate segment, partially offset by growth in our foreclosure trustee business in the Solutions business within the Servicer and Real Estate segment. Revenue was lower in the Origination segment from the overall market decline in mortgage originations partially offset by Lenders One growth driven by our new reseller products.
We recognized reimbursable expense revenue of $8.3 million for the year ended December 31, 2023, a 3% increase compared to the year ended December 31, 2022. The increase in reimbursable expenses for the year ended December 31, 2023 is primarily driven by an increase in property preservation services in the Solutions business within the Servicer and Real Estate segment partially offset by lower asset resolution and asset management activities in the Marketplace business within the Servicer and Real Estate segment.
Certain of our revenues can be impacted by seasonality. More specifically, revenues from property sales, loan originations and certain property preservation services in Field Services typically tend to be at their lowest level during the fall and winter months and at their highest level during the spring and summer months. However, as a result of the COVID-19 pandemic and related measures and the rapid rise in mortgage interest rates, the seasonal impact to revenue may not follow historical patterns.
Cost of Revenue and Gross Profit
Cost of revenue principally includes payroll and employee benefits associated with personnel employed in customer service, operations and technology roles, fees paid to external providers related to the provision of services, reimbursable expenses, technology and telecommunications costs as well as depreciation and amortization of operating assets.
Cost of revenue consists of the following for the years ended December 31:
(in thousands) 2023 % Increase (decrease) 2022
Outside fees and services $ 55,858 — $ 55,979
Compensation and benefits 35,396 (26) 48,064
Technology and telecommunications 14,196 (16) 16,937
Reimbursable expenses 8,273 3 8,039
Depreciation and amortization 1,691 (26) 2,286
Total $ 115,414 (12) $ 131,305
We recognized cost of revenue of $115.4 million for the year ended December 31, 2023, a 12% decrease compared to the year ended December 31, 2022. Compensation and benefits for the year ended December 31, 2023 decreased primarily due to efficiency initiatives and cost savings measures taken in 2022 and 2023. Technology and telecommunications for the year ended December 31, 2023 decreased primarily due to the renegotiation of certain contracts and lower overall headcount. Depreciation and amortization was lower from the completion of the depreciation periods of certain premises and equipment and the reduction in capital expenditures.
Gross profit increased to $29.7 million, representing 22% of service revenue, for the year ended December 31, 2023 compared to $21.8 million, representing 15% of service revenue, for the year ended December 31, 2022. Gross profit as a percentage of service revenue for the year ended December 31, 2023 increased compared to the year ended December 31, 2022 primarily due to margin expansion in both the Servicer and Real Estate segment and the Origination segment from efficiency initiatives and cost savings measures and lower corporate costs as a percentage of revenue.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses includes payroll for personnel employed in executive, sales and marketing, finance, technology, law, compliance, audit, human resources, vendor management, facilities and risk management roles. This category also includes professional services fees, occupancy costs, marketing costs, depreciation and amortization of non-operating assets and other expenses.
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SG&A expenses consist of the following for the years ended December 31:
(in thousands) 2023 % Increase (decrease) 2022
Compensation and benefits $ 20,879 (9) $ 22,973
Professional services 7,885 (32) 11,595
Amortization of intangible assets 5,182 1 5,129
Occupancy related costs 4,917 (2) 5,000
Marketing costs 1,977 (36) 3,107
Depreciation and amortization 701 (39) 1,154
Other 4,879 (16) 5,797
Selling, general and administrative expenses $ 46,420 (15) $ 54,755
SG&A expenses for the year ended December 31, 2023 of $46.4 million decreased by 15% compared to the year ended December 31, 2022. The decrease for the year ended December 31, 2023 was primarily driven by lower compensation and benefits, professional services and marketing costs. Compensation and benefits and marketing costs for the year ended December 31, 2023 decreased from efficiency initiatives and cost savings measures. Professional services for the year ended December 31, 2023 decreased primarily due to lower legal and litigation fees.
Loss from Operations
Loss from operations was $(16.8) million, representing (12)% of service revenue, for the year ended December 31, 2023 compared to loss from operations of $(33.2) million, representing (23)% of service revenue, for the year ended December 31, 2022. Loss from operations as a percentage of service revenue improved for the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily as a result of higher gross profit margins and the percentage reduction in SG&A expenses in excess of the percentage change in revenue.
Other income (expense), net
Other income (expense), net, principally includes interest expense and other non-operating gains and losses.
Other income (expense), net was $(35.6) million for the year ended December 31, 2023 compared to $(14.4) million for the year ended December 31, 2022. The change for the year ended December 31, 2023 was primarily driven by higher interest expense and debt amendment costs, partially offset by a gain on the change in fair value of the warrant liability and higher interest and other income. The higher interest expense was driven by higher interest rates due to the increase in SOFR and the increase in the SOFR spread on our amended SSTL and higher amortization of debt discount and debt issuance and amendment costs.
Income Tax Provision
We recognized an income tax provision of $3.7 million and $5.3 million for the years ended December 31, 2023 and 2022, respectively.
The income tax provision for the year ended December 31, 2023 was driven primarily by income tax expense on transfer pricing income from India and the United States, reduction in deferred tax assets related to intangible assets, no tax benefit on the pretax loss from our Luxembourg operating company and uncertain tax positions.
The income tax provision for the year ended December 31, 2022 was driven by income tax expense on transfer pricing income from India, no tax benefit on the pretax loss from our Luxembourg operating company, uncertain tax positions and anticipated withholdings tax on current year earnings in India.
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SEGMENT RESULTS OF OPERATIONS
The following section provides a discussion of pretax results of operations of our business segments. Transactions between segments are accounted for as third party arrangements for purposes of presenting segment results of operations.
Financial information for our segments was as follows:
For the year ended December 31, 2023
(in thousands) Servicer and Real Estate Origination Corporate and Others Consolidated Altisource
Revenue
Service revenue $ 107,779 $ 28,786 $ — $ 136,565
Reimbursable expenses 7,688 585 — 8,273
Non-controlling interests
— 228 — 228
115,467 29,599 — 145,066
Cost of revenue 73,746 27,946 13,722 115,414
Gross profit (loss) 41,721 1,653 (13,722) 29,652
Selling, general and administrative expenses 9,622 7,693 29,105 46,420
Income (loss) from operations 32,099 (6,040) (42,827) (16,768)
Total other income (expense), net — — (35,580) (35,580)
Income (loss) before income taxes and non-controlling interests $ 32,099 $ (6,040) $ (78,407) $ (52,348)
Margins:
Gross profit (loss) / service revenue 39 % 6 % N/M 22 %
Income (loss) from operations / service revenue 30 % (21) % N/M (12) %
_____________________________________
N/M — not meaningful.
For the year ended December 31, 2022
(in thousands) Servicer and Real Estate Origination Corporate and Others Consolidated Altisource
Revenue
Service revenue $ 112,132 $ 32,364 $ — $ 144,496
Reimbursable expenses 7,529 510 — 8,039
Non-controlling interests
— 585 — 585
119,661 33,459 — 153,120
Cost of revenue 81,148 32,052 18,105 131,305
Gross profit (loss) 38,513 1,407 (18,105) 21,815
Selling, general and administrative expenses 12,057 8,825 33,873 54,755
Gain on sale of business
— — 242 242
Income (loss) from operations 26,456 (7,418) (52,220) (33,182)
Total other income (expense), net 4 — (14,389) (14,385)
Income (loss) before income taxes and non-controlling interests $ 26,460 $ (7,418) $ (66,609) $ (47,567)
Margins:
Gross profit (loss) / service revenue 34 % 4 % N/M 15 %
Income (loss) from operations / service revenue 24 % (23) % N/M (23) %
_____________________________________
N/M — not meaningful.
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Servicer and Real Estate
Revenue
Revenue by line of business was as follows for the years ended December 31:
(in thousands) 2023 2022 % Increase (decrease)
Service revenue:
Solutions $ 67,946 $ 71,686 (5)
Marketplace 27,878 29,020 (4)
Technology and SaaS Products 11,955 11,426 5
Total service revenue 107,779 112,132 (4)
Reimbursable expenses:
Solutions 3,551 3,203 11
Marketplace 4,137 4,326 (4)
Total reimbursable expenses 7,688 7,529 2
Total revenue $ 115,467 $ 119,661 (4)
We recognized service revenue of $107.8 million for the year ended December 31, 2023, a 4% decrease compared to the year ended December 31, 2022. We also recognized reimbursable expense revenue of $7.7 million for the year ended December 31, 2023, a 2% increase compared to the year ended December 31, 2022. The decrease in service revenue for the year ended December 31, 2023 was driven by the exit of a low margin customer care business within the Solutions business in the fourth quarter 2022 and the apparent decline in a customer’s propensity to order services in two of our lower margin businesses within the Solutions business, partially offset by growth in our foreclosure trustee business in the Solutions business.
Certain of our Servicer and Real Estate businesses are impacted by seasonality. Revenues from property sales and certain property preservation services are generally lowest during the fall and winter months and highest during the spring and summer months. However, as a result of the COVID-19 pandemic and related measures and the rapid rise in mortgage interest rates, the seasonal impact to revenue may not follow historical patterns.
Cost of Revenue and Gross Profit
Cost of revenue consisted of the following for the years ended December 31:
(in thousands) 2023 2022 % Increase (decrease)
Outside fees and services $ 35,962 $ 40,235 (11)
Compensation and benefits 22,214 25,786 (14)
Reimbursable expenses 7,688 7,529 2
Technology and telecommunications 7,138 6,627 8
Depreciation and amortization 744 971 (23)
Cost of revenue $ 73,746 $ 81,148 (9)
Cost of revenue for the year ended December 31, 2023 of $73.7 million decreased by 9% compared to the year ended December 31, 2022.
The decrease in cost of revenue for the year ended December 31, 2023 is primarily driven by lower compensation and benefits primarily due to efficiency initiatives and cost savings measures and outside fees and services from lower revenue, partially offset by higher technology and telecommunications in the Solutions business from a prior year credit received related to the renegotiation of a vendor agreement for property management technologies.
Gross profit increased to $41.7 million, representing 39% of service revenue, for the year ended December 31, 2023 compared to $38.5 million, representing 34% of service revenue, for the year ended December 31, 2022. Gross profit as a percentage of
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service revenue for the year ended December 31, 2023 increased primarily due to efficiency initiatives and cost savings measures. Our margins can vary substantially depending upon the service revenue mix.
Selling, General and Administrative Expenses
SG&A expenses consisted of the following for the years ended December 31:
(in thousands) 2023 2022 % Increase (decrease)
Amortization of intangible assets $ 2,960 $ 2,970 —
Compensation and benefits 2,311 2,594 (11)
Professional services 1,734 2,711 (36)
Marketing costs 1,258 1,524 (17)
Occupancy related costs 631 931 (32)
Depreciation and amortization 2 12 (83)
Other 726 1,315 (45)
Selling, general and administrative expenses $ 9,622 $ 12,057 (20)
SG&A for the year ended December 31, 2023 of $9.6 million decreased by 20% compared to the year ended December 31, 2022.
The decrease in SG&A for the year ended December 31, 2023 is primarily due to lower professional services, marketing costs, compensation and benefits, occupancy related costs and other expenses. Professional services for the year ended December 31, 2023 decreased primarily due to lower legal fees. Compensation and benefits, occupancy related costs, marketing costs and other expenses for the year ended December 31, 2023 decreased from efficiency initiatives and cost savings measures.
Income from operations
Income from operations increased to $32.1 million, representing 30% of service revenue, for the year ended December 31, 2023 compared to $26.5 million, representing 24% of service revenue, for the year ended December 31, 2022. The increase in operating income as a percentage of service revenue for the year ended December 31, 2023 is primarily the result of higher gross profit margins and a percentage reduction in SG&A in excess of the percentage reduction in revenue.
Origination
Revenue
Revenue by business unit was as follows for the years ended December 31:
(in thousands) 2023 2022 % Increase (decrease)
Service revenue:
Lenders One $ 22,644 $ 20,027 13
Solutions 5,507 11,610 (53)
Technology and SaaS Products 635 727 (13)
Total service revenue 28,786 32,364 (11)
Reimbursable expenses:
Solutions 585 510 15
Total reimbursable expenses 585 510 15
Non-controlling interests
228 585 (61)
Total revenue $ 29,599 $ 33,459 (12)
We recognized service revenue of $28.8 million for the year ended December 31, 2023, an 11% decrease compared to the year
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ended December 31, 2022. We also recognized reimbursable expense revenue of $0.6 million for the year ended December 31, 2023, a 15% increase compared to the year ended December 31, 2022. The decrease in service revenue in the Origination segment for the year ended December 31, 2023 is primarily driven by the overall market decline in mortgage originations partially offset by Lenders One growth with our new reseller products. The decline in the Solutions business revenue was greater than the overall market decline as a greater percentage of revenue in some of our Solutions businesses was derived from refinance transactions which declined at a greater rate than the overall market.
Cost of Revenue and Gross Profit
Cost of revenue consisted of the following for the years ended December 31:
(in thousands) 2023 2022 % Increase (decrease)
Outside fees and services $ 19,896 $ 15,744 26
Compensation and benefits 6,320 13,955 (55)
Technology and telecommunications 1,108 1,806 (39)
Reimbursable expenses 585 510 15
Depreciation and amortization 37 37 —
Cost of revenue $ 27,946 $ 32,052 (13)
Cost of revenue for the year ended December 31, 2023 of $27.9 million decreased by 13% compared to the year ended December 31, 2022. The decrease in cost of revenue for the year ended December 31, 2023 was primarily driven by the alignment of compensation and benefits and technology and telecommunications with lower service revenue discussed above, partially offset by the increase in outside fees and services from Lenders One revenue growth.
Gross profit increased to $1.7 million, representing 6% of service revenue, for the year ended December 31, 2023 compared to $1.4 million, representing 4% of service revenue, for the year ended December 31, 2022. Gross profit as a percentage of service revenue increased from margin expansion from efficiency initiatives and cost savings measures.
Selling, General and Administrative Expenses
SG&A expenses consisted of the following for the years ended December 31:
(in thousands) 2023 2022 % Increase (decrease)
Compensation and benefits $ 2,194 $ 2,887 (24)
Amortization of intangible assets 2,222 2,159 3
Professional services 894 815 10
Marketing costs 728 1,569 (54)
Occupancy related costs 302 543 (44)
Depreciation and amortization 1 — N/M
Other 1,352 852 59
Selling, general and administrative expenses $ 7,693 $ 8,825 (13)
_____________________________________
N/M — not meaningful.
SG&A for the year ended December 31, 2023 of $7.7 million decreased by 13% compared to the year ended December 31, 2022. The decrease in SG&A for the year ended December 31, 2023 was primarily due to lower marketing costs and compensation and benefits from efficiency initiatives and cost savings measures and lower occupancy related costs.
Income from Operations
Loss from operations was $(6.0) million, representing (21)% of service revenue, for the year ended December 31, 2023 compared to loss from operations of $(7.4) million, representing (23)% of service revenue, for the year ended December 31, 2022. The improvement in operating loss as a percentage of service revenue for the year ended December 31, 2023 is primarily
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from higher gross profit margins and from a greater percentage reduction in SG&A expenses than the percentage change in revenue.
Corporate and Others
Cost of Revenue
Cost of revenue consisted of the following for the years ended December 31:
(in thousands) 2023 2022 % Increase (decrease)
Compensation and benefits $ 6,862 $ 8,323 (18)
Technology and telecommunications 5,950 8,504 (30)
Depreciation and amortization 910 1,278 (29)
Cost of revenue $ 13,722 $ 18,105 (24)
Cost of revenue for the year ended December 31, 2023 of $13.7 million decreased by 24% compared to the year ended December 31, 2022. The decrease in cost of revenue for the year ended December 31, 2023 is primarily driven by lower technology and telecommunications and compensation and benefits due to efficiency initiatives and cost savings initiatives.
Selling, General and Administrative Expenses
SG&A in Corporate and Others include costs related to the corporate functions including executive, finance, technology, law, compliance, human resources, vendor management, facilities, risk management and eliminations between reportable segments.
SG&A expenses consisted of the following for the years ended December 31:
(in thousands) 2023 2022 % Increase (decrease)
Compensation and benefits $ 16,374 $ 17,492 (6)
Professional services 5,257 8,069 (35)
Occupancy related costs 3,984 3,526 13
Depreciation and amortization 698 1,142 (39)
Marketing costs (9) 14 (164)
Other 2,801 3,630 (23)
Selling, general and administrative expenses $ 29,105 $ 33,873 (14)
SG&A for the year ended December 31, 2023 of $29.1 million decreased by 14% compared to the year ended December 31, 2022. The decrease for the year ended December 31, 2023 is primarily driven by lower professional services, compensation and benefits and other expenses. Professional services for the year ended December 31, 2023 decreased due to lower insurance, legal and audit related expenses. The decrease in compensation and benefits was driven by efficiency initiatives and cost savings measures.
Other Income (Expense), net
Other Income (Expense), net principally includes interest expense and other non-operating gains and losses.
Other Income (Expense), net was $(35.6) million for the year ended December 31, 2023 compared to $(14.4) million for the year ended December 31, 2022. The change for the year ended December 31, 2023 was primarily driven by higher interest expense and debt amendment costs, partially offset by a gain on the change in fair value of the warrant liability and higher interest and other income. The higher interest expense was driven by higher interest rates, higher interest rates on our amended SSTL and higher amortization of debt discount and debt issuance and amendment costs.
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LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Our primary source of liquidity has historically been cash flow from operations, cash proceeds from sales of businesses, cash proceeds from the sale of equity securities and cash on hand. However, due to governmental and market responses to the COVID-19 pandemic, revenue has declined significantly. The lower revenue, partially offset by efficiency initiatives and cost savings measures, resulted in negative operating cash flow from operations for the years ended December 31, 2023 and 2022. We believe our anticipated revenue growth from the return of the default market, on-boarding sales wins, and revenue mix together with our reduced cost structure, should help reduce negative operating cash flow. We seek to deploy cash generated in a disciplined manner. Principally, we intend to use cash to develop and grow complementary services and businesses that we believe will generate attractive margins in line with our core capabilities and strategy and fund negative operating cash flow. We also use cash for repayments of our long-term debt and capital investments. In addition, from time to time we consider and evaluate business acquisitions, dispositions, closures, sales of equity securities or other similar actions that are aligned with our strategy.
Senior Secured Term Loans
In April 2018, Altisource Portfolio Solutions S.A. and its wholly-owned subsidiary, Altisource S.à r.l., entered into a credit agreement with Morgan Stanley Senior Funding, Inc., as administrative agent and collateral agent, and certain lenders (the “Credit Agreement”). Under the Credit Agreement, Altisource borrowed $412 million in the form of the SSTL. Effective February 14, 2023, Altisource Portfolio Solutions S.A. and Altisource S.à r.l. entered into Amendment No. 2 to the Credit Agreement (as amended by Amendment No. 2, the “Amended Credit Agreement”). Altisource Portfolio Solutions S.A. and its subsidiaries, subject to the applicable exclusions in the Amended Credit Agreement, are guarantors on the SSTL (collectively, the “Guarantors”). Effective June 1, 2023, the administrative agent and collateral agent of the Amended Credit Agreement changed to Wilmington Trust, N.A.
The maturity date of the Amended Credit Agreement is April 30, 2025. If Aggregate Paydowns under the Amended Credit Agreement are equal to or greater than $30 million by February 13, 2024, then (subject to the representations and warranties being true and correct as of such date and there being no default or event of default being in existence as of such date) the maturity date of the SSTL may be extended at the Company’s option to April 30, 2026. Such extension is conditioned upon the Company’s payment of a 2% payment-in-kind extension fee on or before April 30, 2025.
During the year ended December 31, 2023, Company made $30 million of Aggregate Paydowns.
All amounts outstanding under the SSTL become due on the earlier of (i) the maturity date, and (ii) the date on which the loans are declared to be due and owing by the administrative agent at the request (or with the consent) of the Required Lenders (as defined in the Amended Credit Agreement; other capitalized terms, unless defined herein, are defined in the Amended Credit Agreement) or as otherwise provided in the Amended Credit Agreement upon the occurrence of any event of default. There are no mandatory repayments of the SSTL, except as set forth herein, until the April 30, 2025 maturity when the balance is due. If the maturity date is extended to April 30, 2026, the Company is required to make mandatory repayments of $5.2 million in the first quarter of 2026 with the remaining balance due at the April 2026 maturity.
In addition to the scheduled principal payments, subject to certain exceptions, the SSTL is subject to mandatory prepayment upon issuances of debt, certain casualty and condemnation events and sales of assets, as well as 50% of Consolidated Excess Cash Flow, as calculated in accordance with the provisions of the Amended Credit Agreement.
Altisource may incur incremental indebtedness under the Amended Credit Agreement from one or more incremental lenders, which may include existing lenders, in an aggregate incremental principal amount not to exceed $50 million, subject to certain conditions set forth in the Amended Credit Agreement. The lenders have no obligation to provide any incremental indebtedness.
Through March 29, 2023, the SSTL’s interest rate was the Adjusted Eurodollar Rate plus 4.00%. Beginning March 30, 2023, the SSTL bears interest at rates based upon, at our option, the Secured Overnight Financing Rate (“SOFR”) or the Base Rate, as defined in the Amended Credit Agreement. If the Company selects SOFR, the term loans initially bear interest at a rate per annum equal to SOFR plus 5.00% payable in cash plus 5.00% payable in kind (“PIK”). If the Company selects Base Rate, the loans initially bear interest at a rate per annum equal to the Base Rate plus 4.00% payable in cash plus 5.00% PIK. Base Rate term loans bear interest at a rate per annum equal to the sum of (i) the greater of (x) the Base Rate and (y) 2.00% plus (ii) 4.00%. The PIK component of the interest rate is subject to adjustment based on the amount of Aggregate Paydowns as set forth in the table below. The PIK component of the interest rate was 3.75% for the six months ended December 31, 2023 and
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4.50% for the three months ended June 30, 2023. The interest rate as of December 31, 2023, including the PIK component, was 14.24%.
Aggregate Paydowns PIK Component of Interest Rate
Less than $20 million 5.00%
$20 million+ but less than below 4.50%
$30 million+ but less than below 3.75%
$40 million+ but less than below 3.50%
$45 million+ but less than below 3.00%
$50 million+ but less than below 2.50%
$55 million+ but less than below 2.00%
$60 million+ but less than below 1.00%
$65 million+ but less than below 0.50%
$70 million+ 0.00%
If, as of the end of any calendar quarter, (i) the amount of unencumbered cash and cash equivalents of Altisource S.à r.l. and its direct and indirect subsidiaries on a consolidated basis plus (ii) the undrawn commitment amount under the Revolver is, or is forecast as of the end of the immediately subsequent calendar quarter to be, less than $35 million, then up to 2.00% in interest otherwise payable in cash in the following quarter may be paid in kind at the Company’s election.
The payment of all amounts owing by Altisource under the Amended Credit Agreement is guaranteed by the Guarantors and is secured by a pledge of all equity interests of certain subsidiaries of Altisource, as well as a lien on substantially all of the assets of Altisource S.à r.l. and the Guarantors, subject to certain exceptions.
The Amended Credit Agreement includes covenants that restrict or limit, among other things, our ability, subject to certain exceptions and baskets, to incur additional debt, pay dividends and repurchase shares of our common stock. Under the Amended Credit Agreement, we are not permitted to repurchase shares except for limited circumstances. In the event we require additional liquidity, our ability to obtain it may be limited by the Amended Credit Agreement.
As of December 31, 2023, the outstanding principal balance of the SSTL was $224 million.
Revolver
On June 22, 2021 Altisource S.à r.l, a subsidiary of Altisource Portfolio Solutions S.A., entered into a revolving credit facility with a related party, STS Master Fund, Ltd. (“STS”) (the “Revolver”). STS is an investment fund managed by Deer Park. Deer Park owns approximately 16% of Altisource’s common stock as of December 31, 2023 and owns Altisource debt as a lender under the Amended Credit Agreement. Deer Park’s Chief Investment Officer and managing partner was a member of Altisource’s Board of Directors until his resignation on March 1, 2022. The replacement director appointed by the Board of Directors and subsequently elected by shareholders is a current employee of Deer Park. The Revolver was amended effective February 14, 2023 (the “Amended Revolver”). Under the terms of the Amended Revolver, STS will make loans to Altisource from time to time, in amounts requested by Altisource and Altisource may voluntarily prepay all or any portion of the outstanding loans at any time. The Amended Revolver provides Altisource the ability to borrow a maximum amount of $15.0 million. Amounts that are repaid may be re-borrowed in accordance with the limitations set forth below.
The maturity date of the Amended Revolver coincides with the maturity date of the SSTL under the Amended Credit Agreement, as it may be extended. The outstanding balance on the Amended Revolver is due and payable on such maturity date.
Borrowings under the Amended Revolver bear interest of 10.00% per annum in cash and 3.00% per annum PIK and are payable quarterly on the last business day of each March, June, September and December. In connection with the Amended Revolver, Altisource is required to pay a usage fee equal to $0.75 million at the initial extension of credit pursuant to the Amended Revolver.
Altisource’s obligations under the Amended Revolver are secured by a first-priority lien on substantially all of the assets of the Company, which lien will be pari passu with liens securing the SSTL under the Amended Credit Agreement.
The Amended Revolver contains additional representations, warranties, covenants, terms and conditions customary for transactions of this type, that restrict or limit, among other things, our ability to use the proceeds of credit only for general corporate purposes.
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As of December 31, 2023, there was no outstanding debt under the Amended Revolver and since obtaining the Amended Revolver, the Company has not borrowed any amount under the Amended Revolver.
Cash Flows
The following table presents our cash flows for the years ended December 31:
(in thousands) 2023 % Increase (decrease) 2022
Net cash used in operating activities $ (21,833) (51) $ (44,888)
Net cash used in investing activities — (100) (767)
Net cash provided by (used in) financing activities 2,976 234 (2,221)
Net decrease in cash, cash equivalents and restricted cash (18,857) (61) (47,876)
Cash, cash equivalents and restricted cash at the beginning of the period 54,273 (47) 102,149
Cash, cash equivalents and restricted cash at the end of the period $ 35,416 (35) $ 54,273
Cash Flows from Operating Activities
Cash flows from operating activities generally consist of the cash effects of transactions and events that enter into the determination of net loss. For the year ended December 31, 2023, net cash used in operating activities was $(21.8) million compared to net cash used in operating activities of $(44.9) million for the year ended December 31, 2022. During the year ended December 31, 2023, the decrease in cash used in operating activities was driven by a $17.9 million improvement in cash provided by (used for) working capital and a $11.5 million increase in non-cash interest expense (amortization of debt discount and amortization of debt issuance and amendment costs), partially offset by a $3.2 million increase in net loss and a $2.1 million decrease in non-cash depreciation and deferred income tax expenses. The increase in net loss was primarily due to higher interest expense driven by higher interest rates on our Amended Credit Agreement and debt amendment costs, partially offset by lower corporate costs and higher operating income in the Servicer and Real Estate segment from our cash cost savings measures. The improvement in cash provided by (used for) changes in working capital was primarily driven by the $3.8 million net collection of taxes receivable for the year ended December 31, 2023 compared to a net payment of taxes of $3.3 million for the year ended December 31, 2022, a $2.0 million return of surety bonds, and no cash bonuses paid in the year ended December 31, 2023. Non-cash interest expense increased as a result of the February 2023 Amended Credit Agreement. Operating cash flows can be negatively impacted because of the nature of some of our services and the mix of services provided. Certain services are performed immediately following or shortly after the referral, but the collection of the receivable does not occur until a specific event occurs (e.g., the foreclosure is complete, the REO asset is sold, etc.). Furthermore, lower margin services generate lower income and cash flows from operations. Consequently, our cash flows from operations may not be comparable from one period to another.
Cash Flows from Investing Activities
Cash flows from investing activities generally include additions to premises and equipment and proceeds from the sale of businesses. Net cash used in investing activities was $(0.8) million for the year ended 2022 (no comparable amount for the year ended December 31, 2023). We used $0.9 million for the year ended December 31, 2022 (no comparable amount for the year ended December 31, 2023), for additions to premises and equipment primarily related to the purchase of technology hardware.
Cash Flows from Financing Activities
Cash flows from financing activities primarily included payments of tax withholding on issuance of restricted share units and restricted shares, distributions to non-controlling interests, proceeds from the sale of equity securities, debt repayments and debt amendment costs. Net cash provided by (used in) financing activities were $3.0 million and $(2.2) million for the years ended December 31, 2023 and 2022, respectively. During the year ended December 31, 2023, we received $38.8 million in proceeds from the issuance of common stock, net of issuance costs and used $30.0 million of the proceeds for repayment of debt. Also during the year ended December 31, 2023, we paid $4.9 million to lenders or others on behalf of the lenders related to the debt amendment. During the years ended December 31, 2023 and 2022, we made payments of $0.5 million and $1.1 million, respectively, to satisfy employee tax withholding obligations on the issuance of restricted share units and restricted shares. These payments were made to tax authorities, at the employees’ direction, to satisfy the employees’ tax obligations rather than issuing a portion of vested restricted share units and restricted shares to employees. In addition, during the years ended December 31, 2023 and 2022, we distributed $0.4 million and $1.1 million, respectively, to non-controlling interests.
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Future Uses of Cash
Our significant future liquidity obligations primarily pertain to the maturity of the SSTL under the Amended Credit Agreement, interest expense under the Amended Credit Agreement (see Liquidity section above), and operating lease payments on certain of our premises and equipment.
Significant future uses of cash include the following:
Payments Due by Period
(in thousands) Total 2024 2025-2026 2027-2028
Senior secured term loans (1)
$ 235,741 $ — $ 235,741 $ —
Interest expense payments (2)
31,880 23,752 8,128 —
Lease payments 3,785 1,762 2,023 —
Total $ 271,406 $ 25,514 $ 245,892 $ —
______________________________________
(1) The outstanding balance of our SSTL as of December 31, 2023 is $224 million and is due on April 30, 2025. If Aggregate Paydowns are equal to or greater than $30 million, then (subject to a payment of a 2% payment-in-kind extension fee on or before April 30, 2025 and subject to the representations and warranties being true and correct as of such date and there being no default or event of default being in existence as of such date) the maturity date of the SSTL may be extended at the Company’s option to April 30, 2026. During the year ended December 31, 2023, Company made $30 million of Aggregate Paydowns. The table herein reflects a maturity of April 2025. The increase in outstanding balance is from the PIK component of our interest expense and is assumed to be paid in kind through the April 2025 maturity date.
(2) Estimated future interest payments based on the SOFR interest rate as of December 31, 2023 and the April 30, 2025 maturity date. Based on the April 30, 2025 maturity date, no interest expense has been included beyond April 30, 2025.
We anticipate funding future liquidity requirements with a combination of existing cash balances, cash anticipated to be generated by operating activities and, as needed, proceeds from the Amended Revolver. For further information, see Note 11 and Note 22 to the consolidated financial statements.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements consist of escrow arrangements.
We hold customers’ assets in escrow accounts at various financial institutions pending completion of certain real estate activities. These amounts are held in escrow accounts for limited periods of time and are not included in the accompanying consolidated balance sheets. Amounts held in escrow accounts were $21.6 million and $13.2 million as of December 31, 2023 and 2022, respectively.
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND RECENT ACCOUNTING PRONOUNCEMENTS
We prepare our consolidated financial statements in accordance with GAAP. In applying many of these accounting principles, we need to make assumptions, estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses in our consolidated financial statements. We base our estimates and judgments on historical experience and other assumptions that we believe are reasonable under the circumstances. These assumptions, estimates and judgments, however, are often subjective. Actual results may be negatively affected based on changing circumstances. If actual amounts are ultimately different from our estimates, the revisions are included in our results of operations for the period in which the actual amounts become known.
We have identified the critical accounting policies and estimates addressed below. We also have other key accounting policies, which involve the use of assumptions, estimates and judgments that are significant to understanding our results. For additional information, see Note 2 to the consolidated financial statements. Although we believe that our assumptions, estimates and judgments are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates under different assumptions, judgments or conditions.
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Revenue Recognition
We recognize revenue when we satisfy a performance obligation by transferring control of a product or service to a customer in an amount that reflects the consideration that we expect to receive. This revenue can be recognized at a point in time or over time. We invoice customers based on our contractual arrangements with each customer, which may not be consistent with the period that revenues are recognized. When there is a timing difference between when we invoice customers and when revenues are recognized, we record either a contract asset (unbilled accounts receivable) or a contract liability (deferred revenue or other current liabilities), as appropriate.
Descriptions of our principal revenue generating activities are as follows:
Servicer and Real Estate
• For property preservation and inspection services and payment management technologies, we recognize transactional revenue when the service is provided
• For vendor management transactions, we recognize revenue over the period during which we perform the services. We use judgment to determine the period over which we recognize revenue for certain of these services
• For loan disbursement review services, we recognize revenue over the period during which we perform the processing services with full recognition upon completion of the disbursements
• For foreclosure trustee services, we recognize revenue over the period during which we perform the related services, with full recognition upon completion and/or recording the related foreclosure deed. We use judgment to determine the period over which we recognize revenue for certain of these services
• For the real estate auction platform, real estate auction and real estate brokerage services, we recognize revenue on a net basis (i.e., commission and/or auction fee, as applicable, on the sale) at the closing of the sale of the REO as we perform services as an agent without assuming the risks and rewards of ownership of the asset and the commission earned on the sale is a fixed percentage or amount
• For SaaS based technology to manage REO, we recognize revenue over the estimated average number of months the REO are on the platform or ratably over the contract period. We generally recognize revenue for professional services as services are provided. We use judgment to determine the period over which we recognize revenue for certain of these services
• For loan servicing technologies, we generally recognize revenue based on the number of loans on the system. We generally recognized revenue from professional services as services are provided. We use judgment to determine the period over which we recognize revenue for certain of these services
• Reimbursable expenses revenue related to property preservation and inspection services, real estate sales, title services and foreclosure trustee services is included in revenue with an equal amount recognized in cost of revenue. These amounts are recognized on a gross basis, principally because generally we have control over selection of vendors and the vendor relationships are with us, rather than with our customers
Origination
• For the majority of the services we provide, we recognize transactional revenue when the service is provided. We recognize membership fees from Lender One members ratably over the term of membership
• For vendor management oversight SaaS, we recognize revenue over the period during which we perform the services. We use judgment to determine the period over which we recognize revenue for certain of these services.
Goodwill and Identifiable Intangible Assets
Goodwill
We evaluate goodwill for impairment annually during the fourth quarter or more frequently when an event occurs or circumstances change in a manner that indicates the carrying value may not be recoverable. We first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value as a basis for determining whether we need to perform the quantitative goodwill impairment test. Only if we determine, based on qualitative assessment, that it is more likely than not that a reporting unit’s fair value is less than its carrying value will we calculate the fair value of the reporting unit. We estimate the fair value of the reporting units using discounted cash flows and market comparisons. The discounted cash flow method is based on the present value of projected cash flows. Forecasts of future cash flows are based on our estimate of future sales and operating expenses, based primarily on estimated pricing, sales volumes, market segment share, cost trends and general economic conditions. The estimated cash flows are discounted using a rate that
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represents our estimated weighted average cost of capital. The market comparisons include an analysis of revenue and earnings multiples of guideline public companies compared to the Company.
Identifiable Intangible Assets
Identified intangible assets consist primarily of customer related intangible assets, operating agreements, trademarks and trade names and other intangible assets. We determine the useful lives of our identifiable intangible assets after considering the specific facts and circumstances related to each intangible asset. Factors we consider when determining useful lives include the contractual term of any arrangements, the history of the asset, our long-term strategy for use of the asset and other economic factors. We amortize intangible assets that we deem to have definite lives in proportion to actual and expected customer revenues or on a straight-line basis over their useful lives, generally ranging from 4 to 20 years.
We perform tests for impairment if conditions exist that indicate the carrying value may not be recoverable. When facts and circumstances indicate that the carrying value of intangible assets determined to have definite lives may not be recoverable, management assesses the recoverability of the carrying value by preparing estimates of cash flows of discrete intangible assets generally consistent with models utilized for internal planning purposes. If the sum of the undiscounted expected future cash flows is less than the carrying value, we recognize an impairment to the extent the carrying amount exceeds fair value.
Income Taxes
We record income taxes in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 740, Income Taxes (“ASC Topic 740”). We account for certain income and expense items differently for financial reporting purposes and income tax purposes. We recognize deferred income tax assets and liabilities for these differences between the financial reporting basis and the tax basis of our assets and liabilities as well as expected benefits of utilizing net operating loss and credit carryforwards. The most significant temporary differences relate to accrued compensation, amortization, loss carryforwards and valuation allowances. We measure deferred income tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which we anticipate recovery or settlement of those temporary differences. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in determining tax expense and in evaluating tax positions including evaluating uncertainties under ASC Topic 740. We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Resolution of these uncertainties in a manner inconsistent with management’s expectations could have a material impact on our results of operations.
Recently Adopted and Future Adoption of New Accounting Pronouncements
See Note 2 to the consolidated financial statements for a discussion of the recent adoption of a new accounting pronouncements and the future adoption of new accounting pronouncements.
OTHER MATTERS
Customer Concentration
Ocwen
Revenue from Ocwen primarily consists of revenue earned from the loan portfolios serviced and subserviced by Ocwen when Ocwen engages us as the service provider, and revenue earned directly from Ocwen, pursuant to the Ocwen Services Agreements. For the years ended December 31, 2023 and 2022, we recognized revenue from Ocwen of $63.2 million and $63.5 million, respectively. Revenue from Ocwen as a percentage of segment and consolidated revenue was as follows:
2023 2022
Servicer and Real Estate 55 % 53 %
Origination — % — %
Corporate and Others — % — %
Consolidated revenue 44 % 41 %
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We earn additional revenue related to the portfolios serviced and subserviced by Ocwen when a party other than Ocwen or the MSRs owner selects Altisource as the service provider. For the years ended December 31, 2023 and 2022, we recognized $9.2 million and $9.5 million, respectively, of such revenue. These amounts are not included in deriving revenue from Ocwen and revenue from Ocwen as a percentage of revenue discussed above.
As of December 31, 2023, accounts receivable from Ocwen totaled $3.4 million, $2.2 million of which was billed and $1.2 million of which was unbilled. As of December 31, 2022, accounts receivable from Ocwen totaled $4.0 million, $3.2 million of which was billed and $0.8 million of which was unbilled.
Rithm
Ocwen has disclosed that Rithm is a significant client of Ocwen’s. As of December 31, 2023, Ocwen reported that approximately 16% of loans serviced and subserviced by Ocwen (measured in UPB) and approximately 67% of all delinquent loans that Ocwen services were related to Rithm MSRs or rights to MSRs.
Rithm purchases brokerage services for REO exclusively from us, irrespective of the subservicer, subject to certain limitations, for certain MSRs set forth in and pursuant to the terms of a Cooperative Brokerage Agreement, as amended, and related letter agreement (collectively, the “Brokerage Agreement”) with terms extending through August 2025.
For the years ended December 31, 2023 and 2022, we recognized revenue from Rithm of $2.8 million and $3.2 million, respectively, under the Brokerage Agreement. For the years ended December 31, 2023 and 2022, we recognized additional revenue of $12.6 million and $13.0 million, respectively, relating to the Subject MSRs when a party other than Rithm selects Altisource as the service provider.