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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒ ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2021
OR
☐ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER: 001-36063
Altisource Asset Management Corporation
(Exact name of registrant as specified in its charter)
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U.S. Virgin Islands |
66-0783125 |
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(State or other jurisdiction of incorporation or
organization) |
(I.R.S. Employer Identification No.) |
5100 Tamarind Reef
Christiansted, U.S. Virgin Islands 00820
(Address of principal executive office)
(704) 275-9113
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class |
Trading Symbol(s) |
Name of Exchange on which Registered |
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Common stock, par value $0.01 per share |
AAMC |
NYSE American |
Securities registered pursuant to Section 12(g) of the
Act:
None.
Indicate by check if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes
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No
☒
Indicate by check if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes
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No
☒
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes
☒
No
☐
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T during the preceding 12
months (or for such shorter period that the registrant was required
to submit such files). Yes
☒
No
☐
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and "emerging growth company" in Rule
12b-2 of the Exchange Act.
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Large Accelerated Filer |
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Accelerated Filer |
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Non-Accelerated Filer |
☒
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Smaller Reporting Company |
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Emerging Growth Company |
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If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act.
☐
Indicate by check mark whether the registrant has filed a report on
and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section
404(b) of the Sarbanes-Oxley Act (15 U.S.C.
7262(b)) by the registered public accounting firm that prepared or
issued its audit report.
☒
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes
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No
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The aggregate market value of common stock held by non-affiliates
of the registrant was $17.0 million, based on the closing share
price as reported on the New York Stock Exchange on June 30,
2021 and the assumption that all Directors and executive officers
of the registrant and their families and beneficial holders of 10%
of the registrant's common stock are affiliates. This determination
of affiliate status is not necessarily a conclusive determination
for any other purpose.
As of March 25, 2022, 2,061,411 shares of our common stock
were outstanding (excluding 1,355,130 shares held as treasury
stock).
Portions of the Registrant's definitive proxy statement relating to
its 2022 annual meeting of shareholders (the "2022 Proxy
Statement") are incorporated by reference into Part III of this
Annual Report on Form 10-K where indicated. The Registrant intends
to file the 2022 Proxy Statement with the U.S. Securities and
Exchange Commission not later than 120 days after the end of the
fiscal year to which this report relates.
Altisource Asset Management Corporation
December 31, 2021
Table of Contents
References in this report to “we,” “our,” “us,” “AAMC,” or the
“Company” refer to Altisource Asset Management Corporation and its
consolidated subsidiaries, unless otherwise indicated. References
in this report to “Front Yard” refer to Front Yard Residential
Corporation and its consolidated subsidiaries, unless otherwise
indicated.
Special note on forward-looking statements
Our disclosure and analysis in this Annual Report on Form 10-K
contain “forward-looking statements” within the meaning of Section
27A of the Securities Act of 1933, as amended (the “Securities
Act”), and Section 21E of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). In some cases, you can identify
forward-looking statements by the use of forward-looking
terminology such as “may,” “will,” “should,” “expects,” “intends,”
“plans,” “anticipates,” “believes,” “estimates,” “predicts,” or
“potential” or the negative of these words and phrases or similar
words or phrases that are predictions of or indicate future events
or trends and that do not relate solely to historical matters. You
can also identify forward-looking statements by discussions of
strategy, plans or intentions.
The forward-looking statements contained in this report reflect our
current views about future events and are subject to numerous known
and unknown risks, uncertainties, assumptions and changes in
circumstances that may cause our actual results to differ
significantly from those expressed in any forward-looking
statement. Factors that may materially affect such forward-looking
statements include, but are not limited to:
•Our
ability to develop and implement new businesses or, to the extent
such businesses are developed, our ability to make them successful
or sustain the performance of any such businesses;
•Developments
in the litigation regarding our redemption obligations under the
Certificate of Designations of our Series A Convertible Preferred
Stock (the “Series A Shares”), including our ability to obtain
declaratory relief confirming that we were not obligated to redeem
any of the Series A Shares on the March 15, 2020 redemption date if
we do not have funds legally available to redeem all, but not less
than all, of the Series A Shares requested to be redeemed on that
redemption date;
•Our
search for a permanent Chief Executive Officer;
•General
economic and market conditions;
•The
failure of our information technology systems, a breach thereto,
and our ability to integrate and improve those systems at a pace
fast enough to keep up with competitors and security threats;
and
•The
potential for the COVID-19 pandemic to adversely affect our
business, financial position, operations, business prospects,
customers, employees and third-party service
providers.
While forward-looking statements reflect our good faith beliefs,
assumptions and expectations, they are not guarantees of future
performance. Such forward-looking statements speak only as of their
respective dates, and we assume no obligation to update them to
reflect changes in underlying assumptions or factors, new
information or otherwise. For a further discussion of these and
other factors that could cause our future results to differ
materially from any forward-looking statements contained herein,
please refer to the section “Item
1A. Risk Factors.”
Part I
Item 1. Business
Our New Business
Altisource Asset Management Corporation (“we,” “our,” “us,” “AAMC,”
or the “Company”) was incorporated in the United States Virgin
Islands (“USVI”) on March 15, 2012 (our “inception”), and we
commenced operations in December 2012. Our primary business was to
provide asset management and certain corporate governance services
to institutional investors. In October 2013, we applied for and
were granted registration by the Securities and Exchange Commission
(the “SEC”) as a registered investment adviser under Section 203(c)
of the Investment Advisers Act of 1940. We historically operated in
a single segment focused on providing asset management and certain
corporate governance services to investment vehicles. Our primary
client was Front Yard Residential Corporation (“Front Yard”), a
public real estate investment trust (“REIT”) focused on acquiring
and managing quality, affordable single-family rental (“SFR”)
properties throughout the United States.
On August 13, 2020, we entered into a Termination and Transition
Agreement (the “Termination Agreement”) with Front Yard and Front
Yard Residential L.P. (“FYR LP”) to terminate the Amended and
Restated Asset Management Agreement, dated as of May 7, 2019 (the
“Amended AMA”), by and among Front Yard, FYR LP and AAMC, and to
provide for a transition plan to facilitate the internalization of
Front Yard’s asset management function (the “Transition Plan”). The
Termination Agreement was effective on December 31, 2020, the date
that the parties mutually agreed that the Transition Plan had been
satisfactorily completed (the “Termination Date”) and, the Amended
AMA was terminated in its entirety.
As disclosed in our public filings, the Company’s prior business
operations ceased in the first week of 2021. During 2021, the
Company engaged in a comprehensive search to acquire an operating
company with the proceeds received from the sale of its operations
in accordance with the Termination Agreement. A range of industries
were included in the search, including, but not limited to, real
estate lending, cryptocurrency, block-chain technology and
insurance operations. Outside professional firms, including among
others, Cowen and Company, LLC, an investment bank, and Norton Rose
Fulbright LLP, a global law practice, were engaged to provide due
diligence, legal and valuation expertise to assist in our
search.
Ultimately, in March 2022, AAMC determined to move forward with the
newly created Alternative Lending Group (ALG) and grow organically
and to pursue an opportunity related to Crypto ATMs.
With a capital commitment of $40 million to grow the operations of
ALG, the Company intends to perform the following:
•Build
out a niche origination platform as well as a loan acquisition
team;
•Fund
the originated or acquired alternative loans from a combination of
Company equity and future lines of credit;
•Sell
the originated and acquired alternative loans through forward
commitment and repurchase contracts;
•Leverage
senior management’s expertise in this space; and
•Utilize
AAMC’s existing operations in India to drive controls and cost
efficiencies.
The type of product we expect to originate or acquire are
alternative loans that offer opportunities for rapid growth and
allow us to tap into underserved markets. We intend to stay agile
on the loan product mix, but we are currently focused on markets
not addressed by banks, agency aggregators and most traditional
lenders, including but not limited to:
•Transitional
Loans: bridge loans on single family and commercial real
estate;
•Ground-up
Construction Loans: assisting developers in projects with the
primary focus on workforce housing;
•Investor
Loans: Non-agency loans on investment rental properties that are
debt service coverage ratio type loans;
•Special
Purpose Credit Programs: loans
to extend special purpose credit to applicants who meet certain
eligibility requirements such as credit assistance programs;
and
•“Gig
Economy” Loans: Loans to professionals, self-employed borrowers,
start-up business owners lacking income documentation to qualify
for Agency purchase.
In the near future, we expect our main business segment to be ALG,
whose primary sources of income will be derived from mortgage
banking activities generated through the origination and
acquisition of loans, and their subsequent sale or securitization
as well as net interest income from loans while held on the balance
sheet.
In addition to ALG operations, AAMC will also invest capital into a
Crypto ATM business through its Right of First Refusal Agreement
with the cryptocurrency company, ForumPay, with the intent to
deploy crypto enabled ATMs worldwide. The
Crypto ATMs using ForumPay's software will generally allow users to
purchase multiple cryptocurrencies such as Bitcoin, Ethereum and
Litecoin, using fiat currency, sell the same cryptocurrencies and
eventually remit payments globally either in cryptocurrency or the
local fiat currency. The Company will earn revenue by charging fees
for utilizing the ATMs for exchange between cryptocurrency and
local fiat currency.
The Right of First Refusal Agreement includes the following
provisions:
•Co-marketing
efforts between AAMC and ForumPay;
•ForumPay
to provide advanced technology that includes:
◦Cash
purchases of cryptocurrencies;
◦Cryptocurrency
conversions to cash (in local currency);
◦Capacity
to fund remittances to third parties (in crypto or local
currencies); and
•AAMC
will be responsible for ATM hardware, installation, maintenance,
operation and insurance.
We will initially invest $2.0 million and plan to invest more as
the opportunity warrants.
Environmental, Social and Governance
As AAMC is initiating new operations, its management team will
assess its strategic and operational approach to environmental,
social, and governance (“ESG”) matters in 2022 and execute on
specific ESG initiatives, accordingly. AAMC’s corporate goal of
investing in underserved markets is integrated with, and linked to,
our approach to ESG matters at AAMC.
Human Capital Resources
As of December 31, 2021, AAMC employed 24 full-time employees,
with plans to increase our headcount through the creation of
alternative loan origination and acquisition teams. At this time,
our employees are primarily based in the United States Virgin
Islands and India. The retention of our employees and the ability
to attract new employees are core to the sustainability and
long-term success of AAMC and we will invest in programs that
attract, retain, develop, and care for our people. Cultural
priorities and values are closely intertwined with our overarching
business strategy and we believe these priorities support AAMC’s
ability to fulfill our mission and contribute to our ongoing focus
on having a strong, healthy culture and a capable and satisfied
workforce.
Diversity, Equity, Inclusion, and Belonging
The Company believes in developing an atmosphere that fosters
diversity, equity, inclusion, and belonging (“DEIB”).
This mandate starts from the top with our Board of Directors all
being persons of color. Our DEIB work is focused on 1) developing
and executing programs and processes that increase the
representation of female and racially diverse employees at all
levels within the organization; and 2) investing in programs,
training, and mentorship that contribute to an inclusive and
equitable work environment for all our employees. Through our
origination activities, we believe that we will have the
opportunity to provide liquidity and capital through our assessment
of underserved markets.
Competition
We will be subject to intense competition in acquiring,
originating, and selling loans, the potential for initiating
securitization transactions, and in other aspects of our business.
Dependent upon the loan product niche as we expand, our potential
competitors may include in varying degrees, commercial banks,
mortgage REITs, regional and community banks, other specialty
finance companies, financial institutions, as well as investment
funds and other investors in real estate-related assets. In
addition, other companies may be formed that will compete with us.
Some of our competitors may have higher risk tolerances or
different risk assessments, which could allow them to consider a
wider variety of investments and establish more favorable
relationships than we can. Some of our competitors have greater
resources than us and we may not be able to compete successfully
with them.
Federal and State Regulatory and Legislative
Developments
Our new business will be affected by conditions in the housing,
business-purpose, multifamily, and real estate markets and the
broader financial markets, as well as by the financial condition
and resources of other participants in these markets.
These
markets and many of the participants in these markets are subject
to, or regulated under, various federal and state laws and
regulations. In some cases, the government or government-sponsored
entities, such as Fannie Mae and Freddie Mac, directly participate
in these markets. In particular, because issues relating to
residential real estate and housing finance can be areas of
political focus, federal, state and local governments may be more
likely to take actions that affect residential real estate, the
markets for financing residential real estate, and the participants
in residential real estate-related industries than they would with
respect to other industries. As a result of the government’s
statutory and regulatory oversight of the markets we participate in
and the government’s direct and indirect participation in these
markets, federal and state governmental actions, policies, and
directives can have an adverse effect on these markets and on our
business and the value of, and the returns on, mortgages,
mortgage-related securities, and other assets we own or may acquire
in the future, which effects may be material. For additional
discussion regarding federal and state legislative and regulatory
developments, see the risk factor below under the heading
“Federal
and state legislative and regulatory developments and the actions
of governmental authorities and entities may adversely affect our
business and the value of, and the returns on, mortgages,
mortgage-related securities, and other assets we own or may acquire
in the future"
in
Part
I, Item 1A of
this Annual Report on Form 10-K.
Information Available on Our Website
Our website can be found at www.altisourceamc.com. We make
available, free of charge through the investor information section
of our website, access to our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the U.S. Securities Exchange Act of 1934, as well
as proxy statements, as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the U.S.
Securities and Exchange Commission (“SEC”). We also make available,
free of charge, access to the charters for our Audit Committee,
Compensation Committee, and Governance and Nominating Committee,
our Corporate Governance Standards, Policy Regarding Majority
Voting, and our Code of Ethics governing our directors, officers,
and employees. Within the time period required by the SEC and the
New York Stock Exchange, we will post on our website any amendment
to the Code of Ethics and any waiver applicable to any executive
officer, director, or senior officer (as defined in the Code). In
addition, our website includes information concerning purchases and
sales of our equity securities by our executive officers and
directors, as well as disclosure relating to certain non-GAAP
financial measures (as defined in the SEC’s Regulation G) that we
may make public orally, telephonically, by webcast, by broadcast,
or by similar means from time to time. The information on our
website is not part of this Annual Report on Form
10-K.
Our Investor Relations Department can be contacted at 5100 Tamarind
Reef, Christiansted, USVI, 00820, Attn: Investor Relations,
telephone 704-275-9113 or email
ir@altisourceamc.com.
Certifications
Our Interim Chief Executive Officer and Chief Financial Officer
have executed certifications
dated March 31, 2022,
as required by Sections 302 and 906 of the Sarbanes-Oxley Act of
2002, and we have included those certifications as exhibits to this
Annual Report on Form 10-K.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) imposes a
wide variety of regulatory requirements on publicly-held companies
and their insiders. Many of these requirements affect us. For
example:
•Pursuant
to Rule 13a-14 under the Exchange Act, our Interim Chief Executive
Officer and Chief Financial Officer must certify the accuracy of
the financial statements contained in our periodic
reports;
•Pursuant
to Item 307 of Regulation S-K, our periodic reports must disclose
our conclusions about the effectiveness of our disclosure controls
and procedures;
•Pursuant
to Rule 13a-15 of the Exchange Act, our management must prepare a
report regarding its assessment of our internal control over
financial reporting; and
•Pursuant
to Item 308 of Regulation S-K and Rule 13a-15 of the Exchange Act,
our periodic reports must disclose whether there were significant
changes in our internal controls or in other factors that could
significantly affect these controls subsequent to the date of their
evaluation, including any corrective actions with regard to
material weaknesses.
The Sarbanes-Oxley Act requires us to review our current policies
and procedures to determine whether we comply with the
Sarbanes-Oxley Act and the regulations promulgated thereunder. We
will continue to monitor our compliance with all
regulations that are adopted under the Sarbanes-Oxley Act and will
take actions necessary to ensure that we are in compliance
therewith.
Item 1A. Risk Factors
The following risk factors and other information included in this
Annual Report on Form 10-K should be carefully considered. Many of
these risks relate to our new businesses and will be increasingly
critical as we invest additional funds in these businesses and
acquire additional mortgage loans. If any of the following risks
actually occur, our business, operating results and financial
condition could be materially adversely affected.
We face a variety of risks that are substantial and inherent in our
businesses. The following is a summary of some of the more
important factors that could affect our businesses:
Market
•General
economic developments and trends and the performance of the
housing, real estate, mortgage finance, and broader financial
markets may adversely affect our business and the value of, and
returns on, real estate-related and other assets we own or may
acquire and could also negatively impact our business and financial
results.
•Federal
and state legislative and regulatory developments and the actions
of governmental authorities and entities may adversely affect our
business and the value of, and the returns on, mortgages,
mortgage-related securities, and other assets we own or may acquire
in the future.
•Unpredictability
of the credit markets may restrict our access to capital and may
make it difficult or impossible for us to obtain any required
additional financing.
•The
future development and growth of our crypto ATM business is subject
to a variety of factors that are difficult to predict and evaluate.
If the crypto business opportunities do not grow as we expect, our
business, operating results, and financial condition could be
adversely affected.
•Our
businesses, financial condition, liquidity and results of
operations have been and may in the future be adversely affected by
the COVID-19 pandemic.
Operational
•We
may not be successful in entering into new businesses and markets,
which could adversely affect our business, results of operations
and financial condition.
•Our
use of leverage may expose us to substantial risks.
•Operational
risks, including those associated with our business model, may
disrupt our businesses, result in losses or limit our
growth.
•We
depend on key personnel to manage our business, and the loss of any
key person’s services, combined with our inability to identify and
retain a suitable replacement for such person, could materially
adversely affect us. Additionally, the cost to retain our key
personnel could put pressure on our operating margins.
•Our
inability to manage future growth effectively could have an adverse
impact on our business, results of operations and financial
condition.
•If
we fail to develop, enhance and implement strategies to adapt to
changing conditions in the real estate and capital markets, our
business, results of operations and financial condition may be
materially and adversely affected.
Investing
•The
nature of the assets we hold and the investments we make expose us
to credit risk that could negatively impact the value of those
assets and investments, our earnings, dividends, cash flows, and
access to liquidity, or otherwise negatively affect our
business.
•We
may have concentrated credit risk in certain geographical regions
and may be disproportionately affected by an economic or housing
downturn, natural disaster, terrorist event, climate change, or any
other adverse event specific to those regions.
•The
timing of credit losses can harm our economic returns.
•Our
efforts to manage credit risks may fail.
•Multifamily
and business purpose mortgage loan borrowers that have been
negatively impacted by the pandemic may not make payments of
principal and interest relating to their mortgage loans on a timely
basis, or at all, which could negatively impact our
business.
•Changes
in prepayment rates of mortgage loans could reduce our earnings,
dividends, cash flows, and access to liquidity.
•Interest
rate fluctuations can have various negative effects on us and could
lead to reduced earnings and increased volatility in our
earnings.
•Our
growth may be limited if assets are not available or not available
at attractive prices.
•We
may change our investment strategy or financing plans, which may
result in riskier investments and diminished returns.
•The
performance of the assets we own will vary and may not meet our
earnings or cash flow expectations. In addition, the cash flows and
earnings from, and market values of loans, we own may be
volatile.
•The
inability to access financial leverage through warehouse and
repurchase facilities, credit facilities, or other forms of debt
financing may inhibit our ability to execute our business plan,
which could have a material adverse effect on our financial
results, financial condition, and business.
•Entering
into hedging activities may subject us to increased
regulation.
•Our
results could be adversely affected by counterparty credit
risk.
Internal
•We
remain in outstanding litigation with one of the holders of our
Series A Convertible Preferred Stock (“Series A Shares”) related to
their purported notices under the Certificate of Designations of
the Series A Shares (the “Certificate”) to redeem an aggregate of
$144.2 million liquidation preference of our Series A Shares in
March 2020. If we are required to pay damages or redeem a portion
of their Series A Shares, it could materially and adversely affect
our ongoing business and liquidity.
•We
are subject to the risks of securities laws liability and related
civil litigation.
•An
unidentified material weakness in our internal control over
financial reporting could, if not remediated, result in material
misstatements in our financial statements.
•We
may become subject to the requirements of the Investment Company
Act, which would limit our business operations and require us to
spend significant resources to comply with such act.
•Failure
to retain the tax benefits provided by the USVI would adversely
affect our financial performance.
•Our
USVI operations may become subject to United States federal income
taxation.
•Our
cash balances are held at a number of financial institutions that
expose us to their credit risk.
•Our
failure to meet the continued listing requirements of the NYSE
American could result in a delisting or a halt in the trading of
our common stock.
•The
market price and trading volume of our common stock may be volatile
and may be affected by market conditions beyond our
control.
RISKS RELATED TO OUR MARKET GENERALLY
General economic developments and trends and the performance of the
housing, real estate, mortgage finance, and broader financial
markets may adversely affect our business and the value of, and
returns on, real estate-related and other assets we own or may
acquire and could also negatively impact our business and financial
results.
Our level of business activity and the profitability of our
business, as well as the values of, and the cash flows from, the
assets we own, are affected by developments in the U.S. economy and
the broader global economy. As a result, negative
economic developments are likely to negatively impact our business
and financial results. There are a number of factors that could
contribute to negative economic developments, including, but not
limited to, U.S. fiscal and monetary policy
changes, including Federal Reserve policy shifts and changes in
benchmark interest rates, changing U.S. consumer spending patterns,
negative developments in the housing, single-family rental (SFR),
multifamily, and real estate markets, rising
unemployment, rising government debt levels, changing expectations
for, or the occurrence of, inflation and deflation, or adverse
global political and economic events, such as the outbreak of
pandemic, epidemic disease, or warfare (including the
recent outbreak of hostilities between Russia and
Ukraine).
Rising inflation and elevated U.S. budget deficits and overall debt
levels, including as a result of federal pandemic relief and
stimulus legislation and/or economic or market and supply chain
conditions, can put upward pressure on interest rates and
could be among the factors that could lead to higher interest rates
in the future. Higher interest rates could adversely affect our
overall business, income, including by reducing the fair value of
many of our assets.
This may affect our earnings results, reduce our ability to
securitize, re-securitize, or sell our assets, or reduce our
liquidity. Higher interest rates could also reduce the ability of
borrowers to make interest payments or to refinance their
loans.
Real estate values, and the ability to generate returns by owning
or taking credit risk on loans secured by real estate, are
important to our business.
Federal and state legislative and regulatory developments and the
actions of governmental authorities and entities may adversely
affect our business and the value of, and the returns on,
mortgages, mortgage-related securities, and other
assets we own or may acquire in the future.
As
noted
above,
our
business
is
affected
by
conditions
in
the
housing,
business
purpose,
multifamily,
and
real
estate
markets
and
the
broader
financial
markets,
as
well
as
by
the
financial
condition
and
resources
of
other
participants
in
these
markets.
These markets and many of the participants in these markets are
subject to, or regulated under, various federal and state laws and
regulations. In some cases, the government or government-sponsored
entities, such as
Fannie Mae and Freddie Mac, directly participate in these markets.
In particular, because issues relating to residential housing and
real estate finance can be areas of political focus, federal, state
and local governments may be more likely to take actions that
affect residential
housing, the markets for financing residential housing, and the
participants in residential housing-related industries than they
would with respect to other industries. As a result of the
government’s statutory and regulatory oversight of the
markets
we participate in and the government’s direct and indirect
participation in these markets, federal and state governmental
actions, policies, and directives can have an adverse effect on
these markets and on our business and the value of, and the
returns on, mortgages, mortgage-related securities, and other
assets we own or may acquire in the future, which effects may be
material.
Ultimately, we cannot assure you of the impact that governmental
actions may have on our business or the financial markets and, in
fact, they may adversely affect us, possibly materially. We cannot
predict whether or when such actions may occur
or what unintended or unanticipated impacts, if any, such actions
could have on our business and financial results. Even after
governmental actions have been taken and we believe we understand
the impacts of those actions, prevailing
interpretations may shift, or we may not be able to effectively
respond to them so as to avoid a negative impact on our business or
financial results.
Unpredictability of the credit markets may restrict our access to
capital and may make it difficult or impossible for us to obtain
any required additional financing.
We intend to borrow money from lenders to fund our origination and
purchase of mortgage loans.
The domestic and international credit markets can be unpredictable.
In the event that we need additional capital for our business, we
may have a difficult time obtaining it and/or the terms upon which
we can obtain it may be unfavorable, which would have an adverse
impact on our financial performance.
The future development and growth of our crypto ATM business is
subject to a variety of factors that are difficult to predict and
evaluate. If the crypto business opportunities do not grow as we
expect, our business, operating results, and financial condition
could be adversely affected.
Crypto assets built on blockchain technology were only introduced
in 2008 and remain in the early stages of development. In addition,
different crypto assets are designed for different purposes.
Bitcoin, for instance, was designed to serve as a peer-to-peer
electronic cash system, while Ethereum was designed to be a smart
contract and decentralized application platform. Many other crypto
networks, ranging from cloud computing to tokenized securities
networks, have only recently been established. The further growth
and development of any crypto assets and their underlying networks
and other cryptographic and algorithmic protocols governing the
creation, transfer, and usage of crypto assets represent a new and
evolving paradigm that is subject to a variety of factors that are
difficult to evaluate
We will need to be vigilant to protect against various operational
risks and technical issues that could potentially result in
disabled functionalities, exposure of certain users’ personal
information, theft of users’ assets, and other negative
consequences, and which would require resolution with the attention
and efforts of their global miner, user, and development
communities. If any such risks or other risks materialize, and in
particular if they are not resolved, the development and growth of
crypto may be significantly affected and, as a result, our
business, operating results, and financial condition could be
adversely affected.
Cryptocurrency is subject to an extensive and highly evolving
regulatory landscape and any adverse changes to, or our failure to
comply with, any laws and regulations could adversely affect our
ability to develop our Crypto ATM business.
The complexity and evolving nature of our business and the
significant uncertainty surrounding the regulation of the
cryptoeconomy require us to exercise our judgment as to whether
certain laws, rules, and regulations apply to us, and it is
possible that governmental bodies and regulators may disagree with
our conclusions. To the extent we have not complied with such laws,
rules, and regulations, we could be subject to significant fines,
revocation of licenses, limitations on our products and services,
reputational harm, and other regulatory consequences, each of which
may be significant and could adversely affect our business,
operating results, and financial condition.
Our businesses, financial condition, liquidity and results of
operations have been and may in the future be adversely affected by
the COVID-19 pandemic.
The COVID-19 pandemic created economic and financial disruptions
that have in the past adversely affected and may in the future
adversely affect our business, financial condition, liquidity and
results of operations. The extent to which the COVID-19 pandemic
will negatively affect our businesses, financial condition,
liquidity and results of operations will depend on future
developments, including the emergence of new variants of COVID-19
and the effectiveness of vaccines and treatments over the long term
and against new variants, which are highly uncertain and cannot be
predicted.
While financial markets have rebounded from the significant
declines that occurred early in the pandemic and global economic
conditions generally improved in 2021, certain of the circumstances
that arose or became more pronounced after the onset of the
COVID-19 pandemic persisted in 2021, including (i) relatively weak
consumer confidence; (ii) low levels of the federal funds rate and
yields on U.S. Treasury securities which, at times, were near zero;
(iii) higher cyber security, information security and operational
risks; and (iv) interruptions in the supply chain that have
adversely affected many businesses and have contributed to higher
rates of inflation.
Depending on the duration and severity of the pandemic going
forward, as well as the effects of the pandemic on consumer
confidence, the conditions noted above could continue for an
extended period and other adverse developments may occur or
reoccur, including defaults by consumers on loans and changes in
consumer spending or borrowing patterns. Our ability to enter into
new business, acquire new business, and grow new business has been
materially impacted by COVID-19 and related governmental measures
imposed to contain the virus, such as the closure of stores,
restrictions on travel, quarantines or stay-at-home orders. If the
disruptions caused by the pandemic continue, our ability to succeed
at these new businesses could suffer materially.
Travel restrictions, the closure of non-essential businesses or
shelter-in-place/stay-at-home orders may make it more difficult and
costly for our business. This extended period of remote working by
our employees may introduce operational risks, including technology
availability and heightened cybersecurity risk. Remote working
environments may be less secure and more susceptible to hacking
attacks, including phishing and social engineering attempts that
seek to exploit the COVID-19 pandemic. In addition, our data
security, data privacy, investor reporting and business continuity
processes could be impacted by a third party’s inability to perform
due to COVID-19 or by failures of, or attacks on, their information
systems and technology. Our accounting and financial reporting
systems, processes, and controls could be impacted as a result of
these risks.
Governmental authorities worldwide have taken increased measures to
stabilize the markets and support economic growth. The continued
success of these measures is unknown and they may not be sufficient
to address future market dislocations or avert severe and prolonged
reductions in economic activity.
RISKS RELATED TO OUR OPERATIONS
We may not be successful in entering into new businesses and
markets, which could adversely affect our business, results of
operations and financial condition.
Our new strategy focuses on the purchase and origination of
mortgage loans. Given our focus across the real estate industry,
these initiatives could increase our costs and expose us to new
market risks and legal and regulatory requirements. These loans
have different economic structures than our previous businesses and
will require different strategies and policies and procedures.
These activities also may impose additional compliance burdens on
us, subject us to enhanced regulatory scrutiny and expose us to
greater reputation and litigation risk.
The success of our growth strategy will depend on, among other
things:
•Our
ability to correctly originate and purchase mortgage loans that
appeal to end investors;
•The
diversion of management’s time and attention into the growth of
such new businesses;
•Management’s
ability to spend time developing and integrating the new business
and the success of the integration effort;
•Our
ability to identify and manage risks in new lines of
businesses;
•Our
ability to obtain requisite approvals and licenses from the
relevant governmental authorities and to comply with applicable
laws and regulations without incurring undue costs and delays;
and
•Our
ability to successfully negotiate and enter into beneficial
arrangements with our counterparties.
We are also entering into a new Crypto ATM business. We may not be
successful in this new business and even if we do succeed in
creating revenues in these businesses, they may not be
profitable.
In some instances, we may determine that growth in a specific area
is best achieved through the acquisition of an existing business or
a smaller scale lift out of an origination team to enhance our
platform. Our ability to consummate an acquisition will depend on
our ability to identify and value potential acquisition
opportunities accurately and successfully compete for these
businesses against companies that may have greater financial
resources. Even if we are able to identify and successfully
negotiate and complete an acquisition, these transactions can be
complex and we may encounter unexpected difficulties or incur
unexpected costs.
In addition, if a new business or venture developed internally or
by acquisition is unsuccessful, we may decide to wind down,
liquidate and/or discontinue it. Such actions could negatively
impact our relationships with our counterparties in those
businesses, could subject us to litigation or regulatory inquiries
and can expose us to additional expenses, including impairment
charges.
Our use of leverage may expose us to substantial
risks.
We intend to use indebtedness as a means to finance our future
business operations, which will expose us to the risks associated
with using leverage. We are dependent on financial institutions
extending credit to us on reasonable terms to finance our new
business. There is no guarantee that such institutions will extend
credit to us or that we will be able to refinance any new
obligations when they mature. As borrowings under any future credit
facility or any other indebtedness mature, we may be required to
either refinance them by entering into a new facility or issuing
additional debt, which could result in higher borrowing costs, or
issuing additional equity, which would dilute existing
stockholders. We could also repay them by using cash on hand, cash
provided by our continuing operations or cash from the sale of our
assets, which could reduce dividends to our stockholders. We could
have difficulty entering into new facilities or issuing debt or
equity securities in the future on attractive terms, or at
all.
Operational risks, including those associated with our business
model, may disrupt our businesses, result in losses or limit our
growth.
We rely heavily on our financial, accounting, information and other
data processing systems. We may face various security threats,
including cyber security threats to and attacks on our information
technology infrastructure that are intended to gain access to our
proprietary information, destroy data or disable, degrade or
sabotage our systems. These security threats could originate from a
wide variety of sources, including unknown third parties outside
the company.
There may be an increase in the frequency and sophistication of the
cyber and security threats we face, with attacks ranging from those
common to businesses generally to those that are more advanced and
persistent, which may target us because, as an alternative lender,
we hold an amount of confidential and sensitive information about
our borrowers, our portfolio companies and potential investments.
As a result, we may face a heightened risk of a security breach,
online extortion attempt, or disruption with respect to this
information resulting from an attack by computer hackers, foreign
governments, cyber extortionists or cyber terrorists. If
successful, these types of attacks on our network or other systems
could have a material adverse effect on our business and results of
operations, due to, among other things, the loss of investor or
proprietary data, interruptions or delays in our business and
damage to our reputation. Our suppliers, contractors, investors,
and other third parties with whom we do business also experience
cyber threats and attacks that are similar in frequency and
sophistication. In many cases, we have to rely on the controls and
safeguards put in place by our suppliers, contractors, investors
and other third parties to defend against, respond to, and report
these attacks.
We depend on key personnel to manage our business, and the loss of
any key person’s services, combined with our inability to identify
and retain a suitable replacement for such person, could materially
adversely affect us. Additionally, the cost to retain our key
personnel could put pressure on our operating margins.
Our success is largely dependent on the skills, experience, and
performance of our key personnel. The business acumen, expertise,
and business relationships of our key personnel are critical
elements in developing our new businesses. Financial services
professionals are in high demand, and we face significant
competition for qualified employees. The loss of services of any of
our key personnel for any reason, combined with our inability to
identify and retain a suitable replacement for such person, could
have a material adverse effect on our business, results of
operations, and financial condition. Moreover, to retain key
personnel, we may be required to increase compensation to such
individuals, resulting in additional expense.
Our inability to manage future growth effectively could have an
adverse impact on our business, results of operations and financial
condition.
Our ability to grow will depend on our management’s ability to
originate and/or acquire investor real estate loans. In order to do
this, we will need to identify, hire, train, supervise and manage
new employees. Any failure to effectively manage our future growth,
including a failure to successfully expand our loan origination
activities could have a material and adverse effect on our
business, results of operations and financial
condition.
If we fail to develop, enhance and implement strategies to adapt to
changing conditions in the real estate and capital markets, our
business, results of operations and financial condition may be
materially and adversely affected.
The manner in which we compete and the loans for which we compete
are affected by changing conditions, which can take the form of
trends or sudden changes in our industry, regulatory environment,
changes in the role of government-sponsored entities, changes in
the role of credit rating agencies or their rating criteria or
process or the United States economy more generally. If we do not
effectively respond to these changes, or if our strategies to
respond to these changes are not successful, our business, results
of operations and financial condition may be materially and
adversely affected.
RISKS RELATED TO OUR INVESTING STRATEGY
The nature of the assets we hold and the expected investments we
make could potentially expose us to credit risk that could
negatively impact the value of those assets and investments, our
earnings, dividends, cash flows, and access to liquidity, or
otherwise negatively affect our business.
Overview of credit risk
We assume credit risk primarily through the ownership of business
purpose and multifamily real estate loans. Credit losses on these
types of real estate loans can occur for many reasons, including:
fraud; poor underwriting; poor servicing practices; weak economic
conditions; increases in payments required to be made by borrowers;
declines in the value of real estate; declining rents and/or
elevated delinquencies associated with single- and multifamily
rental housing; the outbreak of highly infectious or contagious
diseases; natural disasters, the effects of climate change
(including flooding, drought, wildfires, and severe weather) and
other natural events; uninsured property loss; over-leveraging of
the borrower; costs of remediation of environmental conditions,
such as indoor mold; changes in zoning or building codes and the
related costs of compliance; acts of war or terrorism; changes in
legal protections for lenders and other changes in law or
regulation; and personal events affecting borrowers, such as
reduction in income, job loss, divorce, or health problems. In
addition, the amount and timing of credit losses could be affected
by loan modifications, delays in the liquidation process,
documentation errors, and other action by servicers. Weakness in
the U.S. economy or the housing market could cause our credit
losses to increase beyond levels that we currently
anticipate.
Credit losses on business purpose and multifamily real estate loans
can occur for many of the reasons noted above. Moreover, these
types of real estate loans may not be fully amortizing and,
therefore, the borrower’s ability to repay the principal when due
may depend upon the ability of the borrower to refinance or sell
the property at maturity. Business purpose and multifamily real
estate loans and real estate loans collateralizing business purpose
and multifamily securities are particularly sensitive to conditions
in the rental housing market and to demand for residential rental
properties.
For loans we own directly, we will most likely be in a position to
incur credit losses - should they occur - only after losses are
borne by the owner of the property (e.g., by a reduction in the
owner’s equity stake in the property). We may take actions
available to us in an attempt to protect our position and mitigate
the amount of credit losses, but these actions may not prove to be
successful and could result in our increasing the amount of credit
losses we ultimately incur on a loan.
Additionally, loans to small, privately owned businesses such as
borrowers from our business purpose loan origination platforms
involve a high degree of business and financial risk. Often, there
is little or no publicly available information about these
businesses. Accordingly, we must rely on our own due diligence to
obtain information in connection with our investment decisions. A
borrower’s ability to repay its loan may be adversely impacted by
numerous factors, including a downturn in its industry or other
negative local or more general economic conditions. Deterioration
in a borrower’s financial condition and prospects may be
accompanied by deterioration in the collateral for the loan. These
factors may have an impact on loans involving such businesses, and
can result in substantial losses, which in turn could have a
material and adverse effect on our business, results of operations
and financial condition.
We may have concentrated credit risk in certain geographical
regions and may be disproportionately affected by an economic or
housing downturn, natural disaster, terrorist event, climate
change, or any other adverse event specific to those
regions.
A decline in the economy or difficulties in certain real estate
markets, such as a high level of foreclosures in a particular area,
are likely to cause a decline in the value of multifamily
properties in that market. This, in turn, will increase the risk of
delinquency, default, and foreclosure on real estate loans we may
hold with properties in those regions. This may then adversely
affect our credit loss experience and other aspects of our
business, including our ability to securitize (or otherwise sell)
real estate loans and securities.
The occurrence of a natural disaster (such as an earthquake,
tornado, hurricane, flood, landslide, or wildfire), or the effects
of climate change (including flooding, drought, and severe
weather), may cause decreases in the value of real estate
(including sudden or abrupt changes) and would likely reduce the
value of the properties collateralizing real estate loans we own.
For example, in recent years, hurricanes have caused widespread
flooding in Florida and Texas and wildfires and mudslides in
northern and southern California have destroyed or damaged
thousands of homes. Since certain natural disasters may not
typically be covered by the standard hazard insurance policies
maintained by borrowers, the borrowers may have to pay for repairs
due to the disasters. Borrowers may not repair their property or
may stop paying their mortgage loans under those circumstances,
especially if the property is damaged. This would likely cause
foreclosures to increase and lead to higher credit losses on our
loans.
The timing of credit losses can harm our economic
returns.
The timing of credit losses can be a material factor in our
economic returns from real estate loans, investments, and
securities. If unanticipated losses occur within the first few
years after a loan is originated, those losses could have a greater
negative impact on our investment returns than unanticipated losses
on more seasoned loans. The timing of credit losses could be
affected by the creditworthiness of the borrower, the borrower’s
willingness and ability to continue to make payments, and new
legislation, legal actions, or programs that allow for the
modification of loans or rental obligations, or ability for
borrowers or tenants to get relief through forbearance, bankruptcy
or other avenues.
Our efforts to manage credit risks may fail.
We will attempt to manage risks of credit losses by continually
evaluating our investments for impairment indicators and
establishing reserves under GAAP for credit and other risks based
upon our assessment of these risks. We cannot establish credit
reserves for tax accounting purposes. The amount of reserves that
we establish may prove to be insufficient, which would negatively
impact our financial results and would result in decreased
earnings. In addition, cash and other capital we hold to help us
manage credit and other risks and liquidity issues may prove to be
insufficient. If these increased credit losses are greater than we
anticipated and we need to increase our credit reserves, our GAAP
earnings might be reduced. Increased credit losses may also
adversely affect our cash flows, ability to invest, asset fair
values, access to short-term borrowings, and ability to finance
assets.
Changes in consumer behavior, bankruptcy laws, tax laws, regulation
of the mortgage industry, and other laws may exacerbate loan or
investment losses. In most cases, the value of the underlying
property will be the sole effective source of funds for any
recoveries. Other changes or actions by judges or legislators
regarding mortgage loans and contracts, including the voiding of
certain portions of these agreements, may reduce our earnings,
impair our ability to mitigate losses, or increase the probability
and severity of losses. Any expansion of our loss mitigation
efforts could increase our operating costs and the expanded loss
mitigation efforts may not reduce our future credit
losses.
Multifamily and business purpose mortgage loan borrowers that have
been negatively impacted by the pandemic may not make payments of
principal and interest relating to their mortgage loans on a timely
basis, or at all, which could negatively impact our
business.
Multifamily and business purpose loans we are to own could be
subject to similar risks as those described above and could likely
be impaired, potentially materially to the extent multifamily and
business purpose loan borrowers have been negatively impacted by
the pandemic and do not timely remit payments of principal and
interest relating to their mortgage loans. In addition, if tenants
who rent their residence from a multifamily or business purpose
loan borrower are unable to make rental payments, are unwilling to
make rental payments, or a waiver of the requirement to make rental
payments on a timely basis, or at all, is available under the terms
of any applicable forbearance or waiver agreement or program (which
rental payment forbearance or waiver program may be available as a
result of a government-sponsored or -imposed program or under any
such agreement or program a landlord may otherwise offer to
tenants), then the value of multifamily and business purpose loans
we
own will likely be impaired, potentially materially. Moreover, to
the extent the economic impact of any such pandemic impacts local,
regional or national economic conditions, the value of multifamily
and residential real estate that secures multifamily and business
purpose loans is likely to decline, which would also likely
negatively impact the value of mortgage loans we own, potentially
materially.
Additionally, a significant amount of the business purpose loans
that we own are short-term bridge loans that are secured by
residential properties that are undergoing rehabilitation or
construction and not occupied by tenants. Because these properties
are generally not income producing (e.g., from rental revenue), in
order to fund principal and interest payments, these borrowers may
seek to renegotiate the terms of their mortgage loan, including by
seeking payment forbearances, waivers, or maturity extensions as a
result of being negatively impacted by the pandemic. Moreover,
planned construction or rehabilitation of these properties may not
be able to proceed on a timely basis or at all due to operating
disruptions or government mandated moratoriums on construction,
development or redevelopment. All of the foregoing factors would
also likely negatively impact the value of mortgage loans we own,
potentially materially.
Changes in prepayment rates of mortgage loans could reduce our
earnings, dividends, cash flows, and access to
liquidity.
The economic returns we earn from most of the real estate loans we
own are affected by the rate of prepayment of the mortgage loans.
Prepayments are difficult to accurately predict and adverse changes
in the rate of prepayment could reduce our cash flows, earnings,
and dividends. Adverse changes in cash flows would likely reduce
the fair values of many of our assets, which could reduce our
ability to borrow against our assets and may cause market valuation
adjustments for GAAP purposes, which could reduce our reported
earnings. While we will estimate prepayment rates to determine the
effective yield of our assets and valuations, these estimates are
not precise and prepayment rates do not necessarily change in a
predictable manner as a function of interest rate changes.
Prepayment rates can change rapidly. As a result, changes can cause
volatility in our financial results, affect our ability to
securitize assets, affect our ability to fund acquisitions, and
have other negative impacts on our ability to generate
earnings.
Some of the business purpose loans we originate or hold may allow
the borrower to make prepayments without incurring a prepayment
penalty and some may include provisions allowing the borrower to
extend the term of the loan beyond the originally scheduled
maturity. Because the decision to prepay or extend a business
purpose loan is controlled by the borrower, we may not accurately
anticipate the timing of these events, which could affect the
earnings and cash flows we anticipate and could impact our ability
to finance these assets.
Interest rate fluctuations can have various negative effects on us
and could lead to reduced earnings and increased volatility in our
earnings.
Changes in interest rates, the interrelationships between various
interest rates, and interest rate volatility could have negative
effects on our earnings, the fair value of our assets and
liabilities, loan prepayment rates, and our access to liquidity.
Changes in interest rates can also harm the credit performance of
our assets. We may seek to hedge some but not all interest rate
risks. Our hedging may not work effectively and we may change our
hedging strategies or the degree or type of interest rate risk we
assume.
Some of the loans we may own or acquire may have adjustable-rate
coupons (i.e., they may earn interest at a rate that adjusts
periodically based on an interest rate index). The cash flows we
receive from these assets may vary as a function of interest rates,
as may the reported earnings generated by these loans. We also may
acquire loans and securities for future sale, as assets we are
accumulating for securitization, or as a longer-term investment. We
may fund assets with a combination of equity, fixed rate debt and
adjustable rate debt. To the extent we use adjustable rate debt to
fund assets that have a fixed interest rate (or use fixed rate debt
to fund assets that have an adjustable interest rate), an interest
rate mismatch could exist and we could, for example, earn less (and
fair values could decline) if interest rates rise, at least for a
time. We may or may not seek to mitigate interest rate mismatches
for these assets with hedges such as interest rate agreements and
other derivatives and, to the extent we do use hedging techniques,
they may not be successful.
Higher interest rates generally will reduce the fair value of many
of our assets. This may affect our earnings results, reduce our
ability to sell our assets, or reduce our liquidity. Higher
interest rates could reduce the ability of borrowers to make
interest payments or to refinance their loans. Higher interest
rates could reduce property values and increased credit losses
could result. Higher interest rates could reduce mortgage
originations, thus reducing our opportunities to acquire new
assets.
It can be difficult to predict the impact on interest rates of
unexpected and uncertain global political and economic events, such
as the outbreak of pandemic or epidemic disease, warfare (including
the recent outbreak of hostilities between Russia and Ukraine),
economic and international trade conflicts or sanctions, the change
in the U.S. presidential administration and
political makeup of the Congress, or changes in the credit rating
of the U.S. government; however, increased uncertainty or changes
in the economic outlook for, or rating of, the creditworthiness of
the U.S. government may have adverse impacts on, among other
things, the U.S. economy, financial markets, the cost of borrowing,
the financial strength of counterparties we transact business with,
and the value of assets we hold. Any such adverse impacts could
negatively impact the availability to us of short-term debt
financing, our cost of short-term debt financing, our business, and
our financial results.
Our growth may be limited if assets are not available or not
available at attractive prices.
To reinvest the proceeds from principal repayments we receive on
our existing loans and deploy capital we raise, we may seek to
originate, invest in, or acquire new assets. If the availability of
new assets is limited, we may not be able to originate, invest in,
or acquire assets that will generate attractive returns. Generally,
asset supply can be reduced if originations of a particular product
are reduced or if there are fewer sales in the secondary market of
seasoned product from existing portfolios. In particular, assets we
believe have a favorable risk/reward ratio may not be available for
purchase (or origination by our business purpose loan origination
platform).
We originate business purpose loans, but we may not be willing to
provide the level of loan proceeds to the borrower or interest rate
that borrowers find acceptable or that matches our competitors,
which would likely reduce the volume of these types of loans that
we originate.
We may change our investment strategy or financing plans, which may
result in riskier investments and diminished returns.
We may change our investment strategy or financing plans at any
time, which could result in our making investments that are
different from, and possibly riskier than, the investments we are
currently planning to make. A change in our investment strategy or
financing plans may increase our exposure to interest rate and
default risk and real estate market fluctuations. Decisions to
employ additional leverage could increase the risk inherent in our
investment strategy. Furthermore, a change in our investment
strategy could result in our making investments in new asset
categories or in different proportions among asset categories than
management’s current strategy. Alternatively, we could determine to
change our investment strategy or financing plans to be more risk
averse, resulting in potentially lower returns, which could also
have an adverse effect on our financial returns.
The performance of the assets we own will vary and may not meet our
earnings or cash flow expectations. In addition, the cash flows and
earnings from, and market values of loans, we own may be
volatile.
We seek to manage certain of the risks associated with acquiring,
originating, holding, selling, and managing real estate loans. No
amount of risk management or mitigation, however, can change the
variable nature of the cash flows of, fair values of, and financial
results generated by these loans. Changes in the credit performance
of, or the prepayments on, these real estate loans, and changes in
interest rates impact the cash flows on these loans, and the impact
could be significant for our loans with concentrated risks. Changes
in cash flows lead to changes in our return on investment and also
to potential variability in and level of reported income. The
revenue recognized on some of our assets is based on an estimate of
the yield over the remaining life of the asset. Thus, changes in
our estimates of expected cash flow from an asset will result in
changes in our reported earnings on that asset in the current
reporting period. We may be forced to recognize adverse changes in
expected future cash flows as a current expense, further adding to
earnings volatility.
The inability to access financial leverage through warehouse and
repurchase facilities, credit facilities, or other forms of debt
financing may inhibit our ability to execute our business plan,
which could have a material adverse effect on our
financial results, financial condition, and business.
Our ability to fund our business depends on our securing warehouse,
repurchase, or other forms of debt financing (or leverage) on
acceptable terms. For example, pending the sale of a pool of
mortgage
loans we intend to generally fund those mortgage loans through
borrowings from warehouse, repurchase, and credit facilities, and
other forms of short-term financing.
We cannot assure you that we will be successful in establishing
sufficient sources of short-term debt when needed. In addition,
because of its short-term nature, lenders may decline to renew our
short-term debt upon maturity or expiration, and it
may be difficult for us to obtain continued short-term financing.
To
the
extent
our
business
calls for us to access financing and counterparties are unable or
unwilling to lend to us, then our business and financial results
will be adversely affected. It is also possible that lenders who
provide us with financing could
experience changes in their ability to advance funds to
us,
independent of our performance or the performance of our loans, in
which case funds we had planned to be able to access may not be
available to us.
Entering into hedging
activities
may
subject
us
to increased regulation.
Under the Dodd-Frank Act, there is increased regulation of
companies that enter into interest rate hedging agreements and
other hedging instruments and derivatives. This increased
regulation could
result in us being required to register and be regulated as a
commodity pool operator or a commodity trading advisor. If we are
not able to maintain an exemption from these regulations, it could
have a negative
impact on our business or financial results. Moreover, rules
requiring central clearing of certain interest rate swap and other
transactions, as well as rules relating to margin and capital
requirements for swap transactions and regulated participants
in
the swap markets, as well as other swap market regulatory reforms,
may increase the cost or decrease the availability to us of hedging
transactions.
Our
results
could
be
adversely
affected
by
counterparty
credit
risk.
We have credit risks that are generally related to the
counterparties with which we do business. There is a risk that
counterparties will fail to perform under their contractual
arrangements with us and this risk is usually more pronounced
during an economic downturn. The economic impact of the pandemic
and the associated volatility in the financial markets has at times
triggered, and is likely to trigger additional periods of economic
slowdown or recession, and such conditions could jeopardize the
solvency of counterparties with which we do business. Those risks
of non-performance may differ materially from the risks entailed in
exchange-traded transactions, which generally are backed by
clearing organization guarantees, daily mark-to-market and
settlement of positions, and segregation and minimum capital
requirements applicable to intermediaries. Transactions entered
into directly between parties generally do not benefit from those
protections, and expose the parties to the risk of counterparty
default. Furthermore, there may be practical and timing problems
associated with enforcing our rights to assets in the case of an
insolvency of a counterparty.
In the event a counterparty to our borrowings becomes insolvent, we
may fail to recover the full value of our pledged collateral, thus
reducing our earnings and liquidity. In addition, the insolvency of
one or more of our financing counterparties could reduce the amount
of financing available to us, which would make it more difficult
for us to leverage the value of our assets and obtain substitute
financing on attractive terms or at all. A material reduction in
our financing sources or an adverse change in the terms of our
financings could have a material adverse effect on our financial
condition and results of operations. In the event a counterparty to
our interest rate agreements or other derivatives becomes insolvent
or interprets our agreements with it in a manner unfavorable to us,
our ability to realize benefits from the hedge transaction may be
diminished, any cash or collateral we pledged to the counterparty
may be unrecoverable, and we may be forced to unwind these
agreements at a loss. In the event a counterparty that sells us
mortgage loans becomes insolvent or is acquired by a third party,
we may be unable to enforce our loan repurchase rights in
connection with a breach of loan representations and warranties and
we may suffer losses if we must repurchase delinquent loans. In the
event that one of our sub-servicers becomes insolvent or fails to
perform, loan delinquencies and credit losses may increase and we
may not receive the funds to which we are entitled. We will attempt
to diversify our counterparty exposure,
although we may not always be able to do so. Our counterparty risk
management strategy may prove ineffective and, accordingly, our
earnings and cash flows could be adversely affected.
SPECIFIC RISKS RELATING TO US
We remain in outstanding litigation with one of the holders of our
Series A Convertible Preferred Stock (“Series A Shares”) related to
their purported notices under the Certificate of Designations of
the Series A Shares (the “Certificate”) to redeem an aggregate of
$144.2 million liquidation preference of our Series A Shares in
March 2020. If we are required to pay damages or redeem a portion
of their Series A Shares, it could materially and adversely affect
our ongoing business and liquidity.
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, under the terms of the Certificate, we do not
believe that we 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, we have 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. 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. AAMC intends to continue to pursue its strategic
business
initiatives despite this litigation. See “Item
1. Business.”
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. For more information on the
legal proceedings with Luxor, see “Item
3. Legal Proceedings”
in this Annual Report on Form 10-K.
We are subject to the risks of securities laws liability and
related civil litigation.
We may be subject to risk of securities litigation and derivative
actions from time to time as a result of being publicly traded,
including the actions set forth in “Note
7-Commitments and contingencies.”
There can be no assurance that any settlement or liabilities in any
future lawsuits or claims against us would be covered or partially
covered by our insurance policies, which could have a material
adverse effect on our earnings in one or more periods. The range of
possible resolutions for any potential legal actions could include
determinations and judgments against us or settlements that could
require substantial payments by us, including the costs of
defending such suits, which could have a material adverse effect on
our financial condition, results of operations and cash
flows.
An unidentified material weakness in our internal control over
financial reporting could, if not remediated, result in material
misstatements in our financial statements.
A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement
of the company’s annual or interim financial statements will not be
prevented or detected on a timely basis. Our management is
responsible for establishing and maintaining adequate internal
control over our financial reporting, as defined in Rule 13a-15(f)
under the Exchange Act. There can be no assurance that material
weaknesses will not arise in the future or that any remediation
efforts will be successful. If additional material weaknesses or
significant deficiencies in our internal controls are discovered in
the future, we could be required to restate our financial results
or experience a decline in the price of our securities. Our
disclosure controls and procedures and internal control over
financial reporting are designed to provide reasonable assurance of
achieving their objectives as specified above. Management does not
expect, however, that our disclosure controls and procedures or our
internal control over financial reporting will prevent or detect
all error and fraud. Any control system, no matter how well
designed and operated, is based upon certain assumptions and can
provide only reasonable, not absolute, assurance that its
objectives will be met. Further, no evaluation of controls can
provide absolute assurance that misstatements due to error or fraud
will not occur or that all control issues and instances of fraud,
if any, within the Company have been detected.
We may become subject to the requirements of the Investment Company
Act, which would limit our business operations and require us to
spend significant resources to comply with such act.
The Investment Company Act defines an “investment company” as an
issuer that is engaged in the business of investing, reinvesting,
owning, holding or trading in securities and owns investment
securities having a value exceeding 40% of the issuer's
unconsolidated assets, excluding cash items and securities issued
by the federal government. While the Investment Company Act also
has several exclusions and exceptions that we would seek to rely
upon to avoid being deemed an investment company, our reliance on
any such exclusions or exceptions may be misplaced resulting in
violation of the Investment Company Act, the consequences of which
can be significant.
The ramifications of becoming an investment company, both in terms
of the restrictions it would have on us and the cost of compliance,
would be significant. For example, in addition to expenses related
to initially registering as an investment company, the Investment
Company Act also imposes various restrictions with regard to our
ability to enter into affiliated transactions, the diversification
of our assets and our ability to borrow money. If we became subject
to the Investment Company Act at some point in the future, our
ability to continue pursuing our business plan would be severely
limited
Failure to retain the tax benefits provided by the USVI would
adversely affect our financial performance.
We are incorporated under the laws of the USVI and are
headquartered in the USVI. The USVI has an Economic Development
Commission (the “EDC”) that provides benefits (“EDC Benefits”) to
certain qualified businesses in the USVI that enable us to avail
ourselves of significant tax benefits for a thirty-year period. We
received our certificate to operate as a company that qualifies for
EDC Benefits as of February 1, 2013, which provides us with a 90%
tax credit on USVI-source income so long as we comply with the
requirements of the EDC and our certificate of benefits. It is
possible that we may not be able to retain our qualifications for
the EDC Benefits or that changes in U.S. federal, state, local or
USVI taxation statutes or applicable regulations may cause a
reduction in or an elimination of the EDC Benefits, all of which
could result in a significant increase to our tax expense, and,
therefore, adversely affect our financial condition and results of
operations.
Our USVI operations may become subject to United States federal
income taxation.
Our parent company is incorporated under the laws of the USVI and
intends to operate in a manner that will cause us to be treated as
not engaging in a trade or business within the United States, which
will cause us to be exempt from current United States federal
income taxation on our net income. However, because there are no
definitive standards provided by the Code, regulations or court
decisions as to the specific activities that constitute being
engaged in the conduct of a trade or business within the United
States, and as any such determination is essentially factual in
nature, we cannot assure you that the IRS will not successfully
assert that we are engaged in a trade or business within the United
States.
If the IRS were to successfully assert that we have been engaged in
a trade or business within the United States in any taxable year,
various adverse tax consequences could result, including the
following:
•We
may become subject to current United States federal income taxation
on our net income from sources within the United
States;
•We
may be subject to United States federal income tax on a portion of
our net investment income, regardless of its source;
•We
may not be entitled to deduct certain expenses that would otherwise
be deductible from the income subject to United States taxation;
and
•We
may be subject to United States branch profits tax on profits
deemed to have been distributed out of the United
States.
United States persons who own shares may be subject to United
States federal income taxation on our undistributed earnings and
may recognize ordinary income upon disposition of
shares.
Significant potential adverse United States federal income tax
consequences generally apply to any United States person who owns
shares in a passive foreign investment company (“PFIC”). We cannot
provide assurance that we will not be a PFIC in any future taxable
year.
In general, we would be a PFIC for a taxable year if either (i) 75%
or more of our income constitutes “passive income” or (ii) 50% or
more of our assets produce “passive income.” Passive income
generally includes interest, dividends and other investment income.
We believe that we are currently operating, and intend to continue
operating, our business in a way that should not cause us to be a
deemed PFIC; however, we cannot assure you the IRS will not
successfully challenge this conclusion.
United States persons who, directly or indirectly or through
attribution rules, own 10% or more of our shares (“United States
10% Stockholders”), based on either voting power or value, may be
subject to the controlled foreign corporation (“CFC”) rules. Under
the CFC rules, each United States 10% stockholder must annually
include his pro rata share of the CFC's “Subpart F income,” even if
no distributions are made. Also, all capital gains from the sale of
PFIC shares will be treated as ordinary income for federal income
tax purposes and thus are not eligible for preferential long-term
capital gains rates.
We believe that the dispersion of our ordinary shares among holders
will generally prevent new stockholders who acquire shares from
being United States 10% Stockholders. We cannot assure you,
however, that these rules will not apply to you. If you are a
United States person, we strongly urge you to consult your own tax
adviser concerning the CFC rules.
United States tax-exempt organizations who own shares may recognize
unrelated business taxable income.
If you are a United States tax-exempt organization, you may
recognize unrelated business taxable income with respect to our
insurance-related income if a portion of our Subpart F income is
allocated to you. In general, Subpart F income will be allocated to
you if we are a CFC and you are a United States 10% Stockholder and
certain exceptions do not apply. Although we do not believe that
any United States persons will be allocated Subpart F income, we
cannot assure you that this will be the case. If you are a United
States tax-exempt organization, we advise you to consult your own
tax adviser regarding the risk of recognizing unrelated business
taxable income.
We may in the future become subject to the Global Intangible
Low-Taxed Income provisions.
The Tax Cuts and Job Reform Act requires U.S. stockholders of CFCs
to include in income, as a deemed dividend, the global intangible
low-taxed income (“GILTI”) of the CFCs. The GILTI regime is
designed to decrease the incentive for a U.S. group to shift
corporate profits to low-taxed jurisdictions. We are not currently
impacted by the GILTI provisions, as the entirety of the aggregate
net income for each of our CFCs is excluded from our “net tested
income” (the basis on which the tax is calculated), as it
constitutes Subpart F income and is subject to an effective foreign
tax rate greater than 90% of the maximum U.S. corporate income tax
rate. We cannot rule out the possibility that we will in the future
find ourselves subject to the GILTI rules, should the income of our
CFCs no longer be entirely Subpart F income and be taxed at a
foreign tax rate greater than 90% if the U.S. corporate income tax
rate.
Changes to U.S. or state tax laws, our failure to adequately comply
with U.S. or state tax laws, or the outcome of any audits or
regulatory disputes with respect to our compliance with U.S. or
state tax laws could adversely affect us.
Changes to U.S. or state tax law could be enacted in the future
that could have a material adverse effect on our business, results
of operations, and financial condition. Further, we are subject to
potential tax audits in various jurisdictions and in such event,
tax authorities may disagree with certain positions we have taken
and assess penalties or additional taxes. While we assess the
likely outcomes of these potential audits, there can be no
assurance that we will accurately predict the outcome of a
potential audit, and an audit could have a material adverse impact
on our business, results of operations, and financial
condition.
Change in United States tax laws may be retroactive and could
subject us and/or United States persons who own shares to United
States income taxation on our undistributed earnings.
The tax laws and interpretations regarding whether we are engaged
in a United States trade or business, are a CFC or a PFIC are
subject to change, possibly on a retroactive basis. New regulations
or pronouncements interpreting or clarifying such rules may be
forthcoming from the IRS. We are not able to predict if, when or in
what form such guidance will be provided and whether such guidance
will have a retroactive effect.
The impact of the initiative of the Organization for Economic
Cooperation and Development to eliminate harmful tax practices is
uncertain and could adversely affect our tax status in the United
States Virgin Islands.
The Organization for Economic Cooperation and Development has
published reports and launched a global dialogue among member and
non-member countries on measures to limit harmful tax competition.
These measures are largely directed at counteracting the effects of
tax havens and preferential tax regimes in countries around the
world. While the USVI is currently a jurisdiction that has
substantially implemented internationally agreed tax standards, we
are not able to predict if additional requirements will be imposed
and, if so, whether changes arising from such additional
requirements will subject us to additional taxes.
Our cash balances are held at a number of financial institutions
that expose us to their credit risk
We maintain our cash and cash equivalents at financial or other
intermediary institutions. The combined account balances at each
institution typically exceed FDIC insurance coverage of $250,000
per depositor, and, as a result, there is a concentration of credit
risk related to amounts on deposit in excess of FDIC insurance
coverage. At December 31, 2021, substantially all of our cash
and cash equivalent balances held at financial institutions
exceeded FDIC insured limits.
Our failure to meet the continued listing requirements of the NYSE
American could result in a delisting or a halt in the trading of
our common stock.
We must continue to satisfy the NYSE American’s continued listing
requirements. If we fail to satisfy the continued listing
requirements of the NYSE American, the NYSE American may take steps
to delist our common stock or halt the trading of our common stock.
Such a delisting or trading halt would likely have a negative
effect on the price of our common stock and would impair a
shareholder's ability to sell or purchase our common stock when
they wish to do so. We cannot assure the shareholders that we will
continue to meet the existing listing requirements of the NYSE
American because some of the requirements, like the number of
shareholders and the trading price of our common stock, are outside
of our control.
On November 30, 2021, the NYSE American halted trading in our
common stock. Although the NYSE American allowed trading to resume
on March 21, 2022, shareholders were unable to trade our common
stock while the trading halt was in place. Any further trading halt
would prevent shareholders from selling the stock until the trading
halt is lifted and the trading price may be adversely affected if
trading in the stock begins again.
The market price and trading volume of our common stock may be
volatile and may be affected by market conditions beyond our
control.
The price at which our common stock trades has fluctuated, and may
continue to fluctuate, significantly. The market price of our
common stock may fluctuate in response to many things, including
but not limited to, the following:
•Variations
in actual or anticipated results of our operations, liquidity or
financial condition;
•Changes
in, or the failure to meet, our financial estimates or those of by
securities analysts;
•Actions
or announcements by our competitors;
•Potential
conflicts of interest, or the discontinuance of our strategic
relationships;
•Actual
or anticipated accounting problems;
•Regulatory
actions;
•Lack
of liquidity;
•An
inability to develop or obtain new businesses or client
relationships, respectively;
•Changes
in the market outlook for the real estate, mortgage or housing
markets;
•Technology
changes in our business;
•Changes
in interest rates that lead purchasers of our common stock to
demand a higher yield;
•Actions
by our stockholders;
•Speculation
in the press or investment community;
•General
market, economic and political conditions, including an economic
slowdown or dislocation in the global credit markets;
•Failure
to maintain the listing of our common stock on the New York Stock
Exchange ("NYSE") American;
•Changes
in accounting principles;
•Passage
of legislation or other regulatory developments that adversely
affect us or our industry; and
•Departure
of our key personnel.
The market prices of securities of alternative lenders have
experienced fluctuations that often have been unrelated or
disproportionate to the operating results of these companies. These
market fluctuations could result in extreme volatility in the
market price of our common stock.
Furthermore, our small size and different investment
characteristics may not continue to appeal to our current investor
base that may seek to dispose of large amounts of our common stock.
There is no assurance that there will be sufficient buying interest
to offset those sales, and, accordingly, the market price of our
common stock could be depressed and/or experience periods of high
volatility.
RISKS RELATED TO OUR MANAGEMENT AND OUR RELATIONSHIPS
Our Directors have the right to engage or invest in the same or
similar businesses as ours.
Our Directors may have other investments and business activities in
addition to their interest in, and responsibilities to, us. Under
the provisions of our Charter and our bylaws (the “Bylaws”), our
Directors have no duty to abstain from exercising the right to
engage or invest in the same or similar businesses as ours or
employ or otherwise engage any of the other Directors. If any of
our Directors who are also directors, officers or employees of any
company acquires knowledge of a corporate opportunity or is offered
a corporate opportunity outside of his capacity as one of our
Directors, then our Bylaws provide that such Director will be
permitted to pursue that corporate opportunity independently of us,
so long as the Director has acted in good faith. Our Bylaws provide
that, to the fullest extent permitted by law, such a Director will
be deemed to have satisfied his fiduciary duties to us and will not
be liable to us for pursuing such a corporate opportunity
independently of us. This may create conflicts of interest between
us and certain of our Directors and result in less than favorable
treatment of us and our stockholders. As of this date, none of our
Directors is directly involved as a director, officer or employee
of a business that competes with us, but there can be no assurance
that will remain unchanged in the future.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We conduct our principal operations through leased office space. We
are headquartered in approximately 5,000 square feet of office
space located at 5100 Tamarind Reef, Christiansted, VI 00820, and
we also have an office in Bengaluru, India. For
more information, please see
Note
6
to our consolidated financial statements contained in this Annual
Report on Form 10-K.
Item 3. Legal proceedings
We are involved in a number of judicial and legal proceedings
concerning matters arising in connection with the conduct of our
businesses. Given the range of litigations and arbitrations
presently in process, our litigation expenses may remain high.
Refer to
Note
1
and
Note
7
to our consolidated financial statements.
Item 4. Mine safety disclosures
Not applicable.
Part II
Item 5. Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities
Market Information
Our common stock has been listed on the NYSE American under the
symbol “AAMC” since December 13, 2013. The following table sets
forth the high and low close of day sales prices for our common
stock as reported by the NYSE for the periods
indicated:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
2020 |
|
|
|
Quarter ended |
|
High |
|
Low |
|
High |
|
Low |
|
|
|
|
March 31 |
|
$ |
27.73 |
|
|
$ |
16.68 |
|
|
$ |
28.58 |
|
|
$ |
10.56 |
|
|
|
|
|
June 30 |
|
20.36 |
|
|
15.86 |
|
|
20.51 |
|
|
12.17 |
|
|
|
|
|
September 30 |
|
28.98 |
|
|
12.82 |
|
|
23.70 |
|
|
12.51 |
|
|
|
|
|
December 31 |
|
26.41 |
|
|
17.90 |
|
|
23.90 |
|
|
19.50 |
|
|
|
|
Holders
The number of holders of record of our common stock as of
March 25, 2022 was 45. The number of beneficial stockholders
is substantially greater than the number of holders as a large
portion of our stock is held through brokerage firms. Information
regarding securities authorized for issuance under equity
compensation plans is set forth in
Note
9
of the consolidated financial statements.
The information under the heading “Equity Compensation Plan
Information” in our definitive proxy statement for the 2022 Annual
Meeting of Stockholders to be filed with the SEC not later than
120 days after December 31, 2021 is incorporated herein
by reference.
Dividends
We will pay dividends at the sole and absolute discretion of our
Board of Directors in the light of conditions then existing,
including our earnings, financial condition, liquidity, capital
requirements, the availability of capital, general overall economic
conditions and other factors. We paid no dividends from inception
through December 31, 2021.
Issuer Purchases of Equity Securities
In March 2014, the Board of Directors authorized total repurchases
of up to $300.0 million of common stock. At December 31,
2021, we have approximately $31.3 million remaining that is
authorized by our Board of Directors for share repurchases.
Repurchased shares are held as treasury stock and available for
general corporate purposes. No repurchase plan has expired during
the year ended December 31, 2021.
We did not repurchase any shares of common stock pursuant to our
share repurchase plan during the year ended December 31,
2021.
The following table summarizes the common stock reacquired to
satisfy the tax withholding on equity awards:
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|
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|
|
|
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|
|
|
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|
|
|
|
|
|
|
|
Period |
|
Total Number of Shares Purchased |
|
Average Price Paid Per Share |
|
Total Number of Shares Purchased as Part of Publicly Announced
Plans or Programs |
|
Maximum Number of Shares That May Yet Be Purchased Under the Plans
or Programs |
|
|
|
|
January 1, 2021 through June 30, 2021
(1)
|
|
34,625 |
|
|
$ |
23.48 |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
34,625 |
|
|
$ |
23.48 |
|
|
— |
|
|
|
|
|
|
_____________
(1)As
permitted under the Company's equity compensation plans, these
shares were withheld by the Company to satisfy the tax withholding
obligation for those individuals who elected this option in
connection with the vesting of shares of restricted
stock.
The information required by Item 5 of Form 10-K regarding equity
compensation plans is incorporated herein by reference to Item 12
of Part III of this Annual Report.
Item 6. Reserved
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following should be read in conjunction with the other sections
of this Annual Report on Form 10-K, including our audited
consolidated financial statements and the related notes. The
following discussion contains certain forward-looking statements
that involve risks, uncertainties and assumptions. Our actual
results could differ materially from the results contemplated from
these forward-looking statements due to a number of factors
including, but not limited to, those discussed in Part 1, Item 1A
"Risk
Factors"
in this Annual Report on Form 10-K.
Our consolidated financial statements, which we discuss below,
reflect our historical financial condition, results of operations,
and cash flows. The financial information discussed below and
included in this Annual Report on Form 10-K, however, may not
necessarily reflect what our financial condition, results of
operations, or cash flows may be in the future.
On August 13, 2020, we entered into the Termination Agreement with
Front Yard to terminate the Amended AMA, by and among Front Yard,
FYR LP and AAMC, and to provide for a Transition Plan, amongst the
parties. In connection with the termination of the Amended AMA and
subsequent sale of the Disposal Group, we reclassified the Disposal
Group activity as a discontinued operations effective as of the end
of the third quarter of 2020. The Termination Agreement was
effective on December 31, 2020, the date that the parties mutually
agreed that the Transition Plan had been satisfactorily completed
and, the Amended AMA was terminated in its entirety, with the
closing.
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.
See
Note
3
to our accompanying consolidated financial statements for further
information regarding discontinued operations.
Unless otherwise indicated, amounts reported in this "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" pertain to continuing operations only.
Management Overview and New Business
During 2021, the Company engaged in a comprehensive search to
acquire an operating company with the proceeds received from the
sale of its operations in accordance with the Termination
Agreement. A range of industries were included in the search,
including, but not limited to, real estate lending, cryptocurrency,
block-chain technology and insurance operations. Outside
professional firms, including among others, Cowen and Company, LLC,
an investment bank, and Norton Rose Fulbright LLP, a global law
practice, were engaged to provide due diligence, legal and
valuation expertise to assist in our search.
On an interim basis in 2021, the Company invested in REIT equity
securities to provide both dividend income and trading gains and
generate portfolio income as the Company had no on-going
operations.
Ultimately, in March 2022, AAMC determined to move forward with the
newly created Alternative Lending Group (ALG) and grow organically
and to pursue an opportunity related to Crypto ATMs.
With a capital commitment of $40 million to grow the operations of
ALG, the Company intends to perform the following:
•Build
out a niche origination platform as well as a loan acquisition
team;
•Fund
the originated or acquired alternative loans from a combination of
Company equity and future lines of credit;
•Sell
the originated and acquired alternative loans through forward
commitment and repurchase contracts;
•Leverage
senior management’s expertise in this space; and
•Utilize
AAMC’s existing operations in India to drive controls and cost
efficiencies.
The type of product we expect to originate or acquire are
alternative loans that offer opportunities for rapid growth and
allow us to tap into under-served markets. We intend to stay agile
on the loan product mix, but we are currently focused on markets
not addressed by banks, agency aggregators and most traditional
lenders, including but not limited to:
•Transitional
Loans: bridge loans on single family and commercial real
estate;
•Ground-up
Construction Loans: assisting developers in projects with the
primary focus on workforce housing;
•Investor
Loans: Non-agency loans on investment rental properties that are
debt service coverage ratio type loans;
•Special
Purpose Credit Programs: loans
to extend special purpose credit to applicants who meet certain
eligibility requirements such as credit assistance programs;
and
•“Gig
Economy” Loans: Loans to professionals, self-employed borrowers,
start-up business owners lacking income documentation to qualify
for Agency purchase.
In the near future, we expect our main business segment to be ALG,
whose primary sources of income will be derived from mortgage
banking activities generated through the origination and
acquisition of loans, and their subsequent sale or securitization
as well as net interest income from loans while held on the balance
sheet.
In addition to ALG operations, AAMC will also invest capital into a
Crypto ATM business through its Right of First Refusal Agreement
with the cryptocurrency company, ForumPay with the intent to deploy
cryptoenabled ATMs worldwide. The Crypto ATMs using ForumPay's
software will generally allow users to purchase multiple
cryptocurrencies such as Bitcoin, Ethereum and Litecoin, using fiat
currency, sell the same cryptocurrencies and eventually remit
payments globally either in cryptocurrency or the local fiat
currency.
The Right of First Refusal Agreement includes the following
provisions:
•Co-marketing
efforts between AAMC and ForumPay;
•ForumPay
to provide advanced technology that includes:
◦Cash
purchases of cryptocurrencies;
◦Cryptocurrency
conversions to cash (in local currency);
◦Capacity
to fund remittances to third parties (in crypto or local
currencies); and
•AAMC
will be responsible for ATM hardware, installation, maintenance,
operation and insurance.
We will initially invest $2.0 million and plan to invest more as
the opportunity warrants.
Observations on Current Market Opportunities
We believe there is a compelling investment opportunity in the
investor and business purpose loan market and that we have
implemented a strategic plan for AAMC to capitalize on the
significant increase in demand for these products. In our view, the
tightening of credit and lending requirements on traditional
residential loan products, as well as macro-economic changes,
shifting demographics, geographic mobility, favorable changes in
interest rate and monetary policy, as well as cultural and economic
changes resulting from the COVID-19 pandemic have benefited the
overall residential real estate market while reducing yields
available to investors elsewhere. We believe that our initial focus
on short-term investor loans provides the opportunity to generate
attractive risk-adjusted returns on our investments while
minimizing exposure to unforeseen structural shifts in monetary and
fiscal policy and other market changes.
Metrics Affecting Our Consolidated Results
Our operating results are affected by various factors and market
conditions, including the following:
Expenses
Our expenses consist primarily of salaries and employee benefits,
legal and professional fees, general and administrative expenses
and acquisition charges. Salaries and employee benefits include the
base salaries, incentive bonuses, medical coverage, retirement
benefits, non-cash share-based compensation and other benefits
provided to our employees for their services. Legal and
professional fees include services provided by third-party
attorneys, accountants and other service providers of a
professional nature. General and administrative expenses include
costs related to the general operation and overall administration
of our business as well as non-cash share-based compensation
expense related to restricted stock awards to our
Directors. Acquisition charges reflect professional fees incurred
solely for the purpose of assisting the Company in the
identification of target companies and the subsequent due
diligence, valuation, and deal structuring services required to
properly assess the viability of the target companies.
Other Income
Other income primarily relates to income generated from marketable
securities acquired and sold by the Company either through the
Front Yard transaction, primarily in 2020 or on the public market
in 2021.
Results of Continuing Operations
The following discussion compares our results of continuing
operations for the years ended December 31, 2021 and 2020. Our
results of operations for the periods presented are not indicative
of our expected results in future periods.
For discussion that compares our results of operations for the
years ended December 31, 2020 and 2019, see “Item 7.
Management's Discussion and Analysis of Financial Condition and
Results of Operations - Results of Operations” included within
our
Annual Report on Form 10-K
for the year ended December 31, 2020 filed with the SEC on
March 3, 2021.
Fiscal Year ended December 31, 2021 Compared to Fiscal Year
ended December 31, 2020
Salaries and Employee Benefits
Salaries and employee benefits decreased to $5.6 million from $12.0
million for the years ended December 31, 2021 and 2020,
respectively. This decrease is primarily due to lower expenses
after the sale of Front Yard and adjustments to expense based on
the executive departures and the terms of their respective
employment agreement which require repayment of previously paid
bonuses and forfeiture of restricted stock.
Legal, Acquisition and Professional Fees
Legal fees increased to $6.9 million from $4.7 million for the
years ended December 31, 2021 and 2020, respectively. This
increase is primarily due to an increase in legal and consulting
fees related to the Luxor litigation and employment issues. We
incurred $3.9 million as acquisition costs in 2021, primarily
investment banks and the associated legal support for the
assessment and development of merger and acquisition candidates.
Professional fees stayed constant at $1.5 million and $1.5 million
for the years ended December 31, 2021 and 2020,
respectively.
General and Administrative Expenses
General and administrative expenses increased to $2.6 million from
$2.3 million for the years ended December 31, 2021 and 2020,
respectively, attributable to an increase in software license fees,
restricted stock expense, and insurance cost, offset by decreased
travel expenses and lease expense.
Change in Fair Value of Front Yard Common Stock
The change in fair value of Front Yard common stock was $0.1
million compared to $6.3 million during
the years ended December 31, 2021 and 2020, respectively.
These changes in fair value were due solely to changes in the
market price of Front Yard's common stock, as reported on the New
York Stock Exchange. Upon closing of the Front Yard merger, the
Company received cash in exchange for shares held.
Dividend and Gain on Sale Income
Dividend income was $3.1 million for the year ended
December 31, 2021 on REIT equity securities. No dividends for
equity securities were received in 2020, because no REIT equity
securities were held during that period. The increase in equity
security dividends is due to dividends declared on equity
securities acquired during the 2021 reporting periods. Dividends
recognized on shares of Front Yard common stock were zero and $0.2
million for the years ending December 31, 2021 and
2020.
The REIT equity securities were purchased and sold in 2021 for a
realized gain of $8.3 million. No gains were recognized in 2020,
because no REIT equity securities were held during the
period.
Results of Discontinued Operations
On August 13, 2020, we and Front Yard entered into the
Termination Agreement, pursuant to which they have agreed to
effectively internalize the asset management function of Front
Yard. The termination of the Amended AMA and the sale of the
certain assets and operations to Front Yard represents a
significant strategic shift that will have a major effect on our
operations and financial results. Therefore, we have classified the
results of our operations related to Front Yard as discontinued
operations in our condensed consolidated statements of operations.
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 January 1, 2021, we completed the
sale of the remainder of the Disposal Group and recorded a pre-tax
gain on disposal of $7.5 million. See
Note
3
to our accompanying consolidated financial statements for further
information regarding discontinued operations.
We had no results from discontinued operations, outside of Front
Yard, for the year ended December 31, 2021.
Liquidity and Capital Resources
As of December 31, 2021, we had cash and cash equivalents of
$78.3 million compared to $41.6 million as of December 31,
2020. The increase in cash and cash equivalents in 2021 was
primarily due to the receipt of the cash consideration component of
the Termination Fee related to Discontinued Operations. At
December 31, 2021, we held no Front Yard common stock. We are
developing new sources of income through our strategic business
plan. We believe these sources of liquidity are sufficient to
enable us to meet anticipated short-term (one-year) liquidity
requirements. Our ongoing cash expenditures consist of: salaries
and employee benefits, legal and professional fees, lease
obligations and other general and administrative
expenses.
As referred to in
Note
1
in our consolidated financial statements, the Company has settled
with certain owners of its Series A Shares which has reduced the
outstanding balance from $250 million to approximately $144
million. The remaining outstanding Series A Shares are owned by
Luxor in which we are currently in litigation over various
claims.
AAMC intends to continue to pursue its strategic business
initiatives despite this litigation. See “Item
1. Business.”
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. For more information on the
legal proceedings with Luxor, see “Item
1A. Risk Factors”
and “Item
3. Legal Proceedings”
in this Annual Report on Form 10-K.
Treasury Shares
To date, a total of $268.7 million in shares of our common stock
have been repurchased under the authorization by our Board of
Directors to repurchase up to $300.0 million in shares of our
common stock. Repurchased shares are held as treasury stock
and are available for general corporate purposes. We have an
aggregate of $31.3 million remaining for repurchases under our
Board-approved repurchase plan.
Cash Flows
We report and analyze our cash flows based on operating activities,
investing activities and financing activities. The following table
summarizes our cash flows from continuing and discontinued
operations for the periods indicated ($ in
thousands):
|
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|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
2021 |
|
2020 |
|
|
|
Net cash used in operating activities from continuing
operations |
$ |
(23,115) |
|
|
$ |
(19,192) |
|
|
|
|
Net cash from (used in) investing activities from continuing
operations |
58,396 |
|
|
(86) |
|
|
|
|
Net cash from (used in) financing activities from continuing
operations |
(4,884) |
|
|
713 |
|
|
|
|
Total cash flows relating to continuing operations |
$ |
30,397 |
|
|
$ |
(18,565) |
|
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities from discontinued
operations |
$ |
5,439 |
|
|
$ |
37,798 |
|
|
|
|
Net cash from investing activities from discontinued
operations |
511 |
|
|
3,643 |
|
|
|
|
Net cash from (used in) financing activities from discontinued
operations |
80 |
|
|
(1,010) |
|
|
|
|
Total cash flows relating to discontinued operations |
$ |
6,030 |
|
|
$ |
40,431 |
|
|
|
Continuing Operations
Operating Activities From Continuing Operations
During 2021, the change in cash flows used in operating activities
for continuing operations, compared to 2020, was primarily
attributable to ongoing salaries and benefits, payment of annual
incentive compensation, dividend income, gain on securities and
general corporate expenses in excess of revenues,
respectively.
Investing Activities From Continuing Operations
The change in cash flows from investing activities for continuing
operations for the year ended December 31, 2021 compared to
2020 consisted of dividends received on equity securities and net
proceeds of sales of securities.
Financing Activities From Continuing Operations
Net cash used in financing activities during the year ended
December 31, 2021 primarily relates conversion of preferred
stock and intercompany transactions with the disposal group and by
shares withheld for taxes upon vesting of restricted stock. Net
cash from financing activities for the year ended December 31,
2020 primarily relates to intercompany transactions with the
disposal group offset by shares withheld for taxes upon vesting of
restricted stock.
Discontinued Operations
During 2021, the cash flows from discontinued operations were due
to the termination of the Amended AMA with Front Yard and the
related cash receipts from the disposal group. See
Note
3
to our accompanying consolidated financial statements for further
information regarding cash flows from discontinued
operations.
Off-balance Sheet Arrangements
We had no off-balance sheet arrangements as of December 31,
2021 or 2020.
Recent accounting pronouncements
See
Note
1,
“Organization and Basis of Presentation - Recently issued
accounting standards” to our consolidated financial
statements.
Critical Accounting Judgments
Accounting standards require information in financial statements
about the risks and uncertainties inherent in significant
estimates, and the application of generally accepted accounting
principles involves the exercise of varying degrees of judgment.
Certain amounts included in or affecting our financial statements
and related disclosures must be estimated, requiring us to make
certain assumptions with respect to values or conditions that
cannot be known with certainty at the time our consolidated
financial statements are prepared. These estimates and assumptions
affect the amounts we report for our assets and liabilities and our
revenues and expenses during the reporting period and our
disclosure of contingent assets and liabilities at the date of our
consolidated financial statements. Actual results may differ
significantly from our estimates and any effects on our business,
financial position or results of operations resulting from
revisions to these estimates are recorded in the period in which
the facts that give rise to the revision become known.
We consider our critical accounting judgments to be those used in
the determination of the reported amounts and disclosure related to
the following:
Series A Preferred Shares
The Company’s Series A preferred stock is reflected in the balance
sheet as temporary equity. In 2020, the Company received redemption
notices from holders of the Series A Preferred Shares requesting
that the Company redeem an aggregate of $250.0 million of its
Series A Shares on March 15, 2020. The Company did not have the
legally available funds to redeem all, but not less than all, of
the outstanding Series A Shares on March 15, 2020. Therefore, the
Company does not believe that there is an obligation pursuant to
the Certificate of Designation of the Series A Shares to redeem
those shares held by investors unless there are legally available
funds to redeem all, but not less than all, of the Series A Shares.
The presentation of the Series A Preferred Shares will continue to
be classified as temporary equity on the consolidated balance
sheets.
Income taxes
Income taxes are provided for using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using
enacted rates expected to apply to taxable income in the years in
which management expects those temporary differences to be
recovered or settled. The effect on deferred taxes of a change in
tax rates is recognized in income in the period in which the change
occurs. Subject to our judgment, we reduce a deferred tax asset by
a valuation allowance if it is “more likely than not” that some or
the entire deferred tax asset 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 evaluating tax positions, and we recognize
tax benefits only if it is more likely than not that a tax position
will be sustained upon examination by the appropriate taxing
authority.
For all temporary differences, we have considered the potential
future sources of taxable income against which they may be
realized. In so doing, we have taken into account temporary
differences that we expect to reverse in future years and those
where it is unlikely. Where it is more likely than not that there
will not be potential future taxable income to offset a temporary
difference, a valuation allowance has been recorded.
Discontinued Operations
In accordance with the Financial Accounting Standards Board,
Accounting Standards Codification (“ASC”), ASC 205-20, Presentation
of Financial Statements – Discontinued Operations, the results of
operations of a component of an entity or a group or component of
an entity that represents a strategic shift that has, or will have,
a major effect on the reporting company’s operations that has
either been disposed of or is classified as held for sale are
required to be reported as discontinued operations in a company’s
consolidated financial statements. In order to be considered a
discontinued operation, both the operations and cash flows of the
discontinued component must have been (or will be) eliminated from
the ongoing operations of the company and the company will not have
any significant continuing involvement in the operations of the
discontinued component after the disposal transaction. As a result
of the Termination Agreement with Front Yard and FYR LP to
terminate the Amended AMA, the accompanying consolidated financial
statements reflect the activity related to the Termination
Agreement as discontinued operations. See
Note
3
to our consolidated financial statements for additional information
regarding the results, major classes of assets and liabilities,
significant non-cash operating items, and capital expenditures of
discontinued operations.
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk
Market risk includes risks that arise from changes in interest
rates, foreign currency exchange rates, commodity prices, equity
prices and other market changes that affect market sensitive
instruments.
Item 8. Consolidated Financial Statements and Supplementary
Data
See our consolidated financial statements starting on page
F-1.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation required by the Exchange Act, under
the supervision and with the participation of our Interim Chief
Executive Officer and Chief Financial Officer, of the effectiveness
of the design and operation of our disclosure controls and
procedures, as defined in Rule 13a-15(e) of the Exchange Act, as of
December 31, 2021. Based on this evaluation, our Interim Chief
Executive Officer and Chief Financial Officer concluded that, as of
December 31, 2021, our disclosure controls and procedures were
effective to provide reasonable assurance that information required
to be disclosed by us in the reports that we file or submit under
the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms and
to provide reasonable assurance that such information is
accumulated and communicated to our management, including our
Interim Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosures.
Management’s Report on Internal Control over Financial
Reporting
Management is responsible for establishing and maintaining adequate
internal control over financial reporting, as defined in Rule
13a-15(f) of the Exchange Act. Management has assessed the
effectiveness of our internal control over financial reporting as
of December 31, 2021 based on criteria established in Internal
Control-Integrated Framework issued in 2013 by the Committee of
Sponsoring Organizations of the Treadway Commission. As a result of
this assessment, management concluded that, as of December 31,
2021, our internal control over financial reporting was effective
in providing reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles and includes those policies and procedures that 1)
pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of
the assets of the issuer; 2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
issuer are being made only in accordance with authorizations of
management and directors of the issuer; and 3) provide reasonable
assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the issuer's assets that could
have a material effect on the financial statements.
The effectiveness of our internal control over financial reporting
as of December 31, 2021 has been audited by Ernst & Young
LLP, an independent registered certified public accounting firm, as
stated in their report that appears herein.
Report of Independent Registered Public Accounting
Firm
To the Stockholders and Board of Directors of Altisource Asset
Management Corporation
Opinion on Internal Control over Financial Reporting
We have audited Altisource Asset Management Corporation’s internal
control over financial reporting as of December 31, 2021, based on
criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework) (the COSO criteria). In our opinion,
Altisource Asset Management Corporation (the Company) maintained,
in all material respects, effective internal control over financial
reporting as of December 31, 2021, based on
the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States) (PCAOB),
the consolidated balance sheets of Altisource Asset Management
Corporation as of December 31, 2021 and 2020, and the related
consolidated statements of operations, comprehensive loss,
stockholders' deficit and cash flows for the years then ended, and
the related notes and our report dated March 31, 2022
expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting
included in the accompanying Management’s Report on Internal
Control over Financial Reporting. Our responsibility is to express
an opinion on the Company’s internal control over financial
reporting based on our audit. We are a public accounting firm
registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material
respects.
Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
Definition and Limitations of Internal Control over Financial
Reporting
A company’s internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of
the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could
have a material effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Atlanta, Georgia
March 31, 2022
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial
reporting identified in connection with the evaluation required by
Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred
during the quarter ended December 31, 2021 that have
materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
Limitations on Controls
Our disclosure controls and procedures and internal control over
financial reporting are designed to provide reasonable assurance of
achieving their objectives as specified above. Management does not
expect, however, that our disclosure controls and procedures or our
internal control over financial reporting will prevent or detect
all error or fraud. Any control system, no matter how well designed
and operated, is based upon certain assumptions and can provide
only reasonable, not absolute, assurance that its objectives will
be met. Further, no evaluation of controls can provide absolute
assurance that misstatements due to error or fraud will not occur
or that all control issues and instances of fraud, if any, within
the Company have been detected.
Item 9B. Other Information
The following information is being included in this Item 9B in lieu
of filing such information on a Current Report on Form 8-K under
Item 5.02. Compensatory Arrangements of Certain
Officers.
On March 30, 2022, the Board of Directors (the “Board”) of the
Company extended the term of Thomas McCarthy’s employment as
interim Chief Executive Officer to the earlier of May 31, 2022 or
until a permanent Chief Executive Officer is appointed. In
connection with the extension, the Company and Mr. McCarthy amended
the employment agreement dated August 16, 2021, as amended December
30, 2021 (the “Employment Agreement”) to reflect the extension. The
remaining terms of Mr. McCarthy’s Employment Agreement remain the
same.
Part III
We will file a definitive Proxy Statement for our 2022 Annual
Meeting of Stockholders (the “2022 Proxy Statement”) with the
Securities and Exchange Commission, pursuant to
Regulation 14A, not later than 120 days after
December 31, 2021. Accordingly, certain information required
by Part III has been omitted under General Instruction G(3) to
Form 10-K. Only those sections of the 2022 Proxy Statement
that specifically address the items set forth herein are
incorporated by reference.
Item 10. Directors, Executive Officers and Corporate
Governance
The information required by Item 10 is hereby incorporated by
reference from our 2022 Proxy Statement under the captions
“Election of Directors,” “Section 16(a) Beneficial Ownership
Reporting Compliance” and “Code of Ethics.”
Item 11. Executive Compensation
The information required by Item 11 is hereby incorporated by
reference from our 2022 Proxy Statement under the captions
“Executive Compensation” and “Director Compensation.”
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
The information required by Item 12 is hereby incorporated by
reference from our 2022 Proxy Statement under the caption “Security
Ownership of Certain Beneficial Owners and
Management.”
Item 13. Certain Relationships and Related Transactions, and
Director Independence
The information required by Item 13 is hereby incorporated by
reference from our 2022 Proxy Statement under the captions
“Transactions with Related Persons” and “Information Regarding the
Board of Directors and Corporate Governance.”
Item 14. Principal Accountant Fees and Services
The information required by Item 14 is hereby incorporated by
reference from our 2022 Proxy Statement under the captions
“Independent Registered Public Accounting Firm Fees” and
“Pre-Approval Policy and Procedures.”
Part IV
Item 15. Exhibits
Exhibits
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Exhibit Number |
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Description |
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Separation Agreement, dated as of December 21, 2012, between
Altisource Asset Management Corporation and Altisource Portfolio
Solutions S.A. (incorporated by reference to Exhibit 2.1 of the
Registrant's Current Report on Form 8-K filed with the SEC on
December 28, 2012). |
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Amended and Restated Articles of Incorporation of Altisource Asset
Management Corporation (incorporated by reference to Exhibit 3.1 of
the Registrant's Current Report on Form 8-K filed with the SEC on
January 5, 2017). |
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Third Amended and Restated Bylaws of Altisource Asset Management
Corporation (incorporated by reference to Exhibit 3.2 of the
Registrant's Annual Report on Form 10-K filed with the SEC on
February 28, 2020). |
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Certificate of Designations establishing the Company’s Series A
Convertible Preferred Stock (incorporated by reference to Exhibit
3.1 of the Registrant’s Current Report on Form 8-K filed with the
SEC on March 19, 2014). |
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Description of Registrant's Securities. |
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Altisource Asset Management Corporation 2012 Equity Incentive Plan
(incorporated by reference to Exhibit 10.11 of the Registrant's
Amendment No. 4 to Form 10 filed with the SEC on December 18,
2012). |
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Amended and Restated Asset Management Agreement, dated as of May 7,
2019, by and among Front Yard Residential Corporation, Front Yard
Residential, L.P. and Altisource Asset Management Corporation
(incorporated by reference to Exhibit 10.1 of the Registrant's
Current Report on Form 8-K filed with the SEC on May 8,
2019). |
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Asset Management Agreement, dated March 31, 2015, among Front Yard
Residential Corporation (f/k/a Altisource Residential Corporation),
Front Yard Residential L.P. (f/k/a Altisource Residential, L.P.)
and Altisource Asset Management Corporation (incorporated by
reference to Exhibit 10.1 of the Registrant's Current Report on
Form 8-K filed with the SEC on April 2, 2015). |
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Amendment to Asset Management Agreement, dated April 7, 2015, among
Front Yard Residential Corporation (f/k/a Altisource Residential
Corporation), Front Yard Residential L.P. (f/k/a Altisource
Residential, L.P.) and Altisource Asset Management Corporation
(incorporated by reference to Exhibit 10.1 of the Registrant's
Current Report on Form 8-K filed with the SEC on April 13,
2015). |
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Altisource Asset Management Corporation 2016 Preferred Stock Plan
(incorporated by reference to Exhibit 10.22 of the Registrant's
Annual Report on Form 10-K filed with the SEC on March 1,
2017). |
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Form of Preferred Stock Agreement under 2016 Employee Preferred
Stock Plan (incorporated by reference to Exhibit 10.1 of the
Registrant's Current Report on Form 8-K filed with the SEC on
January 5, 2017). |
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Employment Agreement of Thomas K. McCarthy, dated as of August 16,
2021, as amended on December 30, 2021. |
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Altisource Asset Management Corporation 2020 Equity Incentive Plan
(incorporated by reference to Exhibit 4.3 of the Registrant's Form
S-8 filed with the SEC on December 21, 2020). |
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Employment Agreement of Stephen R. Krallman, dated as of May 24,
2021. (incorporated by reference to Exhibit 10.1 to the
Registrant's Current Report on Form 8-K filed with the SEC on June
28, 2021). |
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Employment Agreement of Jason Kopcak, dated as of March 16, 2022.
(incorporated by reference to Exhibit 10.1 to the Registrant's
Current Report on Form 8-K filed with the SEC on March 18,
2022.) |
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Settlement Agreement dated as of February 17, 2021, between
Altisource Asset Management Corporation and Putnam Focused Equity
Fund, a series of Putnam Funds Trust, dated as of February 17, 2021
(incorporated by reference to Exhibit 10.1 to the Registrant's
Current Report on Form 8-K filed with the SEC on February 18,
2021). |
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Settlement Agreement dated as of August 27, 2021, between
Altisource Asset Management Corporation and
Ithan Creek Master Investors (Cayman) L.P., Bay Pond Investors
(Bermuda) L.P., Bay Pond Partners, L.P. and Wellington Management
Company LLP (together, the “Wellington Parties”).
(incorporated by reference to Exhibit 10.1 to the Registrant's
Current Report on Form 8-K filed with the SEC on August 30,
2021).
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Amendment dated March 30, 2022 to the Employment Agreement of
Thomas K. McCarthy, dated August 16, 2021, as amended on December
20, 2021. |
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Schedule of Subsidiaries. |
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Consent of Ernst & Young LLP. |
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Power of Attorney (incorporated by reference to the signature page
of this Annual Report on Form 10-K). |
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Exhibit Number |
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Description |
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Certification of Interim CEO Pursuant to Section 302 of the
Sarbanes-Oxley Act. |
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Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley
Act. |
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Certification of Interim CEO Pursuant to Section 906 of the
Sarbanes-Oxley Act. |
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Certification of CFO Pursuant to Section 906 of the Sarbanes-Oxley
Act. |
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101.INS* |
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XBRL Instance Document. |
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101.SCH* |
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XBRL Taxonomy Extension Schema Document. |
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101.CAL* |
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XBRL Taxonomy Extension Calculation Linkbase Document. |
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101.DEF* |
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XBRL Taxonomy Extension Definition Linkbase Document. |
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101.LAB* |
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XBRL Extension Label Linkbase Document. |
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101.PRE* |
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XBRL Taxonomy Extension Presentation Linkbase Document. |
__________
* Filed herewith.
** Indicates the exhibit is being furnished, not filed, with this
report.
† Denotes management contract or compensatory
arrangement.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the registrant has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
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Altisource Asset Management Corporation |
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Date: |
March 31, 2022 |
By: |
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/s/ Thomas K. McCarthy |
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Thomas K. McCarthy |
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Interim Chief Executive Officer |
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Date: |
March 31, 2022 |
By: |
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/s/ Stephen Ramiro Krallman |
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Stephen Ramiro Krallman |
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Chief Financial Officer |
Power of Attorney
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Thomas K. McCarthy
and Stephen Ramiro Krallman each of them severally, his or her true
and lawful attorney-in-fact with power of substitution and
resubstitution to sign in his or her name, place and stead, in any
and all capacities, to do any and all things and execute any and
all instruments that such attorney may deem necessary or advisable
under the Securities Exchange Act of 1934, as amended, and any
rules, regulations and requirements of the Securities and Exchange
Commission in connection with the Annual Report on Form 10-K
and any and all amendments hereto, as fully for all intents and
purposes as he or she might or could do in person, and hereby
ratifies and confirms all said attorneys-in-fact and agents, each
acting alone, and his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, this report has been signed below by the
following persons on behalf of the registrant and in the capacities
indicated:
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Signature |
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Title |
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Date |
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/s/ John P. de Jongh, Jr. |
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Director |
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March 31, 2022 |
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John P. de Jongh, Jr. |
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/s/ Ricardo C. Byrd |
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Director |
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March 31, 2022 |
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Ricardo C. Byrd |
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/s/ John A. Engerman |
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Director |
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March 31, 2022 |
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John A. Engerman |
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/s/ Thomas K. McCarthy |
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Interim Chief Executive Officer |
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March 31, 2022 |
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Thomas K. McCarthy |
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/s/ Stephen Ramiro Krallman |
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Chief Financial Officer (Principal Financial Officer and
Principal Accounting Officer) |
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March 31, 2022 |
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Stephen Ramiro Krallman |
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Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting
Firm
To the Stockholders and Board of Directors of Altisource Asset
Management Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of
Altisource Asset Management Corporation (the Company) as of
December 31, 2021 and 2020, the related consolidated statements of
operations, comprehensive income (loss), stockholders’ deficit and
cash flows for the years then ended, and the related notes
(collectively referred to as the “consolidated financial
statements”). In our opinion, the consolidated financial statements
present fairly, in all material respects, the financial position of
the Company at December 31, 2021 and 2020, and the results of its
operations and its cash flows for the years then ended, in
conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States) (PCAOB),
the Company's internal control over financial reporting as of
December 31, 2021, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 framework), and our
report dated March 31, 2022 expressed an unqualified opinion
thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public
accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error
or fraud. Our audits included performing procedures to assess the
risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to
those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising
from the current period audit of the financial statements that was
communicated or required to be communicated to the audit committee
and that: (1) relates to accounts or disclosures that are material
to the financial statements and (2) involved our especially
challenging, subjective or complex judgments. The communication of
the critical audit matter does not alter in any way our opinion on
the consolidated financial statements, taken as a whole, and we are
not, by communicating the critical audit matter below, providing a
separate opinion on the critical audit matter or on the accounts or
disclosures to which it relates.
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Series A Preferred Shares
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Description of the Matter
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As discussed in
Note
1
to the consolidated financial statements, the Company had $250
million of Series A Preferred Shares (“Series A Shares”)
outstanding at December 31, 2020 that are presented on the
consolidated balance sheet as mezzanine equity. In February 2020,
the Company received notices from holders of the Series A Shares
requesting the Company to redeem an aggregate of $250 million
liquidation preference of such shares on March 15, 2020. The
Company does not believe it is obligated to redeem any of the
Series A Shares because the Company did not have legally available
funds to do so at March 15, 2020. During the year ended December
31, 2021, the Company settled $100 million (100,000 shares) of the
Series A Shares through settlement agreements with two Preferred
shareholders. As of December 31, 2021, the Company has $150 million
of Series A Shares outstanding, which is presented on the
consolidated balance sheet as mezzanine equity.
The Company’s legal determination and evaluation of the redemption
rights of the investors based on the liquidity and financial
position of the Company and the terms of the Series A Preferred
Share Agreement required significant management judgment and an
increased audit effort. Given the judgment needed to legally
evaluate and determine conclusions related to the investor
redemption rights, any default and remedy provisions or lack
thereof, and evaluate the liquidity and financial position of the
Company, auditing the $150 million outstanding Series A Preferred
Shares involved especially challenging and complex
judgment.
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How We Addressed the Matter in Our Audit
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We obtained an understanding, evaluated the design, and tested the
operating effectiveness of the controls over management’s
accounting treatment and disclosures for the Series A Shares. For
example, we tested controls over management’s review of the terms
of the Series A Preferred Share Agreement and Series A Shares
Settlement Agreements, including redemption rights related to the
Series A Shares.
Our testing of the Company’s accounting for and disclosures related
to the Series A Shares included, among others, reading the terms of
the Series A Preferred Share Agreement and Series A Shares
Settlement Agreements, including those covering the right to
redemption, any event of default or remedy provisions or lack
thereof, and provisions related to the Company’s liquidity and
financial position. We inspected copies of the redemption notices
received by the Company related to the Series A Shares. We
requested and received internal and external legal counsel letters
and obtained representations from the Company with respect to their
conclusions for the accounting for and the presentation of the
matter.
We also evaluated the adequacy of the disclosures included in the
financial statements regarding the Series A Preferred
Shares.
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/s/ Ernst & Young LLP
We have served as the Company‘s auditor since 2017.
Atlanta, Georgia
March 31, 2022
Altisource Asset Management Corporation
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
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December 31, 2021 |
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December 31, 2020 |
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Current assets: |
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Cash and cash equivalents |
$ |
78,349 |
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$ |
41,623 |
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Front Yard common stock, at fair value |
— |
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47,355 |
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Receivable from Front Yard |
— |
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3,414 |
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Prepaid expenses and other assets |
1,837 |
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3,328 |
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Current assets held for sale |
— |
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894 |
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Total current assets |
80,186 |
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96,614 |
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Non-current assets: |
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Right-of-use lease assets |
825 |
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656 |
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Other non-current assets |
465 |
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503 |
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Non-current assets held for sale |
— |
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1,979 |
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Total non-current assets |
1,290 |
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3,138 |
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Total assets
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$ |
81,476 |
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$ |
99,752 |
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Current liabilities: |
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Accrued salaries and employee benefits |
$ |
983 |
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$ |
2,539 |
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Accounts payable and accrued liabilities |
3,465 |
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9,152 |
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Short-term lease liabilities |
139 |
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75 |
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Current liabilities held for sale |
— |
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1,338 |
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Total current liabilities |
4,587 |
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13,104 |
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Non-current liabilities |
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Long-term lease liabilities |
720 |
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600 |
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Other non-current liabilities |
2,697 |
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1,027 |
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Non-current liabilities held for sale |
— |
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1,599 |
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Total non-current liabilities |
3,417 |
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3,226 |
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Total liabilities |
8,004 |
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16,330 |
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Commitments and contingencies (Note
7)
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— |
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— |
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Redeemable preferred stock: |
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Preferred stock, $0.01 par value, 250,000 shares issued as of
December 31, 2021 and December 31, 2020. 150,000 shares
outstanding and $150,000 redemption value as of December 31,
2021 and 250,000 shares outstanding and $250,000 redemption value
as of December 31, 2020.
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150,000 |
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250,000 |
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Stockholders' deficit: |
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Common stock, $.01 par value, 5,000,000 authorized shares;
3,416,541 and 2,055,561 shares issued and outstanding,
respectively, as of December 31, 2021 and 2,966,207 and
1,650,212 shares issued and outstanding, respectively, as of
December 31, 2020.
|
34 |
|
|
30 |
|
|
Additional paid-in capital |
143,523 |
|
|
46,574 |
|
|
Retained earnings |
57,450 |
|
|
63,426 |
|
|
Accumulated other comprehensive income (loss) |
54 |
|
|
(65) |
|
|
Treasury stock, at cost, 1,360,980 shares as of December 31,
2021 and 1,315,995 shares as of December 31,
2020.
|
(277,589) |
|
|
(276,543) |
|
|
Total stockholders' deficit
|
(76,528) |
|
|
(166,578) |
|
|
Total liabilities and equity
|
$ |
81,476 |
|
|
$ |
99,752 |
|
See accompanying notes to consolidated financial
statements.
F-4
Altisource Asset Management Corporation
Consolidated Statements of Operations
(In thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
2021 |
|
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
Salaries and employee benefits |
$ |
5,635 |
|
|
$ |
11,977 |
|
|
|
|
|
|
|
|
|
|
Legal fees |
6,885 |
|
|
4,748 |
|
|
|
|
Professional fees |
1,531 |
|
|
1,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
2,633 |
|
|
2,328 |
|
|
|
|
Acquisition charges |
3,908 |
|
|
— |
|
|
|
|
Total expenses |
20,592 |
|
|
20,510 |
|
|
|
|
|
|
|
|
|
|
|
Other income: |
|
|
|
|
|
|
Change in fair value of Front Yard common stock |
146 |
|
|
6,270 |
|
|
|
|
Dividend income on Front Yard common stock |
— |
|
|
244 |
|
|
|
|
|
|
|
|
|
|
Dividend income |
3,061 |
|
|
— |
|
|
|
|
Gain on sale of equity securities |
8,347 |
|
|
— |
|
|
|
|
Interest expense |
(60) |
|
|
— |
|
|
|
|
Other income |
154 |
|
|
45 |
|
|
|
|
Total other income |
11,648 |
|
|
6,559 |
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations before income taxes |
(8,944) |
|
|
(13,951) |
|
|
|
|
Income tax expense |
3,273 |
|
|
769 |
|
|
|
|
Net loss from continuing operations |
(12,217) |
|
|
(14,720) |
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations: |
|
|
|
|
|
|
Income from operations related to Front Yard, net of
tax |
— |
|
|
54,643 |
|
|
|
|
Gain (loss) on disposal of operation related to Front
Yard |
7,485 |
|
|
(102) |
|
|
|
|
Income tax expense related to disposal |
1,272 |
|
|
— |
|
|
|
|
Net gain on discontinued operations |
6,213 |
|
|
54,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
(6,004) |
|
|
39,821 |
|
|
|
|
Amortization of preferred stock issuance costs |
— |
|
|
(42) |
|
|
|
|
Net income (loss) attributable to common stockholders |
$ |
(6,004) |
|
|
$ |
39,779 |
|
|
|
|
|
|
|
|
|
|
|
Continuing operations earnings per share |
|
|
|
|
|
|
Net loss from continuing operations |
(12,217) |
|
|
(14,720) |
|
|
|
|
Reverse amortization of preferred stock issuance costs |
— |
|
|
42 |
|
|
|
|
Gain on preferred stock transaction |
87,961 |
|
|
— |
|
|
|
|
Numerator for earnings per share from continuing
operations |
$ |
75,744 |
|
|
$ |
(14,678) |
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations earnings per share |
|
|
|
|
|
|
Net income from discontinued operations |
$ |
6,213 |
|
|
$ |
54,541 |
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share of common stock – basic: |
|
|
|
|
|
|
Continuing operations – basic |
$ |
37.83 |
|
|
$ |
(9.05) |
|
|
|
See accompanying notes to consolidated financial
statements.
F-5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations – basic |
3.11 |
|
33.43 |
|
|
|
Earnings (loss) per basic common share |
$ |
40.94 |
|
|
$ |
24.38 |
|
|
|
|
Weighted average common stock outstanding – basic |
2,002,111 |
|
1,631,326 |
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share of common stock – diluted: |
|
|
|
|
|
|
Continuing operations – diluted |
$ |
35.03 |
|
|
$ |
(9.05) |
|
|
|
|
Discontinued operations – diluted |
2.87 |
|
|
33.43 |
|
|
|
|
Earnings (loss) per diluted common share |
$ |
37.90 |
|
|
$ |
24.38 |
|
|
|
|
Weighted average common stock outstanding – diluted |
2,162,378 |
|
1,631,326 |
|
|
See accompanying notes to consolidated financial
statements.
F-6
Altisource Asset Management Corporation
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
2021 |
|
2020 |
|
|
|
Net income (loss) |
$ |
(6,004) |
|
|
$ |
39,821 |
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss: |
|
|
|
|
|
|
Currency translation adjustments, net |
(6) |
|
|
(32) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive loss |
(6) |
|
|
(32) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
$ |
(6,010) |
|
|
$ |
39,789 |
|
|
|
See accompanying notes to consolidated financial
statements.
F-7
Altisource Asset Management Corporation
Consolidated Statements of Stockholders' Deficit
(In thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
Additional Paid-in Capital |
|
Retained Earnings |
|
Accumulated Other Comprehensive Loss |
|
Treasury Stock |
|
|
|
Total Stockholders' Deficit |
|
Number of Shares |
|
Amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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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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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019 |
2,897,177 |
|
|
$ |
29 |
|
|
$ |
44,646 |
|
|
$ |
23,662 |
|
|
$ |
(33) |
|
|
$ |
(276,232) |
|
|
|
|
$ |
(207,928) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued under share-based compensation plans, net of
employee tax withholdings |
69,030 |
|
|
1 |
|
|
13 |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
14 |
|
|
Shares withheld for taxes upon vesting of restricted
stock |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(311) |
|
|
|
|
(311) |
|
|
Amortization of preferred stock issuance costs |
— |
|
|
— |
|
|
— |
|
|
(42) |
|
|
— |
|
|
— |
|
|
|
|
(42) |
|
|
Share-based compensation |
— |
|
|
— |
|
|
1,915 |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
1,915 |
|
|
Currency translation adjustments, net |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(32) |
|
|
— |
|
|
|
|
(32) |
|
|
Other - disposition |
|
|
|
|
|
|
(15) |
|
|
|
|
|
|
|
|
(15) |
|
|
Net income |
— |
|
|
— |
|
|
— |
|
|
39,821 |
|
|
— |
|
|
— |
|
|
|
|
39,821 |
|
|
December 31, 2020 |
2,966,207 |
|
|
$ |
30 |
|
|
$ |
46,574 |
|
|
$ |
63,426 |
|
|
$ |
(65) |
|
|
$ |
(276,543) |
|
|
|
|
$ |
(166,578) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued under share-based compensation plans, net of
employee tax withholdings |
162,051 |
|
|
2 |
|
|
(2) |
|
|
— |
|
|
— |
|
|
(800) |
|
|
|
|
(800) |
|
|
Shares withheld for taxes upon vesting of restricted
stock |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(27) |
|
|
|
|
(27) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation, net of tax |
— |
|
|
— |
|
|
1,939 |
|
|
— |
|
|
— |
|
|
(219) |
|
|
|
|
1,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustments, net |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(6) |
|
|
— |
|
|
|
|
(6) |
|
|
Acquisition and disposition of subsidiaries |
— |
|
|
— |
|
|
— |
|
|
28 |
|
|
125 |
|
|
— |
|
|
|
|
153 |
|
|
Preferred stock conversion |
288,283 |
|
|
2 |
|
|
95,012 |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
95,014 |
|
|
Net income |
— |
|
|
— |
|
|
— |
|
|
(6,004) |
|
|
— |
|
|
— |
|
|
|
|
(6,004) |
|
|
December 31, 2021 |
3,416,541 |
|
|
$ |
34 |
|
|
$ |
143,523 |
|
|
$ |
57,450 |
|
|
$ |
54 |
|
|
$ |
(277,589) |
|
|
|
|
$ |
(76,528) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial
statements.
F-8
Altisource Asset Management Corporation
Consolidated Statements of Cash Flows
(In thousands)
See accompanying notes to consolidated financial
statements.
F-9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
2021 |
|
2020 |
|
|
|
Operating activities: |
|
|
|
|
|
|
Net income (loss) |
$ |
(6,004) |
|
|
$ |
39,821 |
|
|
|
|
Less: Income from discontinued operations, net of tax |
6,213 |
|
|
54,541 |
|
|
|
|
Loss from continuing operations |
(12,217) |
|
|
(14,720) |
|
|
|
|
Adjustments to reconcile net income (loss) from continuing
operations to net cash from (used in) operating
activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of Front Yard common stock |
(146) |
|
|
(6,270) |
|
|
|
|
Share-based compensation |
1,939 |
|
|
1,915 |
|
|
|
|
|
|
|
|
|
|
Depreciation |
309 |
|
|
354 |
|
|
|
|
Amortization of operating lease right-of-use assets |
139 |
|
|
76 |
|
|
|
|
Dividend income |
(3,061) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
Gain on securities |
(8,347) |
|
|
— |
|
|
|
|
Changes in operating assets and liabilities, net of effects from
discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Receivable from Front Yard |
3,414 |
|
|
1,600 |
|
|
|
|
Prepaid expenses and other assets |
56 |
|
|
(2,477) |
|
|
|
|
Other non-current assets |
1,553 |
|
|
699 |
|
|
|
|
|
|
|
|
|
|
Accrued salaries and employee benefits |
(1,544) |
|
|
(1,206) |
|
|
|
|
Accounts payable and accrued liabilities |
(7,064) |
|
|
(119) |
|
|
|
|
|
|
|
|
|
|
Other non-current liabilities and operating lease
liabilities |
1,854 |
|
|
956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in continuing operations |
(23,115) |
|
|
(19,192) |
|
|
|
|
Net cash from discontinued operations |
5,439 |
|
|
37,798 |
|
|
|
|
Net cash from (used in) operating activities |
(17,676) |
|
|
18,606 |
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of securities |
(96,950) |
|
|
— |
|
|
|
|
Dividends received |
3,061 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of interest in
equity securities |
152,796 |
|
|
— |
|
|
|
|
Investment in property and equipment |
(511) |
|
|
(86) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) continuing operations |
58,396 |
|
|
(86) |
|
|
|
|
Net cash from discontinued operations |
511 |
|
|
3,643 |
|
|
|
|
Net cash from investing activities |
58,907 |
|
|
3,557 |
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from borrowed funds |
28,549 |
|
|
— |
|
|
|
|
Repayment of borrowed funds |
(28,549) |
|
|
— |
|
|
|
|
Conversion of preferred stock |
(3,763) |
|
|
— |
|
|
|
|
Proceeds and payment of tax withholding on exercise of stock
options, net |
5 |
|
|
14 |
|
|
|
|
|
|
|
|
|
|
Shares withheld for taxes upon vesting of restricted
stock |
(1,046) |
|
|
(311) |
|
|
|
|
Net receipts (payment) from subsidiaries included in disposal
group |
(80) |
|
|
1,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) continuing operations |
(4,884) |
|
|
713 |
|
|
|
|
Net cash from (used in) discontinued operations |
80 |
|
|
(1,010) |
|
|
|
|
Net cash used in financing activities |
(4,804) |
|
|
(297) |
|
|
|
|
Net change in cash and cash equivalents |
36,427 |
|
|
21,866 |
|
|
|
|
Effect of exchange rate changes on cash and cash
equivalents |
115 |
|
|
(24) |
|
|
|
|
Consolidated cash and cash equivalents, beginning of
period |
41,807 |
|
|
19,965 |
|
|
|
|
Consolidated cash and cash equivalents, end of the
period |
$ |
78,349 |
|
|
$ |
41,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial
statements.
F-10
Altisource Asset Management Corporation
Consolidated Statements of Cash Flows (Continued)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
2021 |
|
2020 |
|
|
|
Supplemental disclosure of cash flow information (continuing and
discontinued operations): |
|
|
|
|
|
|
Cash paid for interest |
$ |
60 |
|
|
$ |
— |
|
|
|
|
Income taxes paid |
2,103 |
|
|
428 |
|
|
|
|
Right-of-use lease assets recognized - operating leases |
308 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of cash and cash equivalents to consolidated balance
sheets: |
|
|
|
|
|
|
Cash and cash equivalents |
$ |
78,349 |
|
|
$ |
41,623 |
|
|
|
|
Cash and cash equivalents included in assets of discontinued
operations |
— |
|
|
184 |
|
|
|
|
Consolidated cash and cash equivalents |
78,349 |
|
|
41,807 |
|
|
|
See accompanying notes to consolidated financial
statements.
F-11
Altisource Asset Management Corporation
Notes to Consolidated Financial Statements
December 31, 2021
1. Organization and Basis of Presentation
Altisource Asset Management Corporation (“we,” “our,” “us,” “AAMC,”
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.
In October 2013, we applied for and were granted registration by
the Securities and Exchange Commission (the “SEC”) as a registered
investment adviser under Section 203(c) of the Investment Advisers
Act of 1940. We historically operated in a single segment focused
on providing asset management and certain corporate governance
services to investment vehicles. Our primary client was Front Yard
Residential Corporation (“Front Yard”), a public real estate
investment trust (“REIT”) focused on acquiring and managing
quality, affordable single-family rental (“SFR”) properties
throughout the United States. Our primary business prior to
December 31, 2021 was to provide asset management and certain
corporate governance services to institutional
investors.
On August 13, 2020, we entered into a Termination and Transition
Agreement (the “Termination Agreement”) with Front Yard and Front
Yard Residential L.P. (“FYR LP”) to terminate the Amended and
Restated Asset Management Agreement, dated as of May 7, 2019 (the
“Amended AMA”), by and among Front Yard, FYR LP and AAMC, and to
provide for a transition plan to facilitate the internalization of
Front Yard’s asset management function (the “Transition Plan”). The
Termination Agreement was effective on December 31, 2020, the date
that the parties mutually agreed that the Transition Plan had been
satisfactorily completed (the “Termination Date”) and the Amended
AMA was terminated in its entirety.
For further information, please see
Note 3
Related Parties
Upon the Company’s prior business operations with Front Yard
ceasing the first week of 2021, AAMC began a comprehensive search
in 2021 to acquire an operating company with the proceeds received
from the sale of its operations via the Termination Agreement. We
are in the process of establishing and launching multiple new lines
of business, a short-term investor loan aggregation and origination
business and establishment of strategic relationships with real
estate loan originators. These business lines leverage our history
and experience in asset management, real estate investing and real
estate operations. We have taken steps to reduce our annual
operating expenses, including reductions in our physical office
footprint and the optimization of our workforce. Though our
potential new businesses are in the development stage, we expect
that they will include asset management services, investments in
real estate related assets or other businesses that will be
augmented by our past experience.
Basis of presentation and use of estimates
The accompanying audited consolidated financial statements have
been prepared in accordance with accounting principles generally
accepted in the United States (“U.S. GAAP”).
Certain prior year amounts have been reclassified for consistency
with the current year presentation. These reclassifications had no
effect on the reported results of operations.
All wholly owned subsidiaries are included, and all intercompany
accounts and transactions have been eliminated.
Use of estimates
The preparation of 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 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
Series A Convertible Preferred Stock in 2014 Private
Placement
Issuance
During the first quarter of 2014, AAMC issued 250,000 shares of
Series A Convertible Preferred Stock (the “Series A Shares”) for
$250.0 million to institutional investors. Under the Certificate of
Designations of the Series A Shares (the “Certificate”), we had 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 through
March 15, 2040 with a final mandatory redemption date on March 15,
2044. 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 as of the
redemption date 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 through March 15, 2040 until the mandatory redemption date in
2044. If we are required to redeem all of a 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 legally
available funds therefore. Due to the redemption provisions of the
Series A Preferred Stock, we classify these shares as mezzanine
equity, outside of permanent stockholders' equity.
The holders of our Series A Shares are not entitled to receive
dividends with respect to their Series A Shares. The Series A
Shares are convertible into shares of our common stock at a
conversion price of $1,250 per share (or an exchange rate of 0.8
shares of common stock for Series A Share), subject to certain
anti-dilution adjustments.
Upon certain change of control transactions or upon the
liquidation, dissolution or winding up of the Company, holders of
the Series A Shares will be entitled to receive an amount in cash
per Series A Share equal to the greater of:
(i) $1,000 plus the aggregate amount of cash dividends
paid on the number of shares of common stock into which such Series
A Shares were convertible on each ex-dividend date for such
dividends; and
(ii) The number of shares of common stock into which the
Series A Shares are then convertible multiplied by the then-current
market price of the common stock.
The Certificate confers no voting rights to holders, except with
respect to matters that materially and adversely affect the voting
powers, rights or preferences of the Series A Shares or as
otherwise required by applicable law.
With respect to the distribution of assets upon the liquidation,
dissolution or winding up of the Company, the Series A Shares rank
senior to our common stock and on parity with all other classes of
preferred stock that may be issued by us in the
future.
The Series A Shares are recorded net of issuance costs, which were
amortized on a straight-line basis through the first potential
redemption date in March 2020.
Between January 31, 2020 and February 3, 2020, we received
purported notices from all of the holders of our Series A Shares
requesting us to redeem an aggregate of $250.0 million liquidation
preference of our Series A Shares on March 15, 2020. We did not
have legally available funds to redeem all of the Series A Shares
on March 15, 2020. As a result, we do not believe, under the terms
of the Certificate, that we were obligated to redeem any of the
Series A Shares under the Certificate.
Current Litigation
–AAMC
(plaintiff) v. Luxor (defendant)
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. Pursuant to
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
(plaintiff) v. AAMC (defendant)
On February 3, 2020, Luxor filed a complaint in the Supreme Court
of the State of New York, County of New York, against AAMC for
breach of contract, specific performance, unjust enrichment, and
related damages and expenses. The complaint alleges that AAMC’s
position that it will not redeem any of Luxor’s Series A Shares on
the March 15, 2020 redemption date is a material breach of AAMC’s
redemption obligations under the Certificate. Luxor seeks an order
requiring AAMC to redeem its Series A Shares, recovery of no less
than $144,212,000 in damages, which is equal to the amount Luxor
would receive if AAMC redeemed all of Luxor’s Series A Shares at
the redemption price of $1,000 per share set forth in the
Certificate, as well as payment of its costs and expenses in the
lawsuit. In the alternative, Luxor seeks a return of its initial
purchase price of $150,000,000 for the Series A Shares, as well as
payment of its costs and expenses in the lawsuit. On May 25, 2020,
Luxor’s complaint was amended to add Putnam Equity Spectrum Fund
and Putnam Capital Spectrum Fund (collectively, “Putnam”), which
also invested in the Series A Shares, as plaintiff. On June 12,
2020, AAMC moved to dismiss the Amended Complaint in favor of
AAMC’s first-filed declaratory judgment action in the U.S. Virgin
Islands. On August 4, 2020, the court denied AAMC’s motion to
dismiss.
–Luxor
Books and Records Demand
On April 26, 2021, Luxor, sent a letter to the Company demanding,
under the common law of the USVI, the right to inspect certain
books and records of the Company (the “Demand”).
According to Luxor, the purpose of the Demand is to investigate
whether the Company’s Board of Directors may have considered or
engaged in transactions with or at the direction of a significant
shareholder of the Company or whether the Company’s Board of
Directors and/or Company management may have mismanaged the Company
or engaged in wrongdoing, may not have properly discharged their
fiduciary duties, or may have conflicts of interest.
Luxor further alleges that it seeks an inspection of the Company
books and records to determine whether the current directors should
continue to serve on the Company’s board or whether a derivative
suit should be filed.
On May 10, 2021, the Company sent a letter responding to the Demand
and declining to provide the Company’s books and records for
inspection (the “Response”).
The Response states that Luxor does not have a credible basis for
the Demand, which is required under the USVI common law; that, as
preferred shareholders with no voting rights, Luxor’s purpose for
the Demand is not reasonably related to Luxor’s interests as
shareholders of the Company because Luxor cannot vote in connection
with Board elections or business transactions of the Company; and
that Luxor’s Demand serves only to personally benefit Luxor in its
private suit against the Company.
AAMC intends to continue to pursue its strategic business
initiatives despite this litigation. If Luxor were to prevail in
its lawsuit, we may need to cease or curtail our business
initiatives and our liquidity could be materially and adversely
affected
Settlement Activities
On February 17, 2021, the Company entered into a settlement
agreement dated as of February 17, 2021 (the “Putnam Agreement”)
with Putnam. Pursuant to the Putnam Agreement, AAMC and Putnam
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. As a result of this settlement, we recognized a one-time
gain directly to Additional paid in capital of
$71.9 million.
On August 27, 2021, the Company entered into a settlement agreement
(the “Wellington Agreement”) with certain funds managed by
Wellington Management Company LLP (collectively,
“Wellington”).
Under the Wellington Agreement, the Company agreed to pay
Wellington $2,093,000 in exchange for 18,200 Series A Shares
($18.2 million of liquidation preference) held by
Wellington,
and in return Wellington agreed to release AAMC from all claims
related to the Series A Shares.
As a result of this settlement, we recognized
a one-time gain directly to Additional paid in capital of
$16.1
million gain.
Subsequent to year end, on January 6, 2022, the Company entered
into a settlement agreement dated as of January 6, 2022 (the
"Settlement Agreement") with two institutional investors.
Under the Settlement Agreement, the Company has agreed to pay the
institutional investors approximately $665 thousand in cash in
exchange for 5,788 Series A shares ($5.79 million of
liquidation preference) held by the institutional investors.
As a result of this settlement, the Company estimates that it will
recognize a gain of approximately $5.1 million to Additional
paid in capital in the first quarter of 2022.
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
the holder's termination of service with the Company for any
reason. At December 31, 2021 and 2020, we had 1,200
and 1,100 and shares outstanding, respectively, and we
included the redemption value of these shares of and $12,000
and $11,000 respectively, within accounts payable and
accrued liabilities in our 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 February 2016, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic
842) (“ASC 842”). ASU 2016-02 requires that lessees recognize
assets and liabilities for leases with lease terms greater than
twelve months in the statement of financial position and also
requires improved disclosures to help users of financial statements
better understand the amount, timing and uncertainty of cash flows
arising from leases. Accounting by lessors is substantially
unchanged from prior practice as lessors will continue to recognize
lease revenue on a straight-line basis. The FASB has also issued
multiple ASUs amending certain aspects of Topic 842. ASU 2016-02 is
effective for fiscal years beginning after December 15, 2018,
including interim reporting periods within those fiscal years. The
amendments in ASU 2016-02 should be applied on a modified
retrospective transition basis, and a number of practical
expedients may apply. These practical expedients relate to the
identification and classification of leases that commenced before
the effective date, initial direct costs for leases that commenced
before the effective date and the ability to use hindsight in
evaluating lessee options to extend or terminate a lease or to
purchase the underlying asset. We adopted this standard as of
January 1, 2019 when the standard became effective and was required
to be adopted. Consistent with the standard, financial information
will not be updated and the disclosures required under the new
standard will not be provided for dates and periods prior to
January 1, 2019. As mentioned above, the new standard provides a
number of optional practical expedients in transition. We elected
the “package of practical expedients,” which permits us not to
reassess our prior conclusions about lease identification, lease
classification and initial direct costs under the new standard. We
did not elect the use-of-hindsight or the practical expedient
pertaining to land easements; the latter not being applicable to
us. The new standard also provides practical expedients for an
entity's ongoing accounting not to separate the lease and non-lease
components, including common area maintenance, property taxes and
insurance on our office leases that is paid along with rents. We
elected the short-term lease exemption for all leases that qualify;
as a result, we will not recognize right-of-use assets or lease
liabilities for leases with a term of less than 12 months at
inception. Upon our adoption of this standard, we recognized
operating lease right-of-use assets of $2.8 million, lease
liabilities of $2.8 million and a cumulative-effect adjustment
to retained earnings of $(0.1) million. We have also provided
the required incremental disclosures about our leasing activities
on a prospective basis in
Note
6.
In June 2016, the 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 as of 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 or in the 2020 Form 10-K 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. Summary of Significant Accounting Policies
Cash equivalents
We consider highly liquid investments with an original maturity of
three months or less when purchased to be cash
equivalents.
Certain account balances exceed FDIC insurance coverage and, as a
result, there is a concentration of credit risk related to amounts
on deposit in excess of FDIC insurance coverage. To mitigate this
risk, we maintain our cash and cash equivalents at large national
or international banking institutions.
Consolidations
The consolidated financial statements include the accounts of AAMC
and its consolidated subsidiaries, which include the voting
interest entities in which we are determined to have a controlling
financial interest. Our voting interest entities consist entirely
of our wholly owned subsidiaries. We also consider variable
interest entities (“VIEs”) for consolidation where we are the
primary beneficiary. We had no VIEs or potential VIEs as of and for
the years ended December 31, 2021 or 2020.
Earnings per share
Basic earnings per share is computed by dividing net income or
loss, less amortization of preferred stock issuance costs, by the
weighted average common stock outstanding during the period.
Diluted earnings per share is computed by dividing net income or
loss by the weighted average common stock outstanding for the
period plus the dilutive effect of (i) stock options and restricted
stock outstanding using the treasury stock method and (ii) Series A
Preferred Stock using the if-converted method. Weighted average
common stock outstanding - basic excludes the impact of unvested
restricted stock since dividends paid on such restricted stock are
non-participating. Any gain on settlement of preferred shares,
which is recorded directly to equity, is included in the numerators
for our earnings per share calculations.
Fair value of financial instruments
We designate fair value measurements into three levels based on the
lowest level of substantive input used to make the fair value
measurement. Those levels are as follows:
•Level
1 -
Quoted prices in active markets for identical assets or
liabilities.
•Level
2 -
Observable inputs other than Level 1 prices such as quoted prices
for similar assets or liabilities; quoted prices in markets that
are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full
term of the related assets or liabilities.
•Level
3 -
Unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets
or liabilities.
Front Yard common stock
The shares of Front Yard common stock that we held was reported at
fair value based on unadjusted quoted market prices in active
markets. Changes in the fair value of Front Yard common stock are
recognized through net income. We held no Front Yard common stock
as of January 12, 2021.
Income taxes
Income taxes are provided for using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using
enacted rates expected to apply to taxable income in the years in
which management expects those temporary differences to be
recovered or settled. The effect on deferred taxes of a change in
tax rates is recognized in income in the period in which the change
occurs. Subject to our judgment, we reduce a deferred tax asset by
a valuation allowance if it is “more likely than not” that some or
the entire deferred tax asset 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 evaluating tax positions, and we recognize
tax benefits only if it is more likely than not that a tax position
will be sustained upon examination by the appropriate taxing
authority.
For all temporary differences, we have considered the potential
future sources of taxable income against which they may be
realized. In so doing, we have taken into account temporary
differences that we expect to reverse in future years and those
where it is unlikely. Where it is more likely than not that there
will not be potential future taxable income to offset a temporary
difference, a valuation allowance has been recorded.
Lastly, the Company accounts for the tax on global intangible
low-taxed income (“GILTI”) as incurred and therefore has not
recorded deferred taxes related to GILTI on its foreign
subsidiaries.
Leases
On January 1, 2019, we adopted ASU 2016-02, including various
associated updates and amendments, which together comprise the
requirements for lease accounting under ASC 842. ASU 2016-02
fundamentally changes accounting for operating leases by requiring
lessees to recognize a liability to make lease payments and a
right-of-use asset over the term of the lease. We also adopted the
“package of practical expedients,” which permits us not to reassess
our prior conclusions about lease identification, lease
classification and initial direct costs under the new standard. We
also elected the short-term lease exemption for all leases that
qualify; as a result, we will not recognize right-of-use assets or
lease liabilities for leases with a term of less than 12 months at
inception.
We lease office space under two operating leases. Our
office leases are generally for terms of
one to five years and typically include renewal options,
which we consider when determining our lease right-of-use assets
and lease liabilities to the extent that a renewal option is
reasonably certain of being exercised. Along with rents, we are
generally required to pay common area maintenance, property taxes
and insurance, each of which vary from period to period and are
therefore expensed as incurred.
Other non-current assets
Other non-current assets includes leasehold improvements;
furniture, fixtures and equipment; deferred tax assets and
miscellaneous other assets. The cost basis of fixed assets is
depreciated using the straight-line method over an estimated useful
life of
three to five years based on the nature of the
components.
Assets and liabilities held for sale
Assets and liabilities held for sale in 2020 represent the disposal
group held at the lower of cost or fair value less estimated costs
to sell. The Company had no assets and liabilities for sale in
2021. See
Note
3
for further information on Discontinued Operations.
Revenue recognition
Under the Amended AMA, we administered certain of Front Yard's
business activities and day-to-day operations and provided
corporate governance services to Front Yard. Base Management Fees
were earned by us ratably throughout the applicable quarter and are
initially based on Front Yard's Adjusted AFFO (as defined in the
Amended AMA), subject to a minimum amount and certain potential
adjustments. See Note
8
for further information on the asset management agreements with
Front Yard.
We have evaluated the nature of the services provided to Front Yard
and have determined that such services constitute a series of
distinct services that should be accounted for as a single
performance obligation completed over time, which is simultaneously
performed by us and consumed by Front Yard. Therefore, we earn
management fees are ratably over the applicable fiscal
period.
Under both the Amended AMA and the Former AMA, we received expense
reimbursements from Front Yard for the compensation and benefits of
the General Counsel dedicated to Front Yard and certain operating
expenses incurred on Front Yard's behalf. These expense
reimbursements were earned by us at the time the underlying expense
is incurred.
In addition, under the Former AMA, we also received conversion fees
based on a percentage of the fair value of properties that became
rented for the first time in each quarter. Such conversion fees
were earned by us in the quarter that the conversion to rentals
occurred.
We have determined that the expense reimbursements are variable
consideration, and we recognize each component of this revenue on a
quarterly basis up to the amount that would likely not be
reversed.
Share-based compensation
We amortize the grant date fair value of restricted stock as
expense on a straight-line basis over the service period with an
offsetting increase in stockholders' equity. The grant date fair
value of awards with only service-based vesting conditions is
determined based upon the share price on the grant date. The grant
date fair value of awards with both service-based and market-based
vesting conditions is calculated using a Monte Carlo
simulation.
We recognize share-based compensation expense related to (i) awards
to employees in salaries and employee benefits and (ii) awards to
Directors or non-employees in general and administrative expense in
our consolidated statements of operations.
Forfeitures of share-based awards are recognized as they
occur.
Treasury stock
We account for repurchased common stock under the cost method and
include such treasury stock as a component of total stockholders’
equity. We have repurchased shares of our common stock (i) under
our Board approval to repurchase up to $300.0 million in shares of
our common stock and (ii) upon our withholding of shares of our
common stock to satisfy tax withholding obligations in connection
with the vesting of our restricted stock.
3. Discontinued Operations
Our primary client prior to December 31, 2020 had been Front Yard
Residential Corporation (“Front Yard”), a public real estate
investment trust (“REIT”) focused on acquiring and managing
quality, affordable single-family rental (“SFR”) properties
throughout the United States. All of our revenue for all periods
presented prior to December 31, 2021 was generated through our
asset management agreements with Front Yard.
On August 13, 2020, AAMC and Front Yard entered into a Termination
and Transition Agreement (the “Termination Agreement”), pursuant to
which the Company and Front Yard have agreed to effectively
internalize the asset management function of Front Yard. The
Termination Agreement provided that the Amended AMA would terminate
following a transition period to enable the internalization of
Front Yard’s asset management function, allow for the assignment of
certain vendor contracts and implement the transfer of certain
employees to Front Yard and the training of required replacement
employees at each company. The transition period ended at the close
of business, December 31, 2020, the time that AAMC and Front Yard
mutually agreed that all required transition activities have been
successfully completed (the “Termination Date”). On the Termination
Date, the Amended AMA terminated, and AAMC will no longer provide
services to Front Yard under the Amended AMA. Below are the
material terms of the Termination Agreement:
•Front
Yard paid AAMC an aggregate termination fee of $46.0 million
(the “Termination Fee”), consisting of the following
payments:
◦$15.0 million
paid in cash to AAMC on August 17, 2020,
◦$15.0 million
paid in cash on the Termination Date, and
◦$16.0 million
paid in Front Yard common stock on the Termination
Date.
•Front
Yard acquired the equity interests of AAMC's Indian subsidiary, the
equity interests of AAMC's Cayman Islands subsidiary, the right to
solicit and hire designated AAMC employees that 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 (the “Transferred Assets”) for an aggregate purchase price
of $8.2 million ($3.2 million of which was paid in cash
to AAMC on August 17, 2020), and the remaining $5.0 million
was paid in Front Yard common stock on the Termination
Date.
•On
the Termination Date, in satisfaction of the amounts payable in
Front Yard stock, we received (2,923,166) shares of Front Yard
common stock. We recorded a nominal gain on the shares
received.
•On
the Termination Date, 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) in the Consolidated Statements of
Income.
•AAMC
and Front Yard completed the transition contemplated by the
Termination and Transition Agreement, dated August 13,
2020.
We have evaluated the nature of the services provided to Front Yard
in exchange for the Termination Fee and have determined that such
services constitute a series of distinct services that should be
accounted for as a single performance obligation completed over
time, which is simultaneously performed by us and consumed by Front
Yard, and the Termination Fee was recognized through the
Termination Date of December 31, 2020.
During the third quarter of 2020, we received an upfront payment of
$3.2 million of the $8.2 million aggregate purchase price
of the Transferred Assets. In the fourth quarter of 2020, we
received a payment of the remaining $5.0 million, in Front
Yard common stock, of the aggregate purchase price of the
Transferred Assets in advance of the sale of shares. We have
included these upfront payments within accounts payable and accrued
liabilities in our condensed consolidated balance
sheet.
We have concluded that the Transferred Assets meets the
held-for-sale criteria and have therefore classified the
Transferred Assets as held for sale on our condensed consolidated
balance sheet at December 31, 2020. The termination of the Amended
AMA and the sale of the Transferred Assets also represents a
significant strategic shift that will have a major effect on
our
operations and financial results. Therefore, we have classified the
results of operations related to Front Yard as discontinued
operations in our condensed consolidated statements of
operations.
On August 13, 2020, AAMC and Front Yard entered into Termination
and Transition Agreement, pursuant to which Front Yard agreed to
effectively internalize the asset management function of Front
Yard. Pursuant to the agreement, Front Yard acquired the equity
interests of AAMC's Indian subsidiary, the equity interests of
AAMC's Cayman Islands subsidiary, the right to solicit and hire
designated AAMC employees that oversaw the management of Front
Yard's business and other assets of AAMC that were used in
connection with the operation of Front Yard's
business.
On December 31, 2020, in connection with the Termination
Agreement, the company completed the assignment of our lease in
Charlotte, North Carolina to Front Yard. Additionally, on
December 31, 2020, we completed the sale of our Cayman Islands
subsidiary.
On January 1, 2021, in connection with the Termination Agreement,
the company completed the sale of our India
subsidiary.
The carrying value of major classes of assets and liabilities
related to our discontinued operations that constitute the Disposal
Group at December 31, 2021 and December 31, 2020 were as
follows ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2021 |
|
December 31, 2020 |
|
Current assets held for sale: |
|
|
|
|
Cash and cash equivalents |
$ |
— |
|
|
$ |
184 |
|
|
|
|
|
|
Prepaid expenses and other assets |
— |
|
|
710 |
|
|
Total current assets held for sale |
— |
|
|
894 |
|
|
|
|
|
|
|
Non-current assets held for sale: |
|
|
|
|
Right-of-use lease assets |
— |
|
|
1,612 |
|
|
Other non-current assets |
— |
|
|
367 |
|
|
Total non-current assets held for sale |
— |
|
|
1,979 |
|
|
Total assets held for sale |
$ |
— |
|
|
$ |
2,873 |
|
|
|
|
|
|
|
Current liabilities held for sale: |
|
|
|
|
Accrued salaries and employee benefits |
$ |
— |
|
|
$ |
910 |
|
|
Accounts payable and accrued liabilities |
— |
|
|
300 |
|
|
Short-term lease liabilities |
— |
|
|
128 |
|
|
Total current liabilities held for sale |
— |
|
|
1,338 |
|
|
|
|
|
|
|
Non-current liabilities held for sale: |
|
|
|
|
Non-current lease liabilities |
— |
|
|
1,599 |
|
|
Total non-current liabilities held for sale |
— |
|
|
1,599 |
|
|
Total liabilities held for sale |
$ |
— |
|
|
$ |
2,937 |
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
2021 |
|
2020 |
|
Revenues from discontinued operations: |
|
|
|
|
Management fees from Front Yard |
$ |
— |
|
|
$ |
13,713 |
|
|
Termination fee from Front Yard |
— |
|
|
46,000 |
|
|
|
|
|
|
Expense reimbursements from Front Yard |
— |
|
|
2,867 |
|
|
Total revenues from discontinued operations |
— |
|
|
62,580 |
|
|
|
|
|
|
|
Expenses from discontinued operations: |
|
|
|
|
Salaries and employee benefits |
— |
|
|
5,592 |
|
|
Legal and professional fees |
— |
|
|
256 |
|
|
General and administrative |
— |
|
|
1,521 |
|
|
Total expenses from discontinued operations |
— |
|
|
7,369 |
|
|
|
|
|
|
|
Other income (loss) from discontinued operations: |
|
|
|
|
Gain on disposal |
7,485 |
|
|
— |
|
|
Other income (loss) |
— |
|
|
20 |
|
|
Total other income (loss) from discontinued operations |
7,485 |
|
|
20 |
|
|
|
|
|
|
|
Net income from discontinued operations before income
taxes |
7,485 |
|
|
55,231 |
|
|
Loss on disposal of discontinued operations before income
taxes |
— |
|
|
102 |
|
|
Income tax expense |
1,272 |
|
|
588 |
|
|
Net income from discontinued operations |
$ |
6,213 |
|
|
$ |
54,541 |
|
The following table details cash flow information related to our
discontinued operations for the periods indicated ($ in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
2021 |
|
2020 |
|
Total operating cash flows from discontinued operations |
$ |
5,439 |
|
|
$ |
37,798 |
|
|
Total investing cash flows from discontinued operations |
511 |
|
|
3,643 |
|
|
Total financing cash flows (used in) from discontinued
operations |
80 |
|
|
(1,010) |
|
4. Fair Value of Financial Instruments
The following table sets forth the carrying amount and fair value
of the Company's financial assets by level within the fair value
hierarchy at December 31, 2020 ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Carrying Amount |
|
Quoted Prices in Active Markets |
|
Observable Inputs Other Than Level 1 Prices |
|
Unobservable Inputs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020 |
|
|
|
|
|
|
|
|
Recurring basis (assets) |
|
|
|
|
|
|
|
|
Front Yard common stock |
$ |
47,355 |
|
|
$ |
47,355 |
|
|
$ |
— |
|
|
$ |
— |
|
As of December 31, 2021, the Company had sold its investments
in securities and there were no securities outstanding. We did not
transfer any assets from one level to another level during the
years ended December 31, 2021 or 2020. The fair value of our
Front Yard common stock is based on unadjusted quoted market prices
from 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. For further
information, please refer to
Note
1.
Investment gains/losses for December 31, 2021 and 2020, are
summarized as follows ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2021 |
|
2020 |
|
|
Equity securities: |
|
|
|
|
|
|
|
|
|
|
Investment gains on securities sold during the period |
$ |
8,347 |
|
|
$ |
— |
|
|
|
|
8,347 |
|
|
— |
|
|
|
|
|
|
|
|
|
Front Yard common stock: |
|
|
|
|
|
Change in unrealized losses during the period on securities held at
the end of the end of the period |
— |
|
|
(6,270) |
|
|
|
Investment gains on securities sold during the period |
146 |
|
|
— |
|
|
|
|
146 |
|
|
(6,270) |
|
|
|
|
|
|
|
|
|
Total change in fair value of equity securities and Front Yard
common stock |
$ |
8,493 |
|
|
$ |
(6,270) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment gains and losses include unrealized gains and losses
from changes in fair values during the period on positions that we
owned at the end of such period, as well as gains and losses on
positions sold during the period. As reflected in the condensed
consolidated statements of cash flows, total proceeds from sales of
securities during December 31, 2021 was $152.8 million which
consisted of proceeds from sales of Front Yard common stock of
$47.5 million and $105.3 million in proceeds from sales of
securities. No proceeds from sales of securities were received in
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 period.
A summary of the year-to-date activity of Front Yard common stock
and equity securities is presented in the table below (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Front Yard Common Stock |
|
Equity Securities |
|
|
|
Shares |
|
Basis |
|
Shares |
|
Basis |
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020 |
|
2,923 |
|
|
$ |
41,635 |
|
|
— |
|
|
$ |
— |
|
|
Purchased |
|
— |
|
|
0 |
|
8,123 |
|
|
96,950 |
|
Sold |
|
(2,923) |
|
|
(41,635) |
|
(8,123) |
|
|
(96,950) |
|
December 31, 2021 |
|
— |
|
|
$ |
— |
|
|
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost |
|
Gross Unrealized Gains |
|
Gross Unrealized Losses |
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020 |
|
|
|
|
|
|
|
|
Front Yard common stock |
$ |
41,635 |
|
|
$ |
5,720 |
|
|
$ |
— |
|
|
$ |
47,355 |
|
|
|
|
|
|
|
|
|
5. Borrowings
In 2021, the Company began borrowing under a standard margin
arrangement with one of our banking institutions. The margin
account is secured by the securities held in our brokerage account
with this institution. We paid interest on all of our borrowings
each month when a balance was owed. As of December 31, 2021,
the Company liquidated its security holdings and the margin
arrangement has been repaid.
6. Leases
We currently occupy office space under operating leases in
Christiansted, St. Croix, U.S. Virgin Islands, and Bengaluru,
India.
As of December 31, 2021 and December 31, 2020, our
weighted average remaining lease term, including applicable
extensions, was 5.1 years and 7.5 years, respectively, and we
applied a discount rate of 7.0% and 7.0%, respectively, to our
office leases. We determined the discount rate for each lease to be
either the discount rate stated in the lease agreement or our
estimated rate that we would charge to finance real estate
assets.
During the years ended December 31, 2021 and December 31,
2020, we recognized rent expense of $0.2 million and $0.7 million,
respectively, related to long-term operating leases. We had no
short-term rent expense in 2021 and $0.1 million in 2020. We
include rent expense as a component of general and administrative
expenses in the consolidated statements of operations. We had no
finance leases during the years ended December 31, 2021 and
December 31, 2020.
The following table presents a maturity analysis of our operating
leases as of December 31, 2021 ($ in
thousands):
|
|
|
|
|
|
|
|
|
|
Operating Lease Liabilities |
|
|
|
2022 |
$ |
194 |
|
|
|
|
2023 |
204 |
|
|
|
|
2024 |
209 |
|
|
|
|
2025 |
206 |
|
|
|
|
2026 |
131 |
|
|
|
|
Thereafter |
76 |
|
|
|
|
Total lease payments |
1,020 |
|
|
|
|
Less: interest |
161 |
|
|
|
|
Lease liabilities |
$ |
859 |
|
|
|
7. Commitments and Contingencies
Litigation, claims and assessments
From time to time, we may be involved in various claims and legal
actions arising in the ordinary course of business. Set forth below
is a summary of material legal proceedings to which we are a party
as of December 31, 2021:
Litigation regarding Luxor Capital Group, LP and certain of its
managed funds and accounts ("Luxor")
Please refer to
Note
1
– Section
Series A Convertible Preferred Stock in 2014 Private
Placement.
Executive Arbitrations
Former Chief Executive Officer, Indroneel Chatterjee
On May 3, 2021, Mr. Chatterjee, commenced an arbitration against
the Company and each of its directors. The arbitration complaint
alleges that the Company’s April 16, 2021 for cause termination of
Mr. Chatterjee was in breach of Mr. Chatterjee’s Amended and
Restated Employment Agreement and made extra contractual claims
against the Company for not affording Mr. Chatterjee a “fair
procedure” and placed him in a “false light” by disclosing Mr.
Chatterjee’s termination in its public announcement of the for
cause termination. In addition, the arbitration complaint also
asserts a tort claim against each of the Company’s directors
relating to that termination and against the Company for its April
16, 2021 public announcement of the for cause termination. Mr.
Chatterjee’s arbitration complaint seeks unspecified damages for
his contract claims including for loss of income, stock and bonus,
and punitive damages on his tort claims. On June 10, 2021, the
Company and its directors responded to the arbitration complaint
and advanced counterclaims against Mr. Chatterjee. On October 20,
2021, the arbitrator granted the Company’s motion to dismiss with
respect to Mr. Chatterjee’s “fair procedure” and “false light”
claims, but denied the motion to dismiss the tort claim against
each of the directors. The arbitrator has set a trial date for
October 24-28, 2022. The Company and the directors intend to
vigorously defend the claims.
Former General Counsel, Graham Singer
On June 25, 2021, Mr. Singer commenced an arbitration against the
Company and its subsidiary AAMC US, Inc. regarding his compensation
and the terms of his employment. The Company had previously
demanded that Mr. Singer return his signing bonus in accordance
with the terms of his employment agreement. The Company and Mr.
Singer have agreed to a settlement in principle resolving all
claims and counterclaims.
Erbey Holding Corporation et al. v. Blackrock Management Inc., et
al.
On April 12, 2018, a partial stockholder derivative action was
filed in the Superior Court of the Virgin Islands, Division of St.
Croix under the caption Erbey Holding Corporation, et al. v.
Blackrock Financial Management Inc., et al. The action was filed by
Erbey Holding Corporation (“Erbey Holding”), John R. Erbey Family
Limited Partnership (“JREFLP”), by its general partner Jupiter
Capital, Inc., Salt Pond Holdings, LLC (“Salt Pond”), Munus, L.P.
(“Munus”), Carisma Trust (“Carisma”), by its trustee, Venia, LLC,
and Tribue Limited Partnership (collectively, the “Plaintiffs”)
each on its own behalf and Salt Pond and Carisma derivatively on
behalf of AAMC. The action was filed against Blackrock Financial
Management, Inc., Blackrock Investment Management, LLC, Blackrock
Investments, LLC, Blackrock Capital Management, Inc., Blackrock,
Inc.
(collectively, “Blackrock”), Pacific Investment Management Company
LLC, PIMCO Investments LLC (collectively, “PIMCO”) and John and
Jane Does 1-10 (collectively with Blackrock and PIMCO, the
“Defendants”). The action alleges a conspiracy by Blackrock and
PIMCO to harm Ocwen Financial Corporation (“Ocwen”) and AAMC and
certain of their subsidiaries, affiliates and related companies and
to extract enormous profits at the expense of Ocwen and AAMC by
attempting to damage their operations, business relationships and
reputations. The complaint alleges that Defendants’ conspiratorial
activities, which included short-selling activities, were designed
to destroy Ocwen and AAMC, and that the Plaintiffs (including AAMC)
suffered significant injury, including but not limited to lost
value of their stock and/or stock holdings. The action seeks, among
other things, an award of monetary damages to AAMC, including
treble damages under Section 605, Title IV of the Virgin Islands
Code related to the Criminally Influenced and Corrupt Organizations
Act, punitive damages and an award of attorney’s and other fees and
expenses.
Defendants have moved to dismiss the first amended verified
complaint. Plaintiffs and AAMC have moved for leave to file a
second amended verified complaint to include AAMC as a direct
plaintiff, rather than as a derivative party. On March 27, 2019,
the Court held oral argument on Defendants' motions to dismiss the
first amended verified complaint and Plaintiffs' motion for
leave to file the second amended verified complaint. The Court held
additional oral argument on the pending motions on October 25,
2021. The Court has not yet decided the pending
motions.
At this time, we are not able to predict the ultimate outcome of
this matter, nor can we estimate the range of possible damages to
be awarded to AAMC, if any. We have determined that there is no
contingent liability related to this matter for AAMC.
COVID-19 Pandemic
Due to the current COVID-19 pandemic in the United States and
globally, our business, our employees and the economy as a whole
could be adversely impacted. The magnitude and duration of the
COVID-19 pandemic and its impact on our cash flows and future
results of operations could potentially be significant and will
largely depend on future developments, which are highly uncertain
and cannot be predicted, including new information which may emerge
concerning the severity of the COVID-19 pandemic, the success of
actions taken to contain or treat the pandemic, and reactions by
consumers, companies, governmental entities and capital
markets.
The COVID-19 pandemic has had significant effects on global
markets, supply chains, businesses and communities. As a result of
increased COVID-19 vaccination rates and significant reopening of
the economy, related risks appear to have decreased. Nevertheless,
the Company has taken appropriate actions to mitigate the negative
impact the virus has on the Company by reducing employee travel,
allowing employees to work remotely, and canceling in-person
meetings when possible.
8. Related-Party Transactions
Asset management agreement with Front Yard
Pursuant to the Amended AMA, we designed and implemented Front
Yard's business strategy, administered its business activities and
day-to-day operations, and provided corporate governance services,
subject to oversight by Front Yard's Board of Directors. We were
responsible for, among other duties: (1) performing and
administering certain of Front Yard's day-to-day operations; (2)
defining investment criteria in Front Yard's investment policy in
cooperation with its Board of Directors; (3) sourcing, analyzing
and executing asset acquisitions, including the related financing
activities; (4) overseeing Front Yard's renovation, leasing and
property management of its SFR properties; (5) analyzing and
executing sales of certain rental properties, REO properties and
residential mortgage loans; (6) performing asset management duties
and (7) performing corporate governance and other management
functions, including financial, accounting and tax management
services.
Through December 31, 2020, we provided Front Yard with a management
team and support personnel with substantial experience in the
acquisition and management of residential properties. Our
management also has significant corporate governance experience
that enabled us to manage Front Yard's business and organizational
structure efficiently. Under the Amended AMA, we had agreed not to
provide the same or substantially similar services without the
prior written consent of Front Yard's Board of Directors to any
business or entity competing against Front Yard in (a) the
acquisition or sale of SFR and/or REO properties, non-performing
and re-performing mortgage loans or other similar assets; (b) the
carrying on of an SFR business or (c) any other activity in which
Front Yard engages. However, following the execution of the
Termination Agreement, we are entitled to provide advisory or other
services to businesses or entities in such competitive activities
without Front Yard's prior consent.
On August 13, 2020, AAMC and Front Yard entered into the
Termination Agreement, pursuant to which they agreed to terminate
the Amended AMA, thereby effectively internalizing the asset
management function of Front Yard in exchange for payment of the
Termination Fee and other consideration to AAMC.
On December 31, 2020, AAMC and Front Yard completed the transition
contemplated by the Termination and Transition Agreement. For a
description of the Termination Agreement and its key terms, please
see
Note
1.
Terms of the Amended AMA
We and Front Yard entered into the Amended AMA on May 7, 2019 (the
“Effective Date”). The Amended AMA amended and restated, in its
entirety, the Former AMA. The Amended AMA had an initial term of
five years and would renew automatically each year thereafter for
an additional one-year term, subject in each case to the
termination provisions further described below.
The Amended AMA provided for a management fee structure that
provides AAMC with a quarterly Base Management Fee and a potential
annual Incentive Fee, each of which were dependent upon Front
Yard's performance and were subject to potential downward
adjustments and an aggregate fee cap. The Base Management Fee under
the Amended AMA was subject to a quarterly minimum of $3,584,000.
The Amended AMA also required that the Base Management Fee would
increase commencing after Front Yard’s per share Adjusted AFFO (as
defined in the Amended AMA) reaching $0.15 (“Additional Base
Fees”). To date, we have earned no Additional Base Fees or
Incentive Fees under the Amended AMA. Due to the termination of the
Amended AMA pursuant to the Termination Agreement, and the
completion of the transition period, we will no longer receive a
Base Management Fee under the Amended AMA.
We were responsible for all of our own costs and expenses other
than the expenses related to compensation of Front Yard’s dedicated
general counsel and, beginning in January 2020, certain specified
employees who provided direct property management services to Front
Yard. Front Yard and its subsidiaries paid their own costs and
expenses, and, to the extent such Front Yard expenses were
initially paid by us, Front Yard was and is required to reimburse
us for such reasonable costs and expenses.
9. Incentive Compensation and Share-based Payments
Long-term incentive compensation
Our officers and employees participate in an annual non-equity
incentive program whereby they are eligible for incentive cash
payments based on a percentage of their annual base salary. Our
officers generally have a target annual non-equity incentive
payment percentage that ranges from 50% to 200% of base salary. The
officer's actual incentive payment for the year is determined by
(i) the Company's performance versus the objectives established by
our Board of Directors (80%) and (ii) a performance appraisal
(20%).
Share-based Payments
Certain executive officers and employees have and will receive
grants of stock options and/or restricted stock under the 2012 and
2020 Equity Incentive Plans, collectively (the "Equity Incentive
Plans"). The Equity Incentive Plans also allow for the grant of
performance awards and other awards such as purchase rights, equity
appreciation rights, shares of common stock awarded without
restrictions or conditions, convertible securities, exchangeable
securities or other rights convertible or exchangeable into shares
of common stock, as the Compensation Committee in its discretion
may determine.
2012 Special Equity Incentive Plan
A special grant of stock options and restricted stock was made to
certain employees of Altisource Portfolio Solutions N.A. (“ASPS”)
related to our separation from ASPS under the 2012 Special Equity
Incentive Plan (the “2012 Special Plan”). We included no
share-based compensation in our consolidated financial statements
for the portion of these grants made to ASPS employees. The shares
of restricted stock became fully vested and were issued during
2017.
Dividends received on restricted stock are forfeitable and are
accumulated until the time of vesting at the same rate and on the
same date as on shares of common stock. Upon the vesting of stock
options and restricted stock, we may withhold up to the statutory
minimum to satisfy the resulting employee tax
obligation.
Stock options
During the years ended December 31, 2021 and 2020, we recorded
approximately $21,000 and $216,000 compensation expense related to
grants of stock options, respectively.
The following table sets forth the activity of our outstanding
options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Options |
|
Weighted Average Exercise Price per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019 |
|
15,256 |
|
|
2.77 |
|
|
Granted (2) |
|
60,000 |
|
|
13.11 |
|
|
Exercised (1) |
|
(8,031) |
|
|
1.66 |
|
|
December 31, 2020 |
|
67,225 |
|
|
12.13 |
|
|
Forfeited/expired (3) |
|
(61,375) |
|
|
12.87 |
|
|
December
31, 2021 |
|
5,850 |
|
|
$ |
4.36 |
|
_____________
(1)The
intrinsic value of stock options exercised during the year ended
December 31, 2020 was $0.1 million.
(2)The
stock options had a weighted average grant date fair value of
$10.61 and had an exercise price of $13.11. The stock options were
forfeited on April 16, 2021 due to the former Chief Executive
Officer's termination.
(3)1,000
stock options expired on July 18, 2021 and 375 expired on July 21,
2021. All forfeited and expired options had a weighted average
exercise price of $12.87.
As of December 31, 2021, we had 5,850 outstanding options
issued under all of our share-based compensation plans or as
inducement awards, with a weighted average exercise price of $4.36,
weighted average remaining life of 0.2 years and intrinsic value of
$0.1 million. Subsequent to year end, all options were exercised in
March 2022.
We had 7,225 options exercisable as of December 31, 2020 with
a weighted average exercise price of $4.01, weighted average
remaining life of 1.1 years, and intrinsic value of
$0.1 million. Of these exercisable options, none had an
exercise price higher than the market price of our common stock as
of December 31, 2020.
We calculated the grant date fair value of stock options granted in
2020 using a Monte Carlo simulation and amortize the resulting
compensation expense over the respective service period. No options
were granted in 2021. The fair value of stock options granted
during the period indicated using the following
assumptions:
|
|
|
|
|
|
|
Year ended December 31, 2020 |
|
Risk-free interest rate (1) |
1.56 |
% |
|
Common stock dividend yield (2) |
— |
% |
|
Expected volatility (3) |
98.30 |
% |
|
_____________ |
|
|
(1) Represents the interest rate as of the grant date on US
treasury bonds having the same life as the estimated life of the
stock option grants |
|
|
(2) Based on the Company's history of not declaring a dividend on
shares of common stock |
|
|
(3) Based on our historical stock price volatility |
|
Restricted stock
During the year ended December 31, 2021, we granted a total of
90,671 shares of service-based restricted stock to members of
management. Of which, 82,671 shares of service-based restricted
stock awards were issued with a weighted average grant date fair
value per share of $26.25 which vested immediately. An additional
8,000 shares were issued with a weighted average grant date value
per share of $21.58. These additional shares of service-based
restricted stock awards were granted either as inducement awards or
under our Equity Incentive Plans. These grants will vest in three
equal annual installments based on the grant date(s), subject to
forfeiture or acceleration.
During the year ended December 31, 2020, we granted 70,000
shares of service-based restricted stock to members of management
with a weighted average grant date value per share of $13.99. These
shares of service-based restricted stock awards were granted either
as inducement awards or under our Equity Incentive Plans. These
grants were to vest in three equal annual installments based on the
grant date(s), subject to forfeiture or acceleration. However,
50,000 shares of the restricted stock units were forfeited in 2021
due to termination or resignations of members of management. The
forfeited shares had a weighted average grant date value per share
of $14.35.
We recorded $1.8 million and $1.7 million of compensation
expense related to these grants for the years ended
December 31, 2021, and 2020, respectively. As of
December 31, 2021 and 2020, we had $0.3 million and
$1.0 million, respectively, of total unrecognized share-based
compensation cost to be recognized over a weighted average
remaining estimated term of 1.2 years and 0.9 years,
respectively.
Additionally, 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. This
restricted stock vests and is issued after a one-year service
period subject to each Director attending at least 75% of the Board
and committee meetings. No dividends are paid on the shares until
the award is issued. During the years ended December 31, 2021
and 2020, we granted 7,236 and 8,622 shares of stock, respectively,
pursuant to our Equity Incentive Plans with a weighted average
grant date fair value per share of $24.88 and $20.87,
respectively.
The following table sets forth the activity of our restricted
stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares |
|
Weighted Average Grant Date Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019 |
|
111,757 |
|
|
54.18 |
|
|
Granted |
|
78,622 |
|
|
14.75 |
|
|
Vested (1) |
|
(60,999) |
|
|
66.70 |
|
|
December 31, 2020 |
|
129,380 |
|
|
24.32 |
|
|
Granted |
|
97,907 |
|
|
25.77 |
|
|
Vested (1) |
|
(162,051) |
|
|
14.50 |
|
|
Forfeited/expired (1) |
|
(50,000) |
|
|
14.35 |
|
|
December 31, 2021 |
|
15,236 |
|
|
$ |
23.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
_____________
(1)The
vesting date fair value of restricted stock that vested during the
years ended December 31, 2021, 2020 and 2019 was $2.1 million,
$1.1 million, and $0.9 million, respectively.
The following table sets forth the number of shares of common stock
reserved for future issuance. We may issue new shares or issue
shares from treasury shares upon the exercise of stock options or
the vesting of restricted stock.
|
|
|
|
|
|
|
|
|
|
|
December 31, 2021 |
|
Stock options outstanding |
|
5,850 |
|
|
Possible future issuances under share-based compensation
plans |
|