Organization and Basis of Presentation

6 Months Ended

Jun. 30, 2024

Organization, Consolidation and Presentation of Financial Statements [Abstract]

1. Organization and Basis of Presentation

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 as an asset manager on December 21, 2012.

During 2022 and 2023, the Company generated alternative private credit loans through Direct to Borrower Lending, Wholesale Originations and Correspondent Loan Acquisitions and funded the originated or acquired alternative loans from a combination of Company equity and lines of credit through its alternative lending group (“ALG”) business line. Those loans were then sold through forward commitments and repurchase contracts.

Following a full year of ALG’s operations, our Board of Directors mandated a comprehensive review of the Company’s mortgage platform to improve the performance of the business. The review involved assessments of operational efficiency and capacity issues, opportunities for cost reductions, strategies for improving liquidity, among other initiatives, all with a view toward enhancing financial performance. While the Company has the ability to originate and purchase loans in the future, it does not anticipate doing so other than on a very selective basis.

On October 6, 2023, the Company signed a non-exclusive patent and technology licensing agreement (“the PTL Agreement”) with System73 Limited (“System 73”), an entity controlled and managed by the 53.6% owners of the Company’s common stock. Under the PTL Agreement, the Company obtained a non-exclusive license for a set of patents for a control system which seeks to optimize the efficiency of electric vehicles (“EVs”). The Company’s investment in the EV business and the development of those business assets is currently the principal line of business of the Company.

As consideration for the patent rights granted in the PTL Agreement, the Company has agreed to pay 6.2 million pounds sterling (approximately $8.0 million) in budgeted increments as they are incurred by System73 under a commercialization contract executed with Seabird Technologies Limited (“Seabird”), plus any future third-party expenses reasonably incurred in connection with the filing, prosecution and maintenance of the patents. Under the commercialization contract, Seabird has been engaged by System 73 to build a technology demonstrator to validate the functionality of an integrated drive unit using the technology and to develop a commercialization strategy for the technology, including the development of a sales pipeline, over an 18-month period commencing on January 1, 2024. Through June 30, 2024, AAMC has made payments of approximately $2.9 million in the aggregate toward these contractual obligations.

Under the terms of the commercialization contract, Seabird will be the exclusive distributor of the control system for two years following development and will earn 10% of revenue from sales directly attributable to their efforts up to $250 million per annum; 20% of revenue from sales directly attributable to their efforts over $250 million per annum; and 10% ownership in System 73 (or any potential future owner of the control system at that time) when revenue attributable to their efforts exceeds $500 million per annum.

In addition, the PTL Agreement contemplates certain equity incentives for System73 based on performance. The PTL Agreement sets out “AAMC Common Stock Milestones”, defined as each instance where the average closing price of the Company’s common stock for the preceding twenty (20) day period reaches an amount equal to or in excess of a multiple of $100 (i.e., $100, $200, $300, etc.). Upon the occurrence of each such AAMC Common Stock Milestone, System 73 would be awarded the number of shares of AAMC Common Stock equal to ten percent (10%) of the AAMC fully diluted Shares. Consistent with New York Stock Exchange rules, any equity award under the PTL Agreement will be subject to stockholder approval.

The Company accounts for the equity award contract under the PTL Agreement as a derivative that is marked-to-market at the end of each reporting period. The Company determined that the equity award contract has a de minimis value as of June 30, 2024 and December 31, 2023 given the likelihood of achieving an AAMC Common Stock Milestone is remote based on the information available to management at those dates.

AAMC, at its option, may terminate the PTL Agreement by providing System73 written notice of intent to terminate at any time and for any reason. Upon termination, in addition to all other obligations under the PTL Agreement, System73 shall promptly pay to AAMC an amount equal to the value of all payments made by AAMC pursuant to the agreement, plus a twenty percent (20%) annualized return on investment on such payments. We have no current plans to terminate the PTL Agreement as of June 30, 2024.

Basis of presentation and use of estimates

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). All wholly owned subsidiaries are included, and all intercompany accounts and transactions have been eliminated.

In management's opinion, the unaudited interim condensed consolidated financial statements contain all adjustments (all of which are normal and recurring in nature) considered necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods. The interim results are not necessarily indicative of results for a full year. We have omitted certain notes and other information from the interim condensed consolidated financial statements presented in this Quarterly Report on Form 10-Q as permitted by SEC rules and regulations. These condensed consolidated financial statements should be read in conjunction with our annual consolidated financial statements included within our Annual Report on Form 10-K for the year ended December 31, 2023.

Liquidity

As of June 30, 2024, the Company has unrestricted cash and cash equivalents of $8.1 million. The Company generated net losses of $2.2 million and $5.3 million for the three- and six-month periods ended June 30, 2024, respectively, and incurred operating cash outflows of $1.2 million for the six-month period ended June 30, 2024.

While management believes that the cash on hand and future collection of outstanding loans receivable will provide sufficient liquidity to enable the Company to meet its obligations due within the next year, including its future commitments under the PTL Agreement, there is risk that the Company will need to seek additional sources of capital to continue its operations and to fulfill is longer-term obligations, including its notes payable that mature in 2027 and thereafter, especially if the Company is unable to realize future benefits from the PTL Agreement. The Company is actively managing its expenses and has reduced costs to conserve cash. The interim financial statements do not include any adjustments relating to the recoverability of recorded asset amounts or the amounts of liabilities that might be necessary should the Company be unable to continue as a going concern for a reasonable period of time.

Use of estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Loans held for sale or investment, carried at fair market value

Through our ALG business line, we previously originated and purchased alternative loans. These loans are either classified as held for investment or held for sale depending upon the determination of management. We have elected to measure these alternative loans at fair value on a loan by loan basis. This option is available when we first recognize a financial asset. Subsequent changes in the fair value of these loans will be recorded in our Condensed Consolidated Statements of Operations in the period of the change. Purchased loans, also known as correspondent loans, can be bought with a net strip interest component in that the seller of the loan will receive an agreed upon percentage of the coupon interest generated from the sold loan. This strip component is reflected as service and asset management expense on the Condensed Consolidated Statements of Operations.

A fair value measurement represents the price at which an orderly transaction would occur between willing market participants at the measurement date. We estimate the fair values of the loans held for investment or sale based on available inputs from the marketplace. The market for the loans that we hold at any given time is generally illiquid. Establishing fair values for illiquid assets is inherently subjective and is often dependent upon our estimates and modeling assumptions. In circumstances where relevant market inputs cannot be obtained, increased analysis and management judgment are required to estimate fair value. This generally requires us to establish internal assumptions about future cash flows and appropriate risk-adjusted discount rates. Regardless of the valuation inputs we apply, the objective of fair value measurement for assets is unchanged from what it would be if markets were operating at normal activity levels and/or transactions were orderly; that is, to determine the current exit price. When the Company sells a loan, a gain or loss will be recognized at the time of the sale in net income for the difference between the fair value and the book value. The fair value is measured as the agreed upon selling price from the contractual agreement with the buyer.

See Note 2 - Loans Held for Sale or Investment at Fair Value for further discussion on fair value measurements.

Interest for these loans is recognized as revenue based on the stated coupon when earned and deemed collectible or until a loan becomes more than 90 days past due, at which point the loan is placed on nonaccrual status and any accrued interest is reversed against interest income. When a seriously delinquent loan previously placed on nonaccrual status has been cured, meaning all delinquent principal and interest have been remitted by the borrower, the loan will be placed back on accrual status. Interest accrued as of period end is included within loans held for sale, at fair value or loans held for investment, at fair value in the Condensed Consolidated Balance Sheets as applicable.

We evaluate transfers of loans held for sale or investment at fair value under the guidance in Financial Accounting Standards Board Accounting Standards Codification ("ASC") Topic No. 860, "Transfers and servicing of financial assets" ("ASC 860"), and account for such transfers as sales when three conditions in ASC 810-10-45-5 have been met. That is, we account for transfers of such financial assets as sales when the assets have been isolated from the Company, when the transferee has the right to pledge or exchanges the assets it receives and there are no restrictions on the transferee that constrain such right, and when the Company has no effective control over the transferred financial assets. There were no transfers of financial assets during the six months ended June 30, 2024. The Company realized an aggregate gain totaling $0.02 million and an aggregate loss of $0.28 million for the six months ended June 30, 2023 on loans held for sale and loans held for investment, respectively, which is included in realized gains on loans held for sale, net and realized losses on loans held for investment, net, respectively, in the accompanying Condensed Consolidated Statement of Operations. Each of the loans transferred during the six months ended June 30, 2023 qualified for sale accounting under ASC 860, as each of the loans was transferred to a third-party "as is" in exchange for cash, and the Company has no continuing involvement with the transferred financial assets or the transferees.

Redeemable preferred stock

Issuance of Series A Convertible Preferred Stock in 2014 Private Placement

During the first quarter of 2014, we issued 250,000 shares of convertible preferred stock for $250.0 million 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 thereafter. In connection with these same redemption dates, each holder of our Series A Shares had the right to give notice requesting us to redeem all of the Series A Shares held by such holder out of legally available funds. Under the terms of the Certificate, the Company would have been required to redeem if it had legally available funds to redeem all, but not less than all, of the Series A Shares requested by a holder to be redeemed on a redemption date. The redemption right would have been exercisable in connection with each redemption date every five years until the mandatory redemption date in 2044.

The Series A Shares were not entitled to receive dividends. The Series A Shares were 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. For a further description of other terms and conditions in respect of the Series A Shares, please refer to Note 1 - Organization and Basis of Presentation to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2023 and the Certificate of Designations for the Series A Convertible Preferred Stock referenced as Exhibit 3.3 in this Quarterly Report.

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, but not less than all, of the Series A Shares on March 15, 2020. As a result, we did not believe, under the terms of the Certificate, that we were obligated to redeem any of the Series A Shares under the Certificate.

Related litigation

–Luxor (plaintiff) v. AAMC (defendant)

On February 3, 2020, a complaint was filed in New York state court by Luxor Capital Group LP and various related entities collectively “Luxor”), each a holder of AAMC Series A Shares, against AAMC claiming breach of contract, specific performance, unjust enrichment, and related damages and expenses. Luxor sought an order requiring AAMC to redeem its Series A Shares, damages of up to $150,000,000, as well as payment of its costs and expenses in the lawsuit.

As noted below, pursuant to a settlement agreement entered into by the parties dated January 11, 2024, this litigation has been terminated and dismissed with prejudice. See “Settlement activities”.

–AAMC (plaintiff) v. Nathaniel Redleaf (defendant)

On October 31, 2022, AAMC filed suit in the Superior Court of the Virgin Islands (subsequently removed to federal court), against former Company director Nathaniel Redleaf alleging disclosure of confidential information to Luxor in breach of the fiduciary duty he owed to AAMC. AAMC sought a number of remedies, including compensatory damages and disgorgement of any benefit received by Luxor or Mr. Redleaf as a result of such alleged breaches.

As noted below, all litigation with Mr. Redleaf and Luxor has been resolved and dismissed with prejudice. See “Settlement activities”.

Settlement activities

From February 2021 through July 2022, the Company entered into a series of settlement agreements with various institutional holders of the Series A Shares resulting in the redemption and cancellation thereof. For information concerning the terms and conditions of these settlements, see Note 1 - Organization and Basis of Presentation to the Consolidated Financial Statements included in our Annual Report on From 10-K for the year ended December 31, 2023.

On January 11, 2024 (the “Effective Date”), AAMC entered into a settlement agreement with Luxor and Mr. Redleaf, pursuant to which the parties agreed as follows:

•Luxor surrendered all 144,212 of its Series A Shares it held to AAMC. Luxor and AAMC agreed that their related Securities Purchase Agreement dated March 13, 2014, along with the Certificate, are void and all rights thereunder are extinguished.

•The Company agreed to provide the following consideration to Luxor

▪A $1,000,000 cash payment within five days of the Effective Date, plus

▪Three Promissory Notes in the following principal amounts and durations:


Year	Principal Amount (Notes Payable)
2024	$	—
2025	—
2026	—
2027	2,000,000
2028	—
Thereafter	9,000,000

•Each Note bears annual interest at either 7.5% on a cash basis or 10% paid-in-kind (“PIK”) basis, at the election of AAMC and the carrying amount of such notes approximates fair value as of June 30, 2024. The Company agreed to refrain from making common stock repurchases or issuing dividends at any time the PIK option is in effect and is subject to certain additional covenants enumerated in the Notes.

•The Company also agreed to pay Luxor 50% of any proceeds received in respect of its damage claims in the action brought by Erbey Holding Corporation pending in USVI Superior Court with case number SX-2018-CV-146, up to a cumulative payout cap to Luxor of $50,000,000.

•The parties agreed and stipulated to dismissal with prejudice of the following actions: (i) Luxor Capital Group LP, et. al v. Altisource Asset Management Corporation filed in the Supreme Court of the State of New York in the County of New York, with index number 650746/2020 (including Luxor’s withdrawal of its pending request for further appellate review by the New York Court of Appeals), and (ii) Altisource Asset Management Corporation v. Nathaniel Redleaf et. al pending in the United States District Court for the District of the Virgin Islands, with case number 1:23-cv-00002. The parties exchanged mutual releases of their respective claims relating to the aforesaid actions, SPA and Certificate, as applicable, and agreed that their settlement shall not constitute or be construed as an admission that any of the parties violated the law, breached any contract or committed any wrong whatsoever.

Recently issued accounting standards

For a discussion of our recently issued accounting standards, please see Note 1 - Organization and Basis of Presentation - “Recently issued accounting standards” in our Annual Report on Form 10-K for the year ended December 31, 2023.

Recent Rules and Accounting Pronouncements

In November 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures” (ASU 2023-07), which requires expanded disclosure of significant segment expense and other segment items on an annual and interim basis. ASU 2023-07 is effective for the Company for annual periods beginning after January 1, 2024 and interim periods beginning after January 1, 2025. The Company is currently evaluating the impact ASU 2023-07 will have on its financial statement disclosures.

In March 2024, the Securities and Exchange Commission (the “SEC”) adopted the final rules that will require certain climate-related information in registration statements and annual reports. In April 2024, the SEC voluntarily stayed the new rules as a result of pending legal challenges. The new rules include a requirement to disclose material climate-related risks, descriptions of board oversight and risk management activities, the material impacts of these risks on a registrants’ strategy, business model and outlook, and any material climate-related targets or goals, as well as material effects of severe weather events and other natural conditions and greenhouse gas emissions. Prior to the stay in the new rules, they would have been effective for annual periods beginning January 1, 2025, except for the greenhouse gas emissions disclosure which would have been effective for annual periods beginning January 1, 2026. The Company is currently evaluating the impact of these rules on its disclosures.

Altisource Asset Management Corp 10-Q