Item 1. Business
Our 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 is 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 have historically operated in a single segment focused on providing asset management and certain corporate governance services to investment vehicles.
Our team employs a range of strategies that leverage our deep industry expertise, local insights, and global resources to deliver attractive returns throughout the investment cycle. We invest with precision, purpose, and alignment between our interests and the interests of Our Fund (defined below) investors, stockholders, and other stakeholders. We are in the process of establishing multiple new lines of business, including, without limitation, investment funds, short-term investor loan aggregation and origination businesses, and the establishment of strategic relationships with real estate loan originators. Building on these efforts, and leveraging our industry expertise and intellectual capital allows us to capitalize on a broader range of the opportunities. As an investment advisor, we earn, or have the opportunity to earn, management fees, transaction fees, and carried interest for providing investment management and other services to our clients, funds, and other vehicles. We plan to earn additional investment income by investing our own capital alongside the capital we manage for fund investors and we expect that AAMC will be able to generate management fees and attractive returns through each of these opportunities.
We have formed investment funds which we believe will allow us to attract domestic and international institutional and high net worth investors. The initial seed capital is expected to be used to invest in real estate debt products, specifically, short-term investor loans. We also intend to subscribe additional capital for The Fund (defined below) from other institutional investors. As capital commitments increase, we intend to expand the investments into other real estate related assets following a disciplined investment approach. We also intend to invest a portion of our own capital directly into The Fund in addition to other investments we may make.
Our primary client has been Front Yard Residential Corporation (“Front Yard”), a public real estate investment trust (“REIT”) focused on acquiring and managing quality, affordable single-family rental (“SFR”) properties for America's families. Front Yard was historically our primary source of revenue and was a significant driver of our results.
During the second quarter of 2019, Front Yard commenced a strategic alternatives review process designed to maximize stockholder value. At the conclusion of this review, Front Yard's board of directors determined that it was in the best interests of its shareholders to liquidate Front Yard. In light of this determination, we appointed a Co-Chief Executive Officer on January 13, 2020 to be responsible for implementing new business. Our incumbent Co-Chief Executive Officer continued to focus on the business of Front Yard and the completion of its strategic alternatives review until his resignation in December 2020.
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 the 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”). Pursuant to the terms of the Termination Agreement, effective on the date that the parties mutually agreed that the Transition Plan had been satisfactorily completed (the “Termination Date”), which was December 31, 2020, the Amended AMA was terminated in its entirety. As part of the Termination Agreement and Transition Plan, the incumbent Co-Chief Executive Officer resigned prior to the Termination Date, at which point our new Co-Chief Executive Officer became the sole Chief Executive Officer of the Company.
In connection with the Termination Agreement, Front Yard paid AAMC an aggregate termination fee (the “Termination Fee”) of $46,000,000, with payments consisting of $30,000,000 in cash and $16,000,000 in Front Yard common stock. During the transition period, AAMC continued to be paid the base management fee provided for in the Amended AMA (equal to $3,584,000 per quarter as contemplated by the Amended AMA) and a pro rata portion of the base management fee for any partial calendar quarter during such period.
In addition, on December 31, 2020 and January 1, 2021, AAMC transferred the equity interests of the Company’s Cayman Islands subsidiary and India subsidiary (the “Transferred Assets”), respectively, to Front Yard. The aggregate purchase price (the “Purchase Price”) for the Transferred Assets was $8,200,000, with payments consisting of $3,200,000 in cash and $5,000,000 in Front Yard’s common stock. Furthermore, on January 1, 2021, Front Yard also transferred the equity interests in its India subsidiary to AAMC. In addition to the retention of key employees, AAMC retained certain assets and operating subsidiaries to continue to build out its asset management businesses focused on the origination and underwriting of short duration construction loans backed by single-family homes as well as other new business initiatives.
On October 19, 2020, Front Yard entered into an Agreement and Plan of Merger (the “Original Merger Agreement”) with Pretium Midway Holdco, LP, a Delaware limited partnership (“Parent”), and Midway AcquisitionCo REIT, a Maryland real estate investment trust (“Merger Sub”), pursuant to which Front Yard would be acquired by a partnership led by Pretium Midway Investments, LP (the “Pretium Investor”), a fund managed by affiliates of Pretium Partners, LLC, and including funds managed by the real estate equity and alternative credit strategies of Ares Management Corporation (the “Ares Investors” and together with Pretium Investor, the "Investors"). The Original Merger Agreement provided that, among other things, upon the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the Merger (“Effective Time”), Front Yard would merge with and into Merger Sub (the “Merger”), with Merger Sub as the successor in the Merger and continuing as a wholly owned subsidiary of Parent.
On January 11, 2021, Front Yard completed its previously announced Merger with the Parent and Merger Sub pursuant to the terms of the Original Agreement, as amended by the First Amendment to Agreement and Plan of Merger, dated as of November 20, 2020 (the “Amendment” and, together with the Original Agreement, the “Merger Agreement”), by and among Front Yard, Parent and Merger Sub. Merger Sub was the surviving company in the Merger. Effective on the closing date of the Merger, each share of common stock of Front Yard, subject to certain exceptions, was cancelled, extinguished, and automatically converted into the right to receive cash in an amount equal to $16.25 per share. Upon the closing of the Merger, AAMC received cash in an amount of approximately $47.5 million for the Front Yard common stock it held at the closing date.
For information on the potential risks to AAMC in relation to the Termination Agreement, Merger, and new business initiatives, see “Item 1A. Risk Factors.”
Additionally, our wholly owned subsidiary, NewSource Reinsurance Company Ltd. (“NewSource”), is a title insurance and reinsurance company licensed with the Bermuda Monetary Authority. NewSource commenced reinsurance activities during the second quarter of 2014. In December 2014, NewSource determined that the economics of the initial business did not warrant the continuation of its initial reinsurance quota share agreement with an unrelated third party. NewSource therefore transferred all of the risk of claims and future losses underwritten to an unrelated third party, and its reinsurance and insurance business has been dormant since that time. In December 2020, the Company determined that it had no immediate intent to re-commence reinsurance activity, and accordingly, we submitted our application letter to the Bermuda Monetary Authority to cancel our license and proceed with a voluntary wind down of NewSource after six years of dormancy.
Asset Management Agreement with Front Yard
On March 31, 2015, we entered into an asset management agreement (the “Former AMA”), under which we were the exclusive asset manager for Front Yard for an initial term of 15 years from April 1, 2015, with two potential five-year extensions. The Former AMA provided for a fee structure in which we were entitled to a base management fee, an incentive management fee and a conversion fee for mortgage loans and real estate owned (“REO”) properties that became rental properties for the first time during each quarter.
On May 7, 2019, we entered into the Amended AMA with Front Yard, under which we were provided to be the exclusive asset manager for Front Yard for an initial term of five years. The Amended AMA had the option to renew automatically each year thereafter for an additional one-year term, subject in each case to certain termination provisions. The Amended AMA provided for a fee structure in which we are entitled to a Base Management Fee and a potential Incentive Fee.
Pursuant to the Amended AMA, we designed and implemented Front Yard's business strategy, administered certain of 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) implementing the investment criteria in Front Yard's investment policy approved by 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 and REO properties; (6) performing asset management duties and (7) performing corporate governance and other management functions, including financial, accounting and tax management services.
We provided Front Yard with a management team and support personnel who have 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. We had, during the term of the Amended AMA, 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 engaged. Notwithstanding the foregoing, we could engage in any other business or render similar or different services to any businesses engaged in lending or insurance activities or any other activity other than those described above. Further, at any time following the termination of the Amended AMA, or Front Yard's determination and announcement that it will no longer engage in any of the above-described competitive activities, we are entitled to provide advisory or other services to businesses or entities in such competitive activities without Front Yard's prior consent.
Accordingly, our operating results were historically highly correlated to Front Yard's operating results.
The Amended AMA provided for the agreement to be terminated without cause (i) by Front Yard (including any successor of Front Yard) for any reason, or no reason, or (ii) by Front Yard or us in connection with the expiration of the initial term or any renewal term, in either case with 180 days' prior written notice. If the Amended AMA was terminated by Front Yard without cause or in connection with the expiration of the initial term or any renewal term, Front Yard would be required to pay the Termination Fee to us in an amount generally equal to three times the arithmetical mean of the aggregate fees actually paid or payable with respect to each of the three immediately preceding completed calendar years (including any such prior years that may have occurred prior to the effective date of the Amended AMA). Upon any such termination by Front Yard, Front Yard would have the right, at its option, to license certain intellectual property and technology assets from us. Front Yard also had the option to continue to utilize the services of AAMC for a transition period of up to one year following the effective date of termination of the Amended AMA at a cost not to exceed $3,584,000 per quarter.
On August 13, 2020, we entered into the Termination Agreement with Front Yard and FYR LP to terminate the Amended AMA by and among the Front Yard, FYR LP, and AAMC, and to complete the Transition Plan. Pursuant to the terms of the Termination Agreement and Transition Plan, effective after December 31, 2020, the Amended AMA was terminated in its entirety.
In connection with the Termination Agreement, Front Yard paid AAMC a Termination Fee. During the transition period, AAMC continued to be paid the base management fee provided for in the Amended AMA.
In addition, on December 31, 2020 and January 1, 2021, the Company transferred the Transferred Assets to Front Yard. The Purchase Price for the Transferred Assets was $8,200,000, with payments consisting of $3,200,000 in cash and $5,000,000 in Front Yard’s common stock. Furthermore, on January 1, 2021, Front Yard also transferred the equity interests in its India subsidiary to AAMC.
As a result of the termination process above, we reported the activity related to the Amended AMA and Transferred Assets (collectively, the "Disposal Group") as "held-for-sale", and a discontinued operation, effective as of the end of the third quarter of 2020. The results of operations, cash flows, and assets and liabilities of our discontinued operations and our continuing operations, for all periods presented in the accompanying consolidated financial statements, have been reclassified to conform to the current year presentation. See Note 3 to our consolidated financial statements for additional information regarding the results, major classes of assets and liabilities, and significant non-cash operating items and capital expenditures of discontinued operations.
For more information on these asset management agreements, please see Note 7 to our consolidated financial statements contained in this Annual Report on Form 10-K.
Our Business Strategy
Our business strategy is to (i) provide asset management services in a manner that builds long-term value and a stable income stream for our stockholders and (ii) to develop additional scalable investment strategies and vehicles by leveraging the expertise of our management team.
Front Yard's Business Strategy
Prior to the Termination Date, we assisted Front Yard in executing its strategy of being one of the top SFR REITs serving American families and their communities with a view to providing consistent and robust returns on equity and long-term growth for its investors. In recent years we:
•improved Front Yard’s operations;
•shifted Front Yard’s focus from residential debt assets to SFR assets;
•strengthen Front Yard’s portfolio with portfolio SFR acquisitions;
•internalized property management; and
•negotiated the sale of Front Yard.
We believed there was a compelling opportunity in the SFR market and that we implemented the right strategic plan for Front Yard to capitalize on the sustained growth in SFR demand. Front Yard targeted the moderately priced single-family home market to acquire rental properties, which in our view, not only provided safe, comfortable homes for residents, but also offered attractive yield opportunities.
Strengths that AAMC Brought to Front Yard
Until the Termination Date, we were committed to a business strategy that would enable Front Yard to efficiently manage and continue to grow its SFR portfolio and to become one of the largest nationwide SFR REITs. Our goal was to enhance Front Yard's long-term stockholder value through the execution of its business plan with a focus on its competitive strengths. We believed these strengths would enable Front Yard to grow and provide strong stabilized results over time, which we expected would, in turn, result in improved results for AAMC. Front Yard's competitive position was based on the following strengths through our management:
•Acquisition Strategy Enabled Front Yard to Continue Building a Portfolio that Targeted Attractive Yields for its Stockholders. Through our personnel and technical expertise, we developed a disciplined market and asset selection approach, and a valuation model for Front Yard that used proprietary and market data to evaluate and project the performance of SFR assets. This valuation model was built with multiple broad economic and geographic inputs as well as numerous property-level inputs to determine which properties would produce attractive yields and how much to pay for those properties to best achieve optimal results. These internally developed tools helped Front Yard to evaluate the most attractive SFR properties for sale. We also leveraged Front Yard's property inspection, management, rental infrastructure, and related data flows to identify and acquire attractive assets in any locations into which Front Yard desired to grow. Through the Termination Date, we continued to build Front Yard's internal property management structure, which allowed Front Yard to focus on strategic areas, develop regional experience to continually refine Front Yard's acquisition strategy, and achieve rental portfolio growth with properties marked by strong stabilized occupancy rates and optimal economic returns. We also believed that Front Yard's focus on affordable housing provided it with a potential advantage, as we believe this is an underserved market segment that provided Front Yard with attractive yield and growth opportunities.
•Extensive Internal Property Management Infrastructure. With the internal property manager and the support of its nationwide vendor networks, we believe that Front Yard was well positioned to operate and manage SFR properties across the United States at an attractive cost structure. We placed an experienced property management team with a successful track-record of internal property management operations with Front Yard, which enabled Front Yard to capitalize on additional opportunities to enhance its tenants’ experience and improve its operating efficiency. We believe the internal property management infrastructure provided Front Yard with a cost-efficient, scalable platform that was a key factor in its success as it continued to grow through acquisition by the Investors.
•Depth of Management Experience. We believe the experience and technical expertise of our management team was one of Front Yard's key strengths. Our team has a broad and deep knowledge of the real estate market with decades of experience in real estate, mortgage trading, housing, financial services, and asset management. Our experience in the real estate industry brought a wealth of understanding of the markets in which Front Yard operated and built Front Yard's portfolio in a manner that positioned it to provide attractive potential returns to its stockholders. Management and its supporting teams have expertise and extensive contacts that enabled us to source SFR assets through access to auctions and sellers of SFR assets and obtain financing to optimize available leverage. We believe that our asset evaluation process and the experience and judgment of our executive management team in identifying, assessing,
valuing, and acquiring new SFR assets helped Front Yard to appropriately value the portfolios at the time of purchase and to operate them profitably.
Front Yard's Investment Process
Using extensive market connections and a disciplined market and asset selection approach incorporating advanced quantitative models, our capital markets group has demonstrated expertise in sourcing, analyzing and negotiating the purchase of both large and small portfolios of rented single-family properties. Through close collaboration with Front Yard's internal property management team, we were able to source and acquire properties that fit Front Yard's investment strategy and integrated well with Front Yard's property management infrastructure. This expertise and coordination enabled us to strategically grow Front Yard's SFR portfolio at September 30, 2020 to approximately 14,500 homes, the majority of which were stabilized rentals at the time of acquisition.
Front Yard's Financing Strategy
We provided a team of experienced legal and financial professionals that executed Front Yard's financing strategy. Front Yard financed its real estate investments with debt and equity, the proportions and character of which varied based upon the particular characteristics of its portfolio and on market conditions. To the extent available at the relevant time, Front Yard's financing sources may have included bank credit facilities, term financing, warehouse lines of credit, securitization financing, seller financing arrangements, structured financing arrangements, and repurchase agreements, among others.
Front Yard's Investment Committee and Investment Policy
We conducted substantially all of the investment activities on behalf of Front Yard pursuant to the Amended AMA. Front Yard’s Board of Directors had adopted a broad investment policy designed to facilitate our management of Front Yard’s capital and assets and our maintenance of an investment portfolio profile that met Front Yard’s objectives. We reported to Front Yard’s Investment Committee, whose role was to act in accordance with the investment policy and guidelines approved by Front Yard’s Board of Directors for the investment of its capital. As part of an overall investment portfolio strategy, the investment policy provided that we could facilitate Front Yard’s purchase or sale of non-performing or sub-performing residential mortgage loans, residential mortgage backed securities, and real estate assets. We were also authorized, on behalf of Front Yard, to offer leases on acquired single-family residential real estate. The investment policy allowed for modification by Front Yard’s Board of Directors without the approval of our stockholders.
The objective of Front Yard’s investment policy was to oversee our efforts to achieve a return on assets consistent with Front Yard’s business objectives and to maintain adequate liquidity to meet Front Yard’s financial covenants and regular cash requirements.
The Investment Committee was authorized to approve the financing of Front Yard’s investment positions through bank credit facilities, seller financing arrangements, warehouse lines of credit, securitization financing, term financing, structured financing arrangements and repurchase agreements, among others, provided such agreements are negotiated with counterparties approved by the Investment Committee. We were also permitted to hedge Front Yard’s interest rate exposure on its financing activities through the use of interest rate swaps or caps, forwards, futures and options, subject to prior approval from Front Yard’s Investment Committee.
Investment Committee Approval of Counterparties
Front Yard’s Investment Committee was authorized to consider and approve, based on our recommendations:
•the financial soundness of institutions with which Front Yard planned to transact business and recommendations with respect thereto;
•Front Yard’s risk exposure limits with respect to the dollar amounts of total exposure with a given institution; and
•investment accounts and trading accounts to be opened with banks, broker-dealers and financial institutions.
Investment Committee Guidelines
The activities of Front Yard’s Investment Committee were subject to the following guidelines, which we were required to follow in making recommendations to the Investment Committee:
•No investment would be made that would cause Front Yard or any of its subsidiaries to fail to qualify as a REIT for U.S. federal income tax purposes;
•No investment would be made that would cause Front Yard to be required to register as an investment company under the Investment Company Act of 1940, as amended (the “Investment Company Act”); and
•Until appropriate investments could be identified, Front Yard may invest available cash in interest-bearing and short-term investments that were consistent with (a) Front Yard’s intention to qualify as a REIT and (b) Front Yard’s exemption from registration as an investment company under the Investment Company Act.
Investment Selection and Due Diligence
For both Our Funds and principal investments, when our team determines that an investment proposal is worth consideration, the proposal is formally presented to the investment committee and the due diligence process commences, if appropriate. The objective of the due diligence process is to identify attractive investment opportunities based on the facts and circumstances surrounding an investment and to prepare a framework that may be used from the date of an acquisition to drive value creation. When conducting due diligence, we evaluate a number of important business, financial, tax, accounting, environmental, social, governance, legal, and regulatory issues in order to determine whether an investment is suitable. While the process differs depending on the type of investment we make, generally, our professionals spend significant amounts of time and effort to understand the opportunities and risks associated with the proposed investment. In addition, our team may also use the services of outside experts, accountants, lawyers, and investment banks as appropriate to assist them in this process.
Equity Investment in Public Securities
In an effort to manage and maximize the benefits of existing capital to our stakeholders, we have invested a significant portion of our assets into publicly traded securities and borrowed against those assets to increase our return to stakeholders. The specialties of the companies we have invested in fall within our core competencies, which we believe gives us a competitive advantage to analyze and value these investments. We believe these investments provide a beneficial risk-adjusted return.
Employees
As of December 31, 2020, we had 112 full-time employees in the USVI, the United States, and India. The majority of our employees performed asset management functions for Front Yard that include acquisitions, capital markets access, risk management, accounting, internal audit, corporate management, and legal services.
Following the completion of the Termination Agreement with Front Yard, certain of our employees became direct employees of Front Yard or its successor, or their subsidiaries, and our headcount was reduced to levels necessary to develop and execute our new business lines.
Our Competition
We are in a highly competitive market and are competing with other asset managers. Our competitors may have greater resources, more personnel, more clients, more sources of revenue, and more capital than we do. Some of our competitors' clients may have the advantage of having significant amounts of capital, lower cost of capital, or access to funding sources not available to our clients. Additionally, our competitors and competitors' clients may have higher risk tolerances or may be willing to accept lower returns on investment. Some of our competitors may be regarded by potential clients as having better expertise related to specific assets. We believe our ability to scale The Fund and future businesses will provide us with a competitive advantage.
Environmental Matters
We do not believe there are any environmental matters that will materially affect the conduct of our business.
As an owner of real estate, Front Yard was subject to various federal, state and local environmental laws, regulations and ordinances and also could have been liable to third parties resulting from environmental contamination or noncompliance with
environmental laws at its properties. We were tasked with monitoring these laws, regulations and ordinances and conducting due diligence in acquired properties for Front Yard. Environmental laws can impose liability on an owner or operator of real property for the investigation and remediation of contamination at or migrating from such real property without regard to whether the owner or operator knew of or was responsible for the presence of the contaminants. The liability is generally not limited under such laws and could exceed the property's value and the aggregate assets of the liable party. The presence of contamination or the failure to remediate contamination could have adversely affected Front Yard's ability to sell, lease, or renovate the real estate or borrow using the real estate as collateral. Although we did not believe these risks directly expose us to environmental liability as a separate independent company, these and other risks related to environmental matters could have had an adverse impact on Front Yard, and such risks are described in more detail in “Item 1A. Risk Factors.”
Governmental Regulations
Our businesses, as well as the financial services industry generally, are subject to extensive regulation in the United States and elsewhere. In general, the SEC and other regulators around the globe have, in recent years, significantly increased their regulatory activities with respect to investment firms.
We are registered as an investment adviser with the SEC. Registered investment advisers are subject to the requirements and regulations of the Advisers Act. Such requirements relate to, among other things, fiduciary duties to advisory clients, maintaining an effective compliance program, solicitation agreements, conflicts of interest, recordkeeping and reporting requirements, disclosure requirements, limitations on agency cross and principal transactions between an adviser and advisory clients and general anti-fraud prohibitions. In addition, as a registered investment advisor, we are subject to routine periodic and other examinations by the staff of the SEC. In accordance with our efforts to enhance our compliance program, certain additional policies and procedures have been put into place, but no material changes to our operations have been made. We have not been subject to any regulatory or disciplinary actions by the SEC.
Front Yard’s Governmental Regulations. Certain of Front Yard’s properties were subject to the rules of the various Home Owners Associations (“HOAs”) where such properties are located. HOAs are private entities that regulate the activities of owners and occupants of, and levy assessments on, properties in a residential subdivision. HOA rules and regulations typically consist of various restrictions or guidelines regarding use and maintenance of the property. In addition, Front Yard’s properties were subject to various covenants and local laws and regulatory requirements, including permitting, licensing and zoning requirements. We believe that under our management, Front Yard was in material compliance with such covenants, local laws and regulatory requirements and HOA rules and regulations. Front Yard also required that its tenants agree to comply with such covenants, laws, ordinances and rules in their leases.
Fair Housing Act Applicable to Front Yard. The Fair Housing Act (“FHA”) and its state law counterparts and the regulations promulgated by the U.S. Department of Housing and Urban Development (“HUD”) and various state agencies, prohibit discrimination in housing on the basis of race or color, national origin, religion, sex, familial status (including children under the age of 18 living with parents or legal custodians, pregnant women and people securing custody of children under the age of 18), handicap or, in some states, financial capability. We believe that, under our management and that of its internal property manager, Front Yard’s properties were in substantial compliance with the FHA and other regulations.
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 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.
•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.
Website and Availability of SEC Filings
Our principal website address is http://www.altisourceamc.com, and we encourage investors to use it as a way of easily finding information about us. We promptly make available free of charge on our website, or provide a link on our website to, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after those reports are electronically filed with, or furnished to, the SEC, along with corporate governance information including our Corporate Governance Guidelines, our Code of Business Conduct and Ethics and select press releases. The contents of our website are available for informational purposes only and shall not be deemed incorporated by reference in this report.
You may also access the reports and other documents we file with the SEC at a website maintained by the SEC at http://www.sec.gov.
Item 1A. Risk Factors
The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered. If any of the following risks actually occur, our business, operating results and financial condition could be materially adversely affected.
RISKS RELATED TO US OR OUR MARKET GENERALLY
Adverse economic and market conditions could negatively impact our business in many ways, including by reducing the value or performance of the investments made by Our Funds and reducing the ability of Our Funds to raise capital, any of which could materially reduce our revenue, earnings and cash flow and adversely affect our financial prospects and condition.
Our business is materially affected by conditions in the global financial markets and economic conditions or events throughout the world that are outside of our control, including, but not limited to, changes in interest rates, availability of credit, inflation rates, economic uncertainty, slowdown in global growth, changes in laws (including laws relating to taxation and regulations on the financial industry), disease, pandemics or other severe public health events, trade barriers, commodity prices, currency exchange rates and controls and national and international political circumstances (including government shutdowns, wars, terrorist acts or security operations). For example, the coronavirus ("COVID-19") pandemic has resulted in a widespread health crisis that continues to adversely affect general commercial activity and the economies and financial markets of many countries. Such unforeseen and catastrophic events could adversely affect the businesses, financial conditions and results of operations of us and Our Funds’ portfolio companies and assets. These factors may affect the level and volatility of securities prices and the liquidity and the value of investments, and we may not be able to or may choose not to manage our exposure to these market conditions and/or other events. In the event of a market downturn, each of our businesses could be affected in different ways.
The global outbreak of the novel coronavirus, or COVID-19, caused severe disruptions in the U.S. and global economies and has impacted, and may continue to adversely impact our performance and results of operations.
In 2020, the global outbreak of COVID-19 spread to every country and every state in the United States. The World Health Organization designated COVID-19 as a pandemic, and numerous countries, including the United States, declared national emergencies with respect to COVID-19. While vaccines have been approved and are slowly being deployed, the global impact of the outbreak continues to adversely impact many industries and different geographies continue to be impacted by the effects of public health restrictions in various ways. The International Monetary Fund estimates that the global economy may not return to pre-pandemic levels until the end of 2021 or early 2022 depending on the roll-out and effectiveness of the vaccine.
While our fears of a great depression at the onset of the pandemic have not today been realized, the economic recovery is only partially underway, and has been gradual, uneven and characterized by meaningful dispersion across sectors and regions with uncertainty regarding the ultimate length and trajectory. Increasing infection rates and hospitalizations in certain geographies and a potential resulting market downturn have resulted in COVID-19 continuing to impact our business, financial condition, results of operations, liquidity, and prospects.
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 Funds and 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.
COVID-19 continues to present a significant threat to our employees’ well-being and morale. Our key employees or executive officers may become sick or otherwise unable to perform their duties for an extended period of time and we may experience a potential loss of productivity. In addition, continued office closures could adversely affect our ability to create a company
culture. Although our employees continue to collaborate across offices and geographies, the informal office interactions that help develop culture have generally ceased. It is also harder to integrate new employees into the firm in a remote working environment. As a result of travel restrictions, stay-at-home orders, etc., many of our staff are unable to travel for physical meetings and/or have been displaced working remotely outside of their normal work location. This may create taxable presence or residency risks for our corporate entities and professionals. Ultimately, these risks could lead to increased levels of taxation and additional compliance complexities. Although a vaccine has been approved for use, the rollout and success are unknown. Although our workforce has demonstrated its ability to achieve pre-pandemic levels of productivity on a remote basis, if we were unable to vaccinate our employee base, our work force may be unwilling to return to the office. In addition to the foregoing, COVID-19 has exacerbated and may continue to exacerbate, many of the other risks described in this Annual Report on Form 10-K.
The asset management business is intensely competitive.
The asset management business is intensely competitive, driven by a variety of factors, including asset performance, the quality of service provided to clients, brand recognition and business reputation. Our asset management business competes with a number of other asset managers. A number of factors serve to increase our competitive risks:
•A number of our competitors may have greater financial, technical, marketing and other resources and more personnel than we do;
•Our clients may not perform as well as the clients of our competitors;
•Several of our competitors and their clients have significant amounts of capital, and many of them have similar management objectives to ours, which may create additional competition for management opportunities;
•Some of these competitors' clients may also have a lower cost of capital and access to funding sources that are not available to our clients, which may create competitive disadvantages for us with respect to funding opportunities;
•Some of our competitors' clients may have higher risk tolerances, different risk assessments or lower return thresholds, which could allow them to facilitate the acquisition and management by their clients of a wider variety of assets and allow them to advise their clients to bid more aggressively than our clients for assets on which we would advise our clients to bid;
•There are relatively few barriers to entry impeding new asset management firms, and the successful efforts of new entrants into the asset management business is expected to continue to result in increased competition;
•Some of our competitors may have better expertise or be regarded by potential clients as having better expertise with regard to specific assets; and
•Other industry participants will from time to time seek to recruit members of our management team and other employees away from us.
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 “Item 3. Legal Proceedings.” 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.
Unpredictability of the credit markets may restrict our clients' or our access to capital and may make it difficult or impossible for us to obtain any required additional financing.
The domestic and international credit markets may 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. In addition, failures of our clients to raise capital or access capital markets could adversely impact their ability to grow and/or generate adequate returns on capital, which could adversely impact any management fees we earn.
RISKS RELATES TO OUR OPERATIONS
We may not be successful in expanding into new investment strategies, markets and businesses, which could adversely affect our business, results of operations and financial condition.
Our growth strategy focuses on providing resources to foster the development of new product offerings and business strategies by our investment professionals. Given our focus across the real estate industry, these initiatives could create conflicts of interests between products, increase our costs and expose us to new market risks and legal and regulatory requirements. These products may have different economic structures than our previous businesses and may require a different marketing approach. 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 identify and create products that appeal to our 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 properly manage conflicts of interests;
•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.
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 investment 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 to the concerns noted above, the success of a firm acquisition will be affected by, among other things:
•difficulties and costs associated with the integration of operations and systems;
•difficulties integrating the acquired business’s internal controls and procedures into our existing control structure;
•difficulties and costs associated with the assimilation of employees; and
•the risk that a change in ownership will negatively impact the relationship between an acquire and the investors in its investment vehicles.
In addition, if a new product, 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 investors in those businesses, could subject us to litigation or regulatory inquiries and can expose us to additional expenses, including impairment charges and potential liability from investor or other complaints.
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.
A company that falls within the scope of Section 3(a)(1)(C) of the Investment Company Act can avoid being regulated as an investment company if it can rely on certain of the exclusions or exemptions under the Investment Company Act. One such exclusion is Rule 3a-2 under the Investment Company Act. Rule 3a-2 of the Investment Company Act provides that inadvertent or transient investment companies will not be treated as investment companies subject to the provisions of the Investment Company Act, provided the issuer has the requisite intent to be engaged in a non-investment business, evidenced by the issuer’s business activities and an appropriate resolution of the issuer’s board of directors, within one year from the commencement of
the earlier of (1) the date on which the issuer owns securities and/or cash having a value exceeding 50% of the value of such issuer's total assets on either a consolidated or unconsolidated basis, or (2) the date on which an issuer owns or proposes to acquire investment securities (as defined in section 3(a) of the Exchange Act) having a value exceeding 40% of the value of such issuer's total assets (exclusive of government securities and cash items) on an unconsolidated basis. We entered into certain investment transactions as previously disclosed in our Current Report on Form 8-K, filed on February 18, 2021, and if we become an inadvertent investment company and fails to meet the requirements of the transient investment company exemption under Rule 3a-2 of the Investment Company Act, then we will be required to register as an investment company under the Investment Company Act.
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.
Our investments in certain public securities exposes us to a variety of market risks.
We invested in publicly traded securities to maximize long-term stakeholder value while taking prudent levels of risk subject to our investment guidelines and various regulatory restrictions. However, investing entails substantial risks. We may not achieve our investment objectives, and our investment performance may vary substantially over time. Losses or volatility in the equity or fixed income markets could materially adversely affect our results of operations and financial condition.
The fair market value of our investment portfolio is affected by general economic and market conditions that are outside of our control, including (i) fluctuations in equity market levels, interest rates, debt market levels and foreign currency exchange rates, (ii) public health crises, natural disasters, terrorist attacks and other outside events, and (iii) credit losses sustained by issuers. A significant decline in the equity markets such as that experienced from September 2008 to March 2009 could materially adversely affect our results of operations and financial condition. In addition to causing declines in the value of securities that we own in our investment portfolio, public health crises, natural disasters, terrorist attacks and other outside events can adversely affect general commercial activity and the economies of many countries, which could materially adversely affect the business, financial condition and results of operations of the entities in which we have invested. We are also exposed to changes in debt markets. Interest rates are highly sensitive to many factors, including governmental monetary policies, economic and political conditions and other factors beyond our control. Our use of margin on these investment may increase the severity of any losses.
Our organizational documents do not limit our ability to enter into new lines of business, and we intend to, from time to time, expand into new investment strategies, geographic markets and businesses, each of which may result in additional risks and uncertainties in our businesses.
We intend, to the extent that market conditions warrant, to seek to grow our businesses and expand into new investment strategies, geographic markets and businesses. Our organizational documents do not limit us to the asset management business and to the extent that we make strategic investments or acquisitions in new geographic markets or businesses, undertake other related strategic initiatives or enter into a new line of business, we may face numerous risks and uncertainties, including risks associated with the following:
•the required investment of capital and other resources;
•the possibility that we have insufficient expertise to engage in such activities profitably or without incurring inappropriate amounts of risk
•the diversion of management’s attention from our core businesses;
•assumption of liabilities in any acquired business;
•the disruption of our ongoing business;
•the increasing demands on or issues related to the combination or integration of operational and management systems and controls;
•compliance with or applicability to our business or our portfolio companies of regulations and laws, including, in particular, local regulations and laws (for example, consumer protection related laws) and customs in the jurisdictions in which we operate and the impact that noncompliance or even perceived noncompliance could have on us and our portfolio companies;
•a potential increase in investor concentration; and
•the broadening of our geographic footprint, including the risks associated with conducting operations in certain jurisdictions where we currently have no presence.
Entry into certain lines of business may subject us to new laws and regulations with which we are not familiar or from which we are currently exempt, and may lead to increased liability, litigation, regulatory risk and expense. If a new business generates insufficient revenue or if we are unable to efficiently manage our expanded operations, our results of operations may be adversely affected.
Our strategic initiatives may include joint ventures, which may subject us to additional risks and uncertainties in that we may be dependent upon, and subject to liability, losses or reputational damage relating to, systems, controls and personnel that are not under our control. There can be no assurances that any joint venture opportunities will be successful.
We may enter new lines of business or acquire new businesses which may impact other business we may conduct or desire to conduct.
As we seek to enter new lines of business we may acquire a business that is complementary to our other lines of business then in existence. This may include the acquisition or establishment of a loan originator. Investors and counterparties in Our Fund may see a loan originator or other line of business as competitive to their relationship with Our Fund, which could have a material adverse impact on The Fund and our revenues. Certain lines of business, such as a loan originator, may require an internal firewall for compliance and data security, which creates the potential of a breach of such firewall and the subsequent liability which may result. There may be other unknown impacts any new line of business may have on an existing line of business, and we may not be able to mitigate those risks after entering into the such line of business.
Our use of leverage may expose us to substantial risks.
We intend to use indebtedness as a means to finance our 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 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 face various security threats on a regular basis, including ongoing 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 has been 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 investment management firm, we hold a significant amount of confidential and sensitive information about our investors, 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, investment advisory expertise, and business relationships of our key personnel are critical elements in operating and expanding our business. 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, in order to retain key personnel, we may be required to increase compensation to such individuals, resulting in additional expense.
We face intense competition in attracting investors and making investments.
The investment advisory industry is intensely competitive, and new participants are continually entering the industry. We compete directly with numerous global and U.S. investment advisors, commercial banks, savings and loan associations, brokerage and investment banking firms, broker-dealers, insurance companies, and other financial institutions that often provide investment products with similar features and objectives to those we offer or may offer. If we are unable to attract investors and retain net assets in the investment fund due to increased competition, our revenues could decline and we could experience a material adverse effect on our business, results of operations, and financial condition.
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 regularly 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
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.
Any disruption in the availability or functionality of our technology infrastructure and systems could have a material adverse effect on our business.
Our ability to make investments and acquire new businesses is critical to our success and is highly dependent upon the efficient and uninterrupted operation of our computer and communications hardware and software systems. Some of these systems are located at our facility and some are maintained by third-party vendors. Any significant interruption in the availability and functionality of these systems could harm our business. In the event of a systems failure or interruption by our third-party vendors, we will have limited ability to affect the timing and success of systems restoration. If such interruptions continue for a prolonged period of time, it could, have a material and adverse impact on our business, results of operations and financial condition. Our security measures may not effectively prohibit others from obtaining improper access to our information. If a person is able to circumvent our security measures, he or she could destroy or misappropriate valuable information or disrupt our operations. Any security breach could expose us to risks of data loss, litigation and liability and could seriously disrupt our operations and harm our reputation.
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.
RISKS RELATED TO INVESTMENT FUND MANAGEMENT
Our asset management business depends in large part on our ability to raise capital from third-party investors. If we are unable to raise capital from third-party investors, we would be unable to collect management fees or deploy their capital into investments and potentially collect carried interest, which would materially reduce our revenue and cash flow and adversely affect our financial condition.
Our ability to raise capital from third-party investors depends on a number of factors, including certain factors that are outside our control. Certain of these factors such as the performance of the stock market, the pace of distributions from our future fund (each fund managed by AAMC is referred to as "The Fund" or "Our Fund") and from the funds of other asset managers or the asset allocation rules or regulations or investment policies to which such third-party investors are subject, could inhibit or restrict the ability of third-party investors to make investments in The Fund. Third-party investors in private equity, real assets, and private credit funds typically use distributions from prior investments to meet future capital calls. In cases where valuations of existing investments fall, the investment pace is delayed and the pace of distributions slows, investors may be unable or unwilling to make new commitments or fund existing commitments to third-party management investment funds such as those advised by us. Although many investors have increased the amount of commitments they are making to alternative investment funds, there can be no assurance that this will lead to increased commitments to Our Fund. For example, there is a continuing shift away from defined benefit pension plans to defined contributions plans, which could reduce the amount of assets available for us to manage on behalf of certain of our clients. In addition, investors may downsize their investment allocations to alternative managers, including private funds and fund of funds vehicles, to rebalance a disproportionate weighting of their overall investment portfolio among asset classes. Investors may also seek to consolidate their investments with a smaller
number of investment managers or prefer to pursue investments directly instead of investing through Our Fund, each of which could impact the amount of allocations they make to Our Fund. Moreover, as some existing investors cease or significantly curtail making commitments to alternative investment funds, we may need to identify and attract new investors in order to maintain or increase the size of Our Funds. We are working to create avenues through which we expect to attract a new base of individual investors. There can be no assurances that we can find or secure commitments from those new investors. Our ability to raise new funds could similarly be hampered if the general appeal of alternative investments were to decline.
An investment in a credit or real estate fund is more illiquid and the returns on such investment may be more volatile than an investment in securities for which there is a more active and transparent market. Credit and real estate investments could fall into disfavor as a result of concerns about liquidity and short-term performance.
Poor performance of The Funds would cause a decline in our revenue, income and cash flow, may obligate us to repay carried interest previously paid to us, and could adversely affect our ability to raise capital for future investment funds.
In the event that our future investment funds were to perform poorly, our revenue, income and cash flow could decline. Investors could also demand lower fees or fee concessions for existing or future funds which would likewise decrease our revenue or require us to record an impairment of intangible assets and/or goodwill in the case of an acquired business
We also could experience losses on our investment of our own capital into Our Fund as a result of poor performance by The Fund. If, as a result of poor performance of later investments in a carry fund’s life, The Fund does not achieve certain investment returns for The Fund over its life, we will be obligated to repay the amount by which carried interest that was previously distributed to us exceeds the amount to which we are ultimately entitled. These repayment obligations may be related to amounts previously distributed to our senior management.
Poor performance of The Fund may also make it more difficult for us to raise new capital. Investors in Our Fund might decline to invest in future investment funds we raise. Investors and potential investors in Our Fund continually assess The Fund’s performance, and our ability to raise capital for existing and future investment funds will depend on Our Fund’s continued satisfactory performance. Accordingly, poor fund performance may deter future investment in Our Fund and thereby decrease the capital invested in Our Fund and ultimately, our management fee income.
Our investors may negotiate to pay us lower management fees and the economic terms of our future funds may be less favorable to us than those of our existing funds, which could adversely affect our revenues.
In connection with raising new funds or securing additional investments in our existing fund, we negotiate terms for such fund and investments with existing and potential investors. The outcome of such negotiations could result in our agreement to terms that are materially less favorable to us than currently anticipated or funds advised by our competitors. Such terms could restrict our ability to raise investment funds with investment objectives or strategies that compete with existing funds, reduce fee revenues we earn, reduce the percentage of profits on third-party capital that we share in or add expenses and obligations for us in managing The Fund or increase our potential liabilities, all of which could ultimately reduce our profitability. Additionally, a change in terms which increases the amount of fee revenue The Fund investors are entitled to could result in a significant decline in revenue generated from transaction fees.
Valuation methodologies for certain assets in Our Funds can involve subjective judgments, and the fair value of assets established pursuant to such methodologies may be incorrect, which could result in the misstatement of fund performance and accrued performance allocations.
There are often no readily ascertainable market prices for a substantial majority of illiquid investments of The Fund. We determine the fair value of the investments of The Fund at least quarterly based on the fair value guidelines set forth by generally accepted accounting principles in the United States (“U.S. GAAP”). The fair value measurement accounting guidance establishes a hierarchical disclosure framework that ranks the observability of market inputs used in measuring financial instruments at fair value. The observability of inputs is impacted by a number of factors, including the type of financial instrument, the characteristics specific to the financial instrument and the state of the marketplace, including the existence and transparency of transactions between market participants. Financial instruments with readily available quoted prices, or for which fair value can be measured from quoted prices in active markets, will generally have a higher degree of market price observability and a lesser degree of judgment applied in determining fair value.
Investments for which market prices are not observable include, but are not limited to illiquid investments in operating companies, real estate, energy ventures and structured vehicles, and encompass all components of the capital structure, including equity, mezzanine, debt, preferred equity and derivative instruments such as options and warrants. Fair values of such
investments are determined by reference to the market approach (i.e., multiplying a key performance metric of the investee company or asset, such as EBITDA, by a relevant valuation multiple observed in the range of comparable public entities or transactions, adjusted by management as appropriate for differences between the investment and the referenced comparables), the income approach (i.e., discounting projected future cash flows of the investee company or asset and/or capitalizing representative stabilized cash flows of the investee company or asset) and other methodologies such as prices provided by reputable dealers or pricing services, option pricing models and replacement costs.
The determination of fair value using these methodologies takes into consideration a range of factors including but not limited to the price at which the investment was acquired, the nature of the investment, local market conditions, the multiples of comparable securities, current and projected operating performance and financing transactions subsequent to the acquisition of the investment. These valuation methodologies involve a significant degree of management judgment.
Because there is significant uncertainty in the valuation of, or in the stability of the value of, illiquid investments, the fair values of such investments as reflected in an investment fund’s net asset value do not necessarily reflect the prices that would be obtained by us on behalf of the investment fund when such investments are realized. Realizations at values significantly lower than the values at which investments had been reflected in prior fund net asset values would result in reduced earnings or losses for the applicable fund, and potentially the loss of carried interest and incentive fees. Changes in values attributed to investments from quarter to quarter may result in volatility in the net asset values and results of operations that we report from period to period. Also, a situation where asset values turn out to be materially different than values reflected in prior fund net asset values could cause investors to lose confidence in us, which could in turn result in difficulty in raising additional funds.
Dependence on significant leverage in investments by Our Fund could adversely affect our ability to achieve attractive rates of return on those investments.
Our Fund and new lines of business may rely heavily on the use of leverage, and our ability to achieve attractive rates of return on investments will depend on our ability to access sufficient sources of indebtedness at attractive rates. The absence of available sources of sufficient debt financing for extended periods of time could therefore materially and adversely affect The Fund and new businesses.
An increase in either the general levels of interest rates or in the risk spread demanded by sources of indebtedness would make it more expensive to finance investments in Our Fund and new business, thereby reducing returns. Increases in interest rates could also make it more difficult to locate and consummate investments because other potential buyers, including companies already operating as strategic buyers, may be able to bid for an asset at a higher price due to a lower overall cost of capital or their ability to benefit from a higher amount of cost savings following the acquisition of the asset. In addition, a portion of the indebtedness used to finance credit fund and real estate investments often includes debt securities issued in the public capital markets and debt instruments privately placed with institutional investors in the private capital markets. Availability of capital from the public and private debt markets is subject to significant volatility, and there may be times when we might not be able to access those markets at attractive rates, or at all, when completing an investment. Certain investments may also be financed through borrowings on fund-level debt facilities, which may or may not be available for a refinancing at the end of their respective terms. Additionally, to the extent there is a reduction in the availability of financing for extended periods of time, the purchasing power of a prospective buyer may be more limited, adversely impacting the fair value of Our Fund’s investments and thereby reducing the disposition price. Finally, the interest payments on the indebtedness used to finance Our Fund’s investments have historically been deductible expenses for income tax purposes, subject to limitations under applicable tax law and policy. The availability of interest deductions for U.S. federal income tax purposes, however, is limited under rules imposed by the TCJA which apply complex limitations on the deductibility of net business interest expense over 30% of a taxpayer’s taxable income of such business (with adjustments for certain interest and taxes, and for taxable years before 2022, depreciation and amortization). The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law on March 27, 2020 and is part of U.S. legislation intended to address the impact of the COVID-19 pandemic. The CARES Act includes provisions that modify the limitation on business interest rules imposed by the TCJA for tax years beginning in 2019 and 2020, increasing the limitation from 30% to 50% and providing special rules for partnerships to temporarily increase business interest deductibility.
The due diligence process that we undertake in connection with investments by The Funds may not reveal all facts that may be relevant in connection with an investment.
Before making investments in Our Fund or acquiring a new business or operating company, we conduct due diligence that we deem reasonable and appropriate based on the known facts and circumstances applicable to each investment or acquisition. The objective of the due diligence process is to identify attractive investment opportunities based on the known facts and circumstances and initial risk assessment surrounding an investment or acquisition and, depending on our ownership or control,
prepare a framework that may be used from the date of an acquisition to drive operational achievement and value creation. When conducting due diligence, we may be required to evaluate important and complex business, financial, regulatory, tax, accounting, environmental (including climate change) and legal issues. Outside consultants, legal advisors, accountants and investment banks may be involved in the due diligence process in varying degrees depending on the type of investment or acquisition. Nevertheless, when conducting due diligence and making an assessment regarding an investment, we rely on the resources available to us, including information provided by the target of the investment and, in some circumstances, third-party investigations and analysis. The due diligence process may at times be subjective with respect to newly-organized companies for which only limited information is available. Accordingly, we cannot be certain that the due diligence investigation that we carry out with respect to any investment opportunity will reveal or highlight all relevant facts that may be necessary or helpful in evaluating such opportunity. The due diligence process in connection with carve-out transactions may underestimate the complexity and/or level of dependence a business has on its parent company and affiliated entities. Because a carve-out business often does not have financial statements that accurately reflect its true financial performance as a stand-alone business, due diligence assessments of such investments can be particularly difficult.
In addition, investment opportunities may arise in companies that have historic and/or unresolved regulatory, tax, fraud or accounting related investigations, audits or inquiries and/or have been subjected to public accusations of improper behavior. However, even heightened and specific due diligence and investigations with respect to such matters may not reveal or highlight all relevant facts that may be necessary or helpful in evaluating such investment opportunity and/or will be able to accurately identify, assess and quantify settlements, enforcement actions and judgments that may arise and which could have a material adverse effect on the portfolio company’s business, financial condition and operations, as well as potential significant harm to the portfolio company’s reputation and prospects. We cannot be certain that our due diligence investigations will result in investments being successful or that the actual financial performance of an investment will not fall short of the financial projections we used when evaluating that investment. Failure to identify risks associated with our investments could have a material adverse effect on our business.
In addition, the global outbreak of COVID-19 may impact our ability to conduct due diligence on investment opportunities in the normal manner. More specifically, during fiscal 2020, travel restrictions negatively affected our ability to have in person meetings with potential target company personnel, customers, vendors and other service providers and such restrictions are likely to continue during fiscal 2021. Similarly, lower business confidence and generally higher levels of uncertainty as a result of the COVID-19 outbreak has made it more difficult to assess target company valuations and delayed our ability to complete due diligence on attractive businesses or assets that we identify, and may continue to do so in the future.
Third-party investors in Our Fund with commitment-based structures may not satisfy their contractual obligation to fund capital calls when requested by us, which could adversely affect a fund’s operations and performance.
Investors in Our Fund make capital commitments that we are entitled to call from those investors at any time during prescribed periods. We will depend on investors fulfilling their commitments when we call capital from them in order for those funds to consummate investments and otherwise pay their obligations (for example, management fees) when due. Any investor that did not fund a capital call would generally be subject to several possible penalties, including having a significant amount of its existing investment forfeited in The Fund. However, the impact of the penalty is directly correlated to the amount of capital previously invested by the investor in The Fund and if an investor has invested little or no capital, for instance early in the life of The Fund, then the forfeiture penalty may not be as meaningful. Investors may also negotiate for lesser or reduced penalties at the outset of The Fund, thereby inhibiting our ability to enforce the funding of a capital call. Our use of subscription lines of credit to purchase an investment prior to calling capital from fund investors could increase the prevalence of defaulting limited partners. Should the value of an investment funded through a fund line-of-credit decline, especially early in a fund’s life-cycle where minimal capital has been contributed by The Fund’s investors, a limited partner may decide not to fund its commitment. In addition, third-party investors in credit funds and real estate assets typically use distributions from prior investments to meet future capital calls. In cases where valuations of investors’ existing investments fall and the pace of distributions slows, investors may be unable to make new commitments to third-party managed investment funds such as Our Fund. If investors were to fail to satisfy a significant amount of capital calls for our fund, the operation and performance of The Fund could be materially and adversely affected.
In addition, our failure to comply with applicable pay-to-play laws, regulations and/or policies adopted by a number of states and municipal pension funds as well as the New York Attorney General’s Public Pension Fund Reform Code of Conduct, may, in certain instances, excuse a public pension fund investor from its obligation to make further capital contributions relating to all or any part of an investment or allow it to withdraw from The Fund. If a public pension fund investor were to seek to be excused from funding a significant amount of capital calls for Our Fund, the operation and performance of The Fund could be materially and adversely affected.
Certain of Our Fund investments may be concentrated in particular asset types or geographic regions, which could exacerbate any negative performance of those funds to the extent those concentrated investments perform poorly.
The governing agreements of Our Fund contain only limited investment restrictions and only limited requirements as to diversification of fund investments, either by geographic region or asset type. For example, Our Fund invests primarily in real estate related assets, and if we expand Our Fund offerings, they may have a real estate focus. During periods of difficult market conditions, slowdowns, or increased borrower defaults in any particular sector or geographic region, decreased revenue, difficulty in obtaining access to financing and increased funding costs experienced by Our Fund or future funds may be exacerbated by this concentration of investments, which would result in lower investment returns for Our Funds. Such concentration may increase the risk that events affecting a specific geographic region or asset type will have an adverse or disparate impact on such investment funds, as compared to funds that invest more broadly. Idiosyncratic factors impacting specific companies or securities can materially affect fund performance depending on the size of the position.
We and Our Funds are subject to risks in using administrators and other agents and third-party service providers.
Our Fund depends on the services of administrators and other agents and third-party service providers to carry out certain securities transactions and other business functions. The counterparty to one or more of our or Our Funds’ contractual arrangements could default on its obligations under the contract. If a counterparty defaults, we and Our Fund may be unable to take action to cover the exposure and we or our fund could incur material losses. Among other systems, our data security, data privacy, investor reporting and business continuity processes could be impacted by a third party’s inability or unwillingness to perform pursuant to our arrangements with them. In addition, we could suffer legal and reputational damage from such failure to perform if we are then unable to satisfy our obligations under our contracts with third parties or otherwise and could suffer losses in the event we are unable to comply with certain other agreements. The consolidation and elimination of counterparties may increase our concentration of counterparty risk and decrease the number of potential counterparties. Our Fund is generally not restricted from dealing with any particular counterparty or from concentrating any or all of their transactions with one counterparty. In the event of the insolvency of a party that is holding our assets or those of Our Fund as collateral, we and Our Fund may not be able to recover equivalent assets in full as we and Our Fund may rank among the counterparty’s unsecured creditors. In addition, our and Our Fund’s cash held with a prime broker, custodian or counterparty may not be segregated from the prime broker’s, custodian’s or counterparty’s own cash, and we and Our Fund therefore may rank as unsecured creditors in relation thereto. The inability to recover our or Our Fund’s assets could have a material impact on us or on the performance of Our Fund.
We may depend on third-party investment professionals and the distribution channels they utilize to market the investment fund.
A potential source of distribution for Our Fund is through intermediaries that include national, regional, and independent broker-dealers, financial planners, and registered investment advisors. Our success may be highly dependent on access to these various distribution channels. We cannot guarantee we will be able to obtain access to these channels at competitive pricing or at all. Increasing competition for these distribution channels could cause our distribution costs to rise, which could have a material adverse effect on our net income. Our lack of access to these distribution channels which could have a material adverse effect on our business.
In addition, these intermediaries generally offer their customers a broad array of investment products that are in addition to, and may compete with, Our Fund. The intermediaries or their customers may favor competing investment products over Our Fund, which could have a material adverse effect on our business.
SPECIFC RISKS RELATING TO US
Holders of our Series A Convertible Preferred Stock (“Series A Shares”) have given us purported notices under the Certificate of Designations of the Series A Shares (the “Certificate”) to redeem an aggregate of $250.0 million liquidation preference of our Series A Shares on March 15, 2020. If we are unable to obtain declaratory relief to confirm that we have no obligation to redeem the Series A Shares because we do not have funds legally available therefor, we may be required to pay damages or redeem a portion of the Series A Shares, which 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 do 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. 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 have a limited operating history. Due to the Termination Agreement and its potential effects on us, if we are unable to timely develop and implement new businesses as planned, we will be materially and adversely affected.
We commenced operations in 2012, and our business model has been relatively untested and evolving. Businesses like ours that have a limited operating history and a limited client base present substantial business and financial risks and may suffer significant losses. As a result, we cannot predict our results of operations, financial condition and cash flows. Our results for prior periods are not necessarily indicative of our results for any future period, and we may not have sufficient additional capital or develop additional revenue streams to implement our business model. Because we have utilized the substantial majority of our resources in the management of Front Yard, as our primary client, we have been unable to develop and implement significant new or alternative business revenue streams. There can be no assurance that our business will be profitable or that, to the extent that new business are implemented, they will be sustainable. The earnings potential of our proposed businesses is unproven, and the absence of an operating history, particularly in any new businesses, makes it difficult to evaluate our prospects.
We may not be able to obtain or develop additional clients or new business on acceptable terms or at all. Our ability to attract, develop and/or maintain additional clients may depend, in large part, on market conditions, key personnel, and other outside factors.
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.
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.
Concentration of 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, 2020, substantially all of our cash and cash equivalent balances held at financial institutions exceeded FDIC insured limits. Any event that would cause a material portion of our cash and cash equivalents at financial institutions to be uninsured by the FDIC could have a material adverse effect on our financial condition and results of operations.
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 asset management service providers 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.
Risks to Us Related to Front Yard’s Business Risks and Operating Performance
We obtained releases from and granted releases to Front Yard related to our prior operations of their business as more specifically described in the Termination Agreement. However, our performance under the Termination Agreement was subject to numerous complex terms and conditions. We believe we materially complied with the terms of the Termination Agreement and satisfied our obligations under the Termination Agreement, but it is possible that Front Yard may claim a breach of our obligations due to an unknown act or omission by us or our directors, officer, or employees. Additionally, we granted to Front Yard releases for its acts and omission preceding the Termination Agreement. In the event we discover a loss or liability for which we are unable to recover against Front yard due to these releases our revenues and assets could be adversely affected. It is also possible that a third party may make a claim against us for the acts or omissions of Front Yard, but our releases of Front Yard may prevent us from seeking recourse from Front Yard for such liability.