SHAREHOLDERS’ EQUITY AND SHARE-BASED COMPENSATION

Common Stock

At December 31, 2018, we had 100 million shares authorized, 25.4 million shares issued and 16.3 million shares of common stock outstanding. At December 31, 2017, we had 100.0 million shares authorized, 25.4 million shares issued and 17.4 million shares of common stock outstanding. The holders of shares of Altisource common stock generally are entitled to one vote for each share on all matters voted on by shareholders, and the holders of such shares generally will possess all voting power.

Equity Incentive Plan

Our 2009 Equity Incentive Plan (the “Plan”) provides for various types of equity awards, including stock options, stock appreciation rights, stock purchase rights, restricted shares, restricted share units and other awards, or a combination of any of the above. Under the Plan, we may grant up to 6.7 million Altisource share-based awards to officers, directors, employees and to employees of our affiliates. As of December 31, 2018, 1.2 million share-based awards were available for future grant under the Plan. Expired and forfeited awards are available for reissuance.

Share Repurchase Program

On May 15, 2018, our shareholders approved the renewal and replacement of the share repurchase program previously approved by the shareholders on May 17, 2017. Under the program, we are authorized to purchase up to 4.3 million shares of our common stock, based on a limit of 25% of the outstanding shares of common stock on the date of approval, at a minimum price of $1.00 per share and a maximum price of $500.00 per share, for a period of five years from the date of approval. As of December 31, 2018, approximately 3.4 million shares of common stock remain available for repurchase under the program. We purchased 1.6 million shares of common stock at an average price of $25.53 per share during the year ended December 31, 2018, 1.6 million shares at an average price of $23.84 per share during the year ended December 31, 2017 and 1.4 million shares at an average price of $26.81 per share during the year ended December 31, 2016. Luxembourg law limits share repurchases to the balance of Altisource Portfolio Solutions S.A. (unconsolidated parent company) retained earnings, less the value of shares repurchased. As of December 31, 2018, we can repurchase up to approximately $139 million of our common stock under Luxembourg law. Our Credit Agreement also limits the amount we can spend on share repurchases, which was approximately $489 million as of December 31, 2018, and may prevent repurchases in certain circumstances.

Share-Based Compensation

We issue share-based awards in the form of stock options, restricted shares and restricted share units for certain employees, officers and directors. We recognized share-based compensation expense of $10.2 million, $4.3 million and $6.2 million for the years ended December 31, 2018, 2017 and 2016, respectively. As of December 31, 2018, estimated unrecognized compensation costs related to share-based awards amounted to $11.8 million, which we expect to recognize over a weighted average remaining requisite service period of approximately 1.90 years.

In connection with the January 1, 2017 adoption of ASU No. 2016-09 (see Note 2), the Company made an accounting policy election to account for forfeitures in compensation expense as they occur, rather than continuing to apply the Company’s previous policy of estimating forfeitures. Prior to this accounting change, share-based compensation expense for stock options and restricted shares was recorded net of estimated forfeiture rates ranging from 0% to 40%. This policy election resulted in a cumulative effect adjustment of $0.9 million to retained earnings and additional paid-in capital as of January 1, 2017 using the modified retrospective transition method.

Stock Options

Stock option grants are composed of a combination of service-based, market-based and performance-based options.

Service-Based Options. These options generally vest over three or four years with equal annual vesting and expire on the earlier of ten years after the date of grant or following termination of service. A total of 500 thousand service-based awards were outstanding as of December 31, 2018.

Market-Based Options. These option grants generally have two components, each of which vests only upon the achievement of certain criteria. The first component, which we refer to as “ordinary performance” grants, generally consists of two-thirds of the market-based grant and begins to vest if the stock price is at least double the exercise price, as long as the stock price realizes a compounded annual gain of at least 20% over the exercise price. The remaining third of the market-based options, which we refer to as “extraordinary performance” grants, generally begins to vest if the stock price is at least triple the exercise price, as long as the stock price realizes a compounded annual gain of at least 25% over the exercise price. Market-based awards vest in three or four year installments with the first installment vesting upon the achievement of the criteria and the remaining installments vesting thereafter in equal annual installments. Market-based options generally expire on the earlier of ten years after the date of grant or following termination of service, unless the performance criteria is met prior to termination of service or in the final three years of the option term, in which case vesting will generally continue in accordance with the provisions of the award agreement. A total of 662 thousand market-based awards were outstanding as of December 31, 2018.

Performance-Based Options. These option grants generally begin to vest upon the achievement of certain specific financial measures. Generally, the awards begin vesting if the performance criteria are achieved; one-fourth vest on each anniversary of the grant date. For certain other financial measures, awards cliff-vest upon the achievement of the specific performance during the period from 2018 through 2021. The award of performance-based options is adjusted based on the level of achievement specified in the award agreements. If the performance criteria achieved is above threshold performance levels, participants have the opportunity to vest in 50% to 200% of the option grants, depending upon performance achieved. If the performance criteria achieved is below a certain threshold, the award is canceled. The options expire on the earlier of ten years after the date of grant or following termination of service. There were 279 thousand performance-based awards outstanding as of December 31, 2018.

The Company granted 277 thousand stock options (at a weighted average exercise price of $25.15 per share), 244 thousand stock options (at a weighted average exercise price of $33.28 per share) and 145 thousand stock options (at a weighted average exercise price of $29.17 per share) during the years ended December 31, 2018, 2017 and 2016, respectively.

The fair values of the service-based options and performance-based options were determined using the Black-Scholes option pricing model and the fair values of the market-based options were determined using a lattice (binomial) model. The following assumptions were used to determine the fair values as of the grant date:

2018

2017

2016

Black-Scholes

Binomial

Black-Scholes

Binomial

Black-Scholes

Binomial

Risk-free interest rate (%)

2.66 – 3.10

1.64 – 3.22

1.89 – 2.29

0.77 – 2.38

1.25 – 1.89

0.23 – 2.23

Expected stock price volatility (%)

70.31 – 71.86

71.36 – 71.86

61.49 – 71.52

66.68 – 71.52

59.75 – 62.14

59.76 – 62.14

Expected dividend yield

—

Expected option life (in years)

6.00 – 6.25

2.56 – 4.33

6.00 – 7.50

2.55 – 4.82

6.00 – 6.25

4.06 – 4.88

Fair value

$16.17 – $19.68

$14.67 – $20.26

$13.57 – $24.80

$11.94 – $24.30

$11.15 – $18.60

$11.06 – $19.27

We determined the expected option life of all service-based stock option grants using the simplified method. We use the simplified method because we believe that our historical data does not provide a reasonable basis upon which to estimate expected option life.

The following table summarizes the weighted average grant date fair value of stock options granted per share, the total intrinsic value of stock options exercised and the grant date fair value of stock options that vested during the years ended December 31:



(in thousands, except per share amounts)	2018		2017		2016

Weighted average grant date fair value of stock options granted per share	$	16.31	$	20.44	$	16.82
Intrinsic value of stock options exercised	4,609		3,028		18,209
Grant date fair value of stock options that vested	1,760		2,279		2,698

The following table summarizes the activity related to our stock options:



	Number of options		Weighted average exercise price		Weighted average contractual term (in years)	Aggregate intrinsic value (in thousands)

Outstanding at December 31, 2017	1,745,906		$	28.20	4.96	$	10,202
Granted	276,876		25.15
Exercised	(330,537	)	11.33
Forfeited	(251,679	)	32.21

Outstanding at December 31, 2018	1,440,566		30.78		5.04	945

Exercisable at December 31, 2018	874,304		27.42		3.20	902

In 2018, the Company modified the performance thresholds that are required to be met in order for vesting to occur for 263 thousand stock options granted to 16 employees during the year ended December 31, 2018. The award modification did not change the inputs into the valuation model or the Company’s assessment of the probability of vesting as of the effective date of the modifications. Consequently, no incremental compensation expense was required as a result of this modification.

The following table summarizes information about stock options outstanding and exercisable at December 31, 2018:



	Options outstanding				Options exercisable
Exercise price range ⁽¹⁾	Number	Weighted average remaining contractual life (in years)	Weighted average exercise price		Number	Weighted average remaining contractual life (in years)	Weighted average exercise price

$10.01 — $20.00	212,667	6.06	$	18.79	203,344	6.05	$	18.79
$20.01 — $30.00	925,563	4.79	24.60		537,607	2.07	23.81
$30.01 — $40.00	132,586	6.20	34.63		54,478	3.54	32.82
$60.01 — $70.00	71,000	3.19	60.73		51,375	3.19	60.74
$70.01 — $80.00	25,000	4.51	72.78		6,250	0.45	72.78
$80.01 — $90.00	25,000	5.60	86.69		6,250	5.60	86.69
$90.01 — $100.00	46,875	5.00	95.64		13,125	4.51	95.59
$100.01 — $110.00	1,875	0.45	105.11		1,875	0.45	105.11

	1,440,566				874,304

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⁽¹⁾	These options contain market-based and performance-based components as described above.

The following table summarizes the market prices necessary in order for the market-based options to begin to vest:



	Market-based options
Vesting price	Ordinary performance		Extraordinary performance

$40.01 — $50.00	6,400		—
$50.01 — $60.00	60,164		9,323
$60.01 — $70.00	16,648		6,325
$70.01 — $80.00	—		11,500
$80.01 — $90.00	—		19,080
$90.01 — $100.00	—		8,325
$140.01 — $150.00	12,500		—
$170.01 — $180.00	12,500		—
$180.01 — $190.00	7,500		19,625
Over $190.00	15,000		23,750

Total	130,712		97,928

Weighted average share price	$	49.46	$	47.79

Other Share-Based Awards

The Company’s other share-based and similar types of awards are composed of restricted shares and, beginning in 2018, restricted share units. The restricted shares and restricted share units are composed of a combination of service-based awards and performance-based awards.

Service-Based Awards. These awards generally vest over one to four years with (a) vesting in equal annual installments, (b) vesting of all of the restricted shares and restricted share units at the end of the vesting period or (c) vesting beginning after two years of service. A total of 482 thousand service-based awards were outstanding as of December 31, 2018.

Performance-Based Awards. These awards generally begin to vest upon the achievement of certain specific financial measures. Generally, the awards begin vesting if the performance criteria are achieved; one-third vest on each anniversary of the grant date. The number of performance-based restricted shares that may vest will be based on the level of achievement, as specified in the award agreements. If the performance criteria achieved is above threshold performance levels, participants have the opportunity to vest in 80% to 150% of the restricted share award, depending on performance achieved. If the performance criteria achieved is below a certain threshold, the award is canceled. A total of four thousand performance-based awards were outstanding as of December 31, 2018.

The Company granted 376 thousand restricted shares and restricted share units (at a weighted average grant date fair value of $21.57 per share) during the year ended December 31, 2018.

The following table summarizes the activity related to our restricted shares and restricted share units:



	Number of restricted shares and restricted share units

Outstanding at December 31, 2017	356,509
Granted	375,524
Issued	(111,565	)
Forfeited/canceled	(134,662	)

Outstanding at December 31, 2018	485,806

In 2018, the Company modified the vesting condition to remove the requirement that a certain employee be employed by the Company in order for the restricted shares to vest for 31 thousand restricted shares granted in the fourth quarter of 2017 and the first quarter of 2018. The award modification did not change the inputs into the valuation model or the Company’s assessment of the probability of vesting as of the effective date of the modifications. Consequently, no incremental compensation expense was required as a result of this modification.