UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/10-Q/A
Amendment #1# 1
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2014March 31, 2017
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period fromto
Commission file number: 001-35637
ASTA FUNDING, INC.
(Exact name of registrant as specified in its charter)
Delaware | ||
22-3388607 | ||
(State or other jurisdiction incorporation or organization) | (IRS Employer
| |
210 Sylvan Ave., Englewood Cliffs, New Jersey | 07632 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number: (201) 567-5648
Former name, former address and former fiscal year, if changed since last report: N/A
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨☐ No x☒
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨☐ No x☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ☐ | Accelerated filer | ☒ | |||
Non-accelerated filer | ☐ (Do not check if a smaller reporting company) | Smaller reporting company | ☐ | |||
Emerging growth company | ☐ | |||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨☐ No x☒
As of June 20, 2015,September 14, 2018, the registrant had 13,060,8396,685,415 common shares outstanding.
EXPLANATORY NOTE
We are
As previously disclosed in the Current Report on Form 8-K filed by Asta Funding, Inc. (“Asta” or the “Company”) with the Securities and Exchange Commission (the “SEC”) on January 18, 2018, the Board of Directors (the “Board”) of the Company, upon the recommendation of the Audit Committee of the Board (the “Audit Committee”), determined that the Company’s previously issued financial statements for each of the years ended September 30, 2016, 2015 and 2014, and the interim periods contained therein, as well as the Company’s unaudited consolidated financial statements for the quarters ended December 31, 2016, March 31, 2017 and June 30, 2017, could no longer be relied upon.
On September 17, 2018, the Company filed an Annual Report on Form 10-K/A to amend and restate the Company’s previously issued financial statements for each of the years ended September 30, 2016, 2015 and 2014, as well as the interim periods contained therein (the “Form 10-K/A”), and a Quarterly Report on Form 10-Q/A to amend and restate the Company's previously issued financial statements for the quarter ended December 31, 2016. The Company is filing this Amendment No. 1 on Form 10-Q/A (this “Amendment”) to reviseamend and restate the following items of ourCompany’s previously issued financial statements contained in its Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 (the “Non-Reliance Period”), which was originally filed with the SEC on May 26, 2017 (the “Original Form 10-Q”). The Company expects to file, at a later time, an amendment to its Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 as originally filed2017.
Prior period amounts have already been restated in the Company's Form 10-K/A and, accordingly have not been restated in this Amendment.
Restatement Background
On January 11, 2018, after discussions with the SecuritiesAudit Committee, management re-evaluated the Company's historical conclusion to consolidate Pegasus Funding, LLC (“Pegasus”). Management has determined that the Company lacked the requisite control to consolidate Pegasus in its historical periods in accordance with Accounting Standards Codification (“ASC”) 810 “Consolidation.” Management also determined that the Company's previous treatment for certain foreign currency matters under ASC 830 “Foreign Currency Matters” was not appropriate. As such, the Company has subsequently revised its investment in Pegasus to the equity method, including the underlying reserve methodology; and Exchange Commission on August 18, 2014 (the “Original Form 10-Q”):has adjusted its financial statements to reflect the proper accounting for certain foreign currency transactions. Additionally, the Company corrected the financial statements for additional known errors consisting of (i) Itemthe adjustment of various accruals, (ii) the fair value of structured settlements, (iii) accounting for unallocated payments, and (iv) the tax effects of the adjustments mentioned above.
The following errors were identified as part of the restatement. See Note 1 of Part I “Financial Information,” (ii) Item 2 of Part I, “Management’s Discussion and Analysis– Restatement of Financial ConditionStatements in the Company’s notes to consolidated financial statements for further details.
1. In connection with the Company determining it lacked the requisite control to consolidate Pegasus during the Non-Reliance Period, the Company has now accounted for its investment in Pegasus under the equity method in accordance with accounting principle generally accepted in the United States (“US GAAP”).
2. The Company determined that it had not previously accounted for certain foreign currency gains/losses on intercompany balances and Resultstransactions in accordance with US GAAP. The Company improperly accounted for the foreign currency effect of Operations,” (iii) Item 4certain transactions as if they were long-term investments by including the foreign currency effect in accumulated other comprehensive income instead of Part I, “Controlsproperly recording the effect as operating expenses as required under ASC 830.
3. Prior to the sale of its structured settlement business, the Company purchased periodic payments under structured settlements and Procedures,”annuity policies from individuals in exchange for a lump sum payment. The Company did not reflect the quarterly increase in certain underlying benchmark interest rates used in determining fair value of the Company's structured settelements. The Company has elected to carry the structured settlements at fair value in accordance with the guidance of FASB ASC, Recognition and (iv) Item 6Measurement of Part II, “Exhibits”,Financial Assets and we have also updatedFinancial Liabilities (ASC 822-10-50-28 through 50-22).
4. The Company determined that it had not accounted for certain unallocated payments reported on its consolidated balance sheet properly.
5. The Company discovered that it did not properly record an amortizable asset and related liability in conjunction with an asset purchase agreement entered into in June 2015 with a related party.
6. The Company identified other transactions that had not been properly accounted for in the signature page,correct period and/or for improper amounts and/or improper accounts.
7. The Company identified the certificationspersonal injury claims asset balance of Pegasus was determined to be overstated.
8. Some of the corrections noted above impacted earnings (loss) before taxes which, in turn, required a calculation of the tax impact.
Internal Control and Disclosure Controls Considerations
In connection with this restatement, our Chief Executive Officer and Chief Financial Officer determined that there were deficiencies in Exhibits 31.1, 31.2, 32.1the Company's internal control over financial reporting that constituted material weaknesses at March 31, 2017. Accordingly, our Chief Executive Officer and 32.2,Chief Financial Officer have concluded that our disclosure controls and our financial statements formattedprocedures were not effective at March 31, 2017, as discussed in Extensible Business Reporting Language (XBRL)Item 4 of this Amendment.
Items Amended in Exhibit 101. No other sections were affected, but forThis Amendment
For the convenience of the reader, this report onAmendment sets forth the Original Form 10-Q/A restates10-Q in its entirety, as modified and adjusted to reflect the restatement described above. In addition to such changes, this Amendment also includes: (i) revisions in presentation for the discontinued operations of the Company’s structured settlement business, which was sold on December 13, 2017; and (ii) updates to the Company’s subsequent events disclosure included in Note 20 to the Consolidated Financial Statements. (collectively with (i) above, the “Subsequent Events”).
In accordance with applicable SEC rules, this Amendment also includes new certifications required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, as amended, from our Original Form 10-Q. This report on Form 10-Q/A is presentedChief Executive Officer and Chief Financial Officer, dated as of the filing date of this Amendment. Aside from the foregoing items, this Amendment has not modified the Original Form 10-Q other than to correct immaterial items and except where otherwise noted, doescertain errors in the exhibit index, and the disclosures contained in this Amendment have not been updated to reflect events occurring after thatsubsequent to the date or modify or update disclosures in any way other than as required to reflect the revision and restatement described below. We previously reported finance income for certain portfolios of consumer receivables acquired for liquidation using the interest method (“interest method portfolios”) in accordance with the guidance of FASB Accounting Standards Codification (“ASC”), Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality (ASC 310-30) We subsequently concluded that it is more appropriate to recognize finance income on these portfolios using the cost recovery method in accordance with ASC 310-30, and to reflect the change in accounting method in results of operations for the quarter ended December 31, 2013. The effect on the restated results of operations for the quarterly period ended June 30, 2014, was a reduction of pre-tax income of $1.3 million with an associated tax benefit of $0.5 million which resulted in net income attributable to Asta Funding, Inc. of $4.7 million or $0.35 per share (diluted) from $5.5 million or $0.41 per share (diluted). The effect on the quarterly period ended June 30, 2013 was a reduction of pre-tax income of $1.1 million, with an associated tax benefit of $0.4 million which resulted in net loss attributable to Asta Funding, Inc. of $3.4 million or $0.26 loss per share from $2.7 million or $0.21 loss per share. The effect on the nine month period ended June 30, 2014 was a reduction of pretax income of $5.5 million with an associated tax benefit of $1.9 million which resulted in net income attributable to Asta Funding, Inc. of $5.7 million or $0.43 per share (diluted) from $9.3 million or $0.70 per share (diluted). The effect on the comparable nine month period ended June 30, 2013 was not material. In addition, we identified certain pre-tax misstatements in prior periods related to our accounting for interest method portfolios accounted for under ASC 310-30. The misstatement resulted in an increase in the carrying value of interest method portfolios of approximately $6.4 million, with an associated decrease in deferred tax assets of approximately $2.7 million as of September 30, 2013. The impact of the misstatement in prior years’ financial statements was not material to any of those years, however, the cumulative effect of correcting all of the prior period misstatements in the current year would be material to our current year consolidated financial statements. As such, we have accounted for the cumulative effect of this misstatementOriginal Form 10-Q, May 26, 2017, except as an adjustmentnoted above with respect to the beginning balanceSubsequent Events.
● | Part I – Item 1. Financial Information. | |
● | Part I – Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. | |
| ● | Part I – Item 3. Quantitative and Qualitative Disclosures About Market Risk | |
● | Part I – Item 4. Controls and Procedures. | |
| ● | Part II – Item 1A. Risk Factors | |
| ● | Part II – Item 6. Exhibits |
ASTA FUNDING, INC. AND SUBSIDIARIES
5 | ||||
Item 1. | 5 | |||
5 | ||||
6 | ||||
7 | ||||
8 | ||||
9 | ||||
Notes to | 10 | |||
45 | ||||
Item 3. Quantitative and Qualitative Disclosures about Market Risk (restated) | 56 | |||
56 | ||||
59 | ||||
59 | ||||
59 | ||||
Item | 59 | |||
59 | ||||
59 | ||||
59 | ||||
60 | ||||
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ASTA FUNDING, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)(rounded to the nearest thousands, except share data)
| June 30, 2014 (As Restated)(1) | September 30, 2013 (As Revised)(1) | |||||||
ASSETS | ||||||||
Cash and cash equivalents | $ | 26,017,000 | $ | 35,179,000 | ||||
Available for sale investments | 70,205,000 | 58,035,000 | ||||||
Restricted cash | — | 968,000 | ||||||
Consumer receivables acquired for liquidation (at net realizable value) | 32,414,000 | 64,254,000 | ||||||
Structured settlements | 35,892,000 | — | ||||||
Investment in personal injury claims | 31,733,000 | 35,758,000 | ||||||
Due from third party collection agencies and attorneys | 1,138,000 | 1,169,000 | ||||||
Prepaid and income taxes receivable | — | 1,496,000 | ||||||
Furniture and equipment, net | 656,000 | 1,106,000 | ||||||
Deferred income taxes | 8,091,000 | 7,772,000 | ||||||
Goodwill | 2,770,000 | 1,410,000 | ||||||
Other assets | 4,990,000 | 4,383,000 | ||||||
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Total assets | $ | 213,906,000 | $ | 211,530,000 | ||||
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LIABILITIES | ||||||||
Non-recourse debt – Bank of Montreal | $ | — | $ | 35,760,000 | ||||
Other debt – CBC (including non-recourse notes payable amounting to $13.0 million at June 30, 2014) | 27,434,000 | — | ||||||
Other liabilities | 2,723,000 | 2,486,000 | ||||||
Income taxes payable | 3,084,000 | — | ||||||
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Total liabilities | 33,241,000 | 38,246,000 | ||||||
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Commitments and contingencies | ||||||||
STOCKHOLDERS’ EQUITY | ||||||||
Preferred stock, $.01 par value; authorized 5,000,000 shares; issued and outstanding – none | — | — | ||||||
Common stock, $.01 par value; authorized 30,000,000 shares; issued – 12,985,739 at June 30, 2014 and 14,917,977 at September 30, 2013; and outstanding 12,985,739 at June 30, 2014 and 12,974,239 at September 30, 2013 | 130,000 | 149,000 | ||||||
Additional paid-in capital | 62,648,000 | 79,104,000 | ||||||
Retained earnings | 118,403,000 | 112,694,000 | ||||||
Accumulated other comprehensive income (loss) | 22,000 | (674,000 | ) | |||||
Treasury stock (at cost), 0 shares at June 30, 2014 and 1,943,738 shares at September 30, 2013 | — | (17,805,000 | ) | |||||
Non-controlling interest | (538,000 | ) | (184,000 | ) | ||||
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Total stockholders’ equity | 180,665,000 | 173,284,000 | ||||||
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Total liabilities and stockholders’ equity | $ | 213,906,000 | $ | 211,530,000 | ||||
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(Unaudited) | ||||||||
March 31, | September 30, | |||||||
ASSETS | ||||||||
Cash and cash equivalents | $ | 8,545,000 | $ | 6,282,000 | ||||
Restricted cash | 9,565,000 | 10,000,000 | ||||||
Available for sale investments (at fair value) | 5,397,000 | 56,763,000 | ||||||
Consumer receivables acquired for liquidation (at net realizable value) | 11,590,000 | 13,427,000 | ||||||
Investment in personal injury claims, net | 3,178,000 | — | ||||||
Other investments, net | — | 3,590,000 | ||||||
Due from third party collection agencies and attorneys | 1,096,000 | 1,050,000 | ||||||
Prepaid and income taxes receivable | 7,560,000 | 714,000 | ||||||
Furniture and equipment, net | 158,000 | 196,000 | ||||||
Equity method investment | 45,924,000 | 48,582,000 | ||||||
Deferred income taxes | 13,981,000 | 14,903,000 | ||||||
Goodwill | 1,410,000 | 1,410,000 | ||||||
Other assets | 4,771,000 | 6,585,000 | ||||||
Assets related to discontinued operations | 95,180,000 | 91,506,000 | ||||||
Total assets | $ | 208,355,000 | $ | 255,008,000 | ||||
LIABILITIES | ||||||||
Line of credit | $ | 9,600,000 | $ | — | ||||
Other liabilities | 6,415,000 | 3,987,000 | ||||||
Liabilities related to discontinued operations | 76,306,000 | 69,238,000 | ||||||
Total liabilities | 92,321,000 | 73,225,000 | ||||||
Commitments and contingencies | ||||||||
STOCKHOLDERS’ EQUITY | ||||||||
Preferred stock, $.01 par value; authorized 5,000,000 shares; issued and outstanding — none | — | — | ||||||
Common stock, $.01 par value, authorized 30,000,000 shares; issued 13,336,508 at March 31, 2017 and at September 30, 2016; and outstanding 6,562,215 at March 31, 2017 and 11,876,224 at September 30, 2016 | 133,000 | 133,000 | ||||||
Additional paid-in capital | 67,042,000 | 67,034,000 | ||||||
Retained earnings | 115,818,000 | 126,738,000 | ||||||
Accumulated other comprehensive income (loss) | 169,000 | 803,000 | ||||||
Treasury stock (at cost) 6,774,293 shares at March 31, 2017 and 1,460,284 shares at September 30, 2016 | (67,128,000 | ) | (12,925,000 | ) | ||||
Total stockholders’ equity | 116,034,000 | 181,783,000 | ||||||
Total liabilities and stockholders’ equity | $ | 208,355,000 | $ | 255,008,000 | ||||
See Notesaccompanying notes to Condensed Consolidated Financial Statements
ASTA FUNDING, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
| Three Months Ended June 30, 2014 (As Restated)(1) | Three Months Ended June 30, 2013 (As Revised)(1) | Nine Months Ended June 30, 2014 (As Restated)(1) | Nine Months Ended June 30, 2013 (As Revised)(1) | |||||||||||||
Revenues: | ||||||||||||||||
Finance income on consumer receivables, net | $ | 5,074,000 | $ | 8,972,000 | $ | 14,792,000 | $ | 25,040,000 | ||||||||
Personal injury claims income | 1,779,000 | 2,287,000 | 5,724,000 | 4,921,000 | ||||||||||||
Unrealized gain on structured settlements | 620,000 | — | 1,440,000 | — | ||||||||||||
Interest income on structured settlements | 786,000 | — | 1,501,000 | — | ||||||||||||
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Total revenues | 8,259,000 | 11,259,000 | 23,457,000 | 29,961,000 | ||||||||||||
Forgiveness of non-recourse debt | 26,101,000 | — | 26,101,000 | — | ||||||||||||
Other income (includes ($116,000) and $17,000 during the three month periods ended June 30, 2014 and 2013, and ($141,000) and $192,000 during the nine month periods ended June 30, 2014 and 2013, respectively, of accumulated other comprehensive income reclassification for unrealized net (losses) / gains on available for sale securities) | 336,000 | 378,000 | 1,370,000 | 1,628,000 | ||||||||||||
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| 34,696,000 | 11,637,000 | 50,928,000 | 31,589,000 | |||||||||||||
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Expenses: | ||||||||||||||||
General and administrative | 7,012,000 | 6,545,000 | 20,517,000 | 17,926,000 | ||||||||||||
Interest | 413,000 | 518,000 | 820,000 | 1,621,000 | ||||||||||||
Impairments of consumer receivables acquired for liquidation | 19,591,000 | 10,186,000 | 19,591,000 | 10,705,000 | ||||||||||||
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| 27,016,000 | 17,249,000 | 40,928,000 | 30,252,000 | |||||||||||||
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Income (loss) before income tax expense (benefit) | 7,680,000 | (5,612,000 | ) | 10,000,000 | 1,337,000 | |||||||||||
Income tax expense (benefit) (includes tax (benefit) expense of ($47,000) and $5,000 during the three month periods ended June 30, 2014 and 2013, and ($57,000) and $76,000 during the nine month periods ended June 30, 2014 and 2013, respectively, of accumulated other comprehensive income reclassifications for unrealized net (losses) gains on available for sale securities) | 2,973,000 | (2,296,000 | ) | 3,808,000 | 443,000 | |||||||||||
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Net income (loss) | 4,707,000 | (3,316,000 | ) | 6,192,000 | 894,000 | |||||||||||
Less: net income attributable to non-controlling interest | 20,000 | 53,000 | 483,000 | 176,000 | ||||||||||||
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Net income (loss) attributable to Asta Funding, Inc. | $ | 4,687,000 | $ | (3,369,000 | ) | $ | 5,709,000 | $ | 718,000 | |||||||
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Net income (loss) per share attributable to Asta Funding, Inc.: | ||||||||||||||||
Basic | $ | 0.36 | $ | (0.26 | ) | $ | 0.44 | $ | 0.06 | |||||||
Diluted | $ | 0.35 | $ | (0.26 | ) | $ | 0.43 | $ | 0.05 | |||||||
Weighted average number of common shares outstanding: | ||||||||||||||||
Basic | 12,984,882 | 12,954,455 | 12,979,472 | 12,946,521 | ||||||||||||
Diluted | 13,214,703 | 12,954,455 | 13,208,015 | 13,217,656 | ||||||||||||
See Notes(rounded to Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)the nearest thousands, except share data)
| Three Months Ended June 30, 2014 (As Restated)(1) | Three Months Ended June 30, 2013 (As Revised)(1) | Nine Months Ended June 30, 2014 (As Restated)(1) | Nine Months Ended June 30, 2013 (As Revised)(1) | |||||||||||||
Comprehensive income (loss) is as follows: | ||||||||||||||||
Net income (loss) | $ | 4,707,000 | $ | (3,316,000 | ) | $ | 6,192,000 | $ | 894,000 | |||||||
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Net unrealized securities gain / (loss), net of tax expense (benefit) of $263,000 and ($415,000), during the 3 month periods ended June 30, 2014 and 2013, respectively, and $511,000 and ($543,000) during the 9 month periods ended June 30, 2014 and 2013, respectively. | 394,000 | (631,000 | ) | 780,000 | (822,000 | ) | ||||||||||
Reclassification adjustments for securities sold, net of tax (benefit) expense of ($47,000) and $5,000, during the 3 month periods ended June 30, 2014 and 2013, respectively, and ($57,000) and $76,000, during the 9 month periods ended June 30, 2014 and 2013, respectively. | (69,000 | ) | (12,000 | ) | (84,000 | ) | (116,000 | ) | ||||||||
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Other comprehensive income (loss) | 325,000 | (643,000 | ) | 696,000 | (938,000 | ) | ||||||||||
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Total comprehensive income (loss) | $ | 5,032,000 | $ | (3,959,000 | ) | $ | 6,888,000 | $ | (44,000 | ) | ||||||
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Three Months |
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Ended | Three Months | Ended | Six Months | |||||||||||||
March 31, 2017 (Restated) | Ended March 31, 2016 | March 31, 2017 (Restated) | Ended March 31, 2016 | |||||||||||||
Revenues: | ||||||||||||||||
Finance income, net | $ | 3,930,000 | $ | 4,879,000 | $ | 8,025,000 | $ | 9,985,000 | ||||||||
Personal injury claims income | 10,000 | — | 10,000 | — | ||||||||||||
Disability fee income | 1,502,000 | 872,000 | 2,856,000 | 1,531,000 | ||||||||||||
Total revenues | 5,442,000 | 5,751,000 | 10,891,000 | 11,516,000 | ||||||||||||
Other income (loss) - includes ($948,000) and $0 during the three month periods ended March 31, 2017 and 2016, and ($993,000) and ($31,000) during the six month periods ended March 31, 2017 and 2016, respectively, of accumulated other comprehensive loss reclassification for securities sold | (667,000 | ) | 608,000 | (216,000 | ) | 1,000,000 | ||||||||||
| 4,775,000 | 6,359,000 | 10,675,000 | 12,516,000 | |||||||||||||
Expenses: | ||||||||||||||||
General and administrative | 12,251,000 | 10,222,000 | 19,546,000 | 15,951,000 | ||||||||||||
Interest | 32,000 | — | 32,000 | — | ||||||||||||
Impairment of consumer receivables acquired for liquidation | — | 124,000 | — | 124,000 | ||||||||||||
(Earnings) loss from equity method investment | 355,000 | (333,000 | ) | (49,000 | ) | (1,827,000 | ) | |||||||||
| 12,638,000 | 10,013,000 | 19,529,000 | 14,248,000 | |||||||||||||
Loss from continuing operations before income tax | (7,863,000 | ) | (3,654,000 | ) | (8,854,000 | ) | (1,732,000 | ) | ||||||||
Income tax (benefit) - includes tax expense of $379,000 and $0 during the three month periods ended March 31, 2017 and 2016 and $397,000 and $11,000 during the six month periods ended March 31, 2017 and 2016, respectively, of accumulated other comprehensive income reclassifications for unrealized net gains / (losses) on available for sale securities | (947,000 | ) | (1,269,000 | ) | (250,000 | ) | (638,000 | ) | ||||||||
Net loss from continuing operations | (6,916,000 | ) | (2,385,000 | ) | (8,604,000 | ) | (1,094,000 | ) | ||||||||
Net (loss) income from discontinued operations, net of income tax | (1,058,000 | ) | 555,000 | (2,316,000 | ) | 827,000 | ||||||||||
Net loss | $ | (7,974,000 | ) | $ | (1,830,000 | ) | $ | (10,920,000 | ) | $ | (267,000 | ) | ||||
(Net loss) income per share: | ||||||||||||||||
Basic (loss) earnings per share from continuing operations | $ | (0.71 | ) | $ | (0.20 | ) | $ | (0.80 | ) | $ | (0.09 | ) | ||||
Basic (loss) earnings per share from discontinued operations | (0.11 | ) | 0.05 | (0.21 | ) | 0.07 | ||||||||||
Basic (loss) earnings per share | $ | (0.82 | ) | $ | (0.15 | ) | $ | (1.01 | ) | $ | (0.02 | ) | ||||
Diluted (loss) earnings per share from continuing operations | $ | (0.71 | ) | $ | (0.20 | ) | $ | (0.80 | ) | $ | (0.09 | ) | ||||
Diluted(loss) earnings per share from discontinued operations | (0.11 | ) | 0.05 | (0.21 | ) | 0.07 | ||||||||||
Diluted (loss) earnings per share | $ | (0.82 | ) | $ | (0.15 | ) | $ | (1.01 | ) | $ | (0.02 | ) | ||||
Weighted average number of common shares outstanding: | ||||||||||||||||
Basic | 9,691,576 | 12,076,120 | 10,795,903 | 12,115,987 | ||||||||||||
Diluted | 9,691,576 | 12,076,120 | 10,795,903 | 12,115,987 | ||||||||||||
See Notesaccompanying notes to Condensed Consolidated Financial Statements
ASTA FUNDING, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ EquityComprehensive Income(Loss)
March 31, 2017 and 2016
(Unaudited)
(rounded to the nearest thousands)
| Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock (1) | Non- Controlling Interest | Total Stockholders’ Equity | ||||||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||||||
Balance, September 30, 2013, as reported | 14,917,977 | $ | 149,000 | $ | 79,104,000 | $ | 109,011,000 | $ | (674,000 | ) | $ | (17,805,000 | ) | $ | (184,000 | ) | $ | 169,601,000 | ||||||||||||||
Cumulative impact of revisions, prior years | — | — | — | 3,683,000 | — | — | — | 3,683,000 | ||||||||||||||||||||||||
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Balance, September 30, 2013, as revised | 14,917,977 | 149,000 | 79,104,000 | 112,694,000 | (674,000 | ) | (17,805,000 | ) | (184,000 | ) | 173,284,000 | |||||||||||||||||||||
Exercise of options | 11,500 | — | 40,000 | — | — | — | — | 40,000 | ||||||||||||||||||||||||
Stock based compensation expense | — | — | 1,290,000 | — | — | — | — | 1,290,000 | ||||||||||||||||||||||||
Net income, as restated (2) | — | — | — | 5,709,000 | — | — | 483,000 | 6,192,000 | ||||||||||||||||||||||||
Unrealized loss on marketable securities | — | — | — | — | 696,000 | — | — | 696,000 | ||||||||||||||||||||||||
Retirement of treasury stock | (1,943,738 | ) | (19,000 | ) | (17,786,000 | ) | — | — | 17,805,000 | — | 0 | |||||||||||||||||||||
Distributions to non-controlling interest | — | — | — | — | — | — | (837,000 | ) | (837,000 | ) | ||||||||||||||||||||||
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Balance, June 30, 2014, as restated | 12,985,739 | $ | 130,000 | $ | 62,648,000 | $ | 118,403,000 | $ | 22,000 | $ | 0 | $ | (538,000 | ) | $ | 180,665,000 | ||||||||||||||||
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(1) Treasury shares at September 30, 2013 totaled 1,943,738. (2) For discussion on the adjustments, see Note 2 – Restatement of Quarterly Financial Statements and Revision of Prior Period Financial statements. |
| |||||||||||||||||||||||||||||||
Three Months (Restated) | Three Months | Six Months (Restated) | Six Months | |||||||||||||
Comprehensive income (loss) is as follows: | ||||||||||||||||
Net loss | $ | (7,974,000 | ) | $ | (1,830,000 | ) | $ | (10,920,000 | ) | $ | (267,000 | ) | ||||
Net unrealized securities gain (loss), net of tax (expense)/benefit of ($680,000) and ($94,000) during the three month periods ended March 31, 2017 and 2016, respectively, and $23,000 and ($283,000) during the six month periods ended March 31, 2017 and 2016, respectively. | 1,204,000 | 156,000 | (35,000 | ) | 486,000 | |||||||||||
Reclassification adjustments for securities sold, net of tax benefit of $379,000 and $0 during the three month periods ended March 31, 2017 and 2016, and $397,000 and $11,000 during the six month periods ended March 31, 2017 and 2016, respectively. | (569,000 | ) | — | (596,000 | ) | (20,000 | ) | |||||||||
Foreign currency translation, net of tax (expense)/benefit of $16,000 and ($8,000) during the three month periods ended March 31, 2017 and 2016, respectively, and $1,000 and ($17,000) during the six month periods ended March 31, 2017 and 2016, respectively. | (21,000 | ) | 12,000 | (3,000 | ) | 26,000 | ||||||||||
Other comprehensive income (loss) | 614,000 | 168,000 | (634,000 | ) | 492,000 | |||||||||||
Total comprehensive (loss) income | $ | (7,360,000 | ) | $ | (1,662,000 | ) | $ | (11,554,000 | ) | $ | 225,000 | |||||
See Notesaccompanying notes to Condensed Consolidated Financial Statements
ASTA FUNDING, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited)
(rounded to the nearest thousands, except share data)
Six months ended March 31, 2017 (restated):
Common Stock | Additional | Accumulated | Non- | Total | ||||||||||||||||||||||||||||
Issued | Amount | Paid-in | Retained | Comprehensive Income (Loss) | Treasury | Controlling | Stockholders’ | |||||||||||||||||||||||||
Balance, September 30, 2016 | 13,336,508 | 133,000 | 67,034,000 | 126,738,000 | 803,000 | (12,925,000 | ) | — | 181,783,000 | |||||||||||||||||||||||
Stock based compensation expense | — | — | 8,000 | — | — | — | — | 8,000 | ||||||||||||||||||||||||
Net loss | — | — | — | (10,920,000 | ) | — | — | — | (10,920,000 | ) | ||||||||||||||||||||||
Amount reclassified from other comprehensive (loss) income | — | — | — | — | (596,000 | ) | — | — | (596,000 | ) | ||||||||||||||||||||||
Unrealized (loss) gain on marketable securities, net | — | — | — | — | (35,000 | ) | — | — | (35,000 | ) | ||||||||||||||||||||||
Purchase of treasury stock | — | — | — | — | — | (54,203,000 | ) | — | (54,203,000 | ) | ||||||||||||||||||||||
Foreign currency translation, net | — | — | — | — | (3,000 | ) | — | — | (3,000 | ) | ||||||||||||||||||||||
Balance, March 31, 2017, as restated | 13,336,508 | $ | 133,000 | $ | 67,042,000 | $ | 115,818,000 | $ | 169,000 | $ | (67,128,000 | ) | $ | — | $ | 116,034,000 | ||||||||||||||||
Six months ended March 31, 2016:
Common Stock | Additional | Accumulated | Non- | Total | ||||||||||||||||||||||||||||
Issued | Amount | Paid-in | Retained | Comprehensive | Treasury | Controlling | Stockholders’ | |||||||||||||||||||||||||
Balance, September 30, 2015 | 13,061,673 | $ | 131,000 | $ | 65,049,000 | $ | 119,165,000 | $ | 20,000 | $ | (1,751,000 | ) | $ | 793,000 | $ | 183,407,000 | ||||||||||||||||
Exercise of options | 7,499 | — | 47,000 | 47,000 | ||||||||||||||||||||||||||||
Stock based compensation expense | — | — | 428,000 | — | — | — | — | 428,000 | ||||||||||||||||||||||||
Restricted stock | 5,000 | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Net (loss) income | — | — | — | (267,000 | ) | — | — | — | (267,000 | ) | ||||||||||||||||||||||
Amount reclassified from other comprehensive income (loss) | — | — | — | — | (20,000 | ) | — | — | (20,000 | ) | ||||||||||||||||||||||
Unrealized gain on marketable securities, net | — | — | — | — | 486,000 | — | — | 486,000 | ||||||||||||||||||||||||
Purchase of treasury stock | — | — | — | — | — | (8,363,000 | ) | — | (8,363,000 | ) | ||||||||||||||||||||||
Foreign currency translation, net | — | — | — | — | 26,000 | — | — | 26,000 | ||||||||||||||||||||||||
Purchase of subsidiary shares from non-controlling interest | — | — | (903,000 | ) | — | — | — | (793,000 | ) | (1,696,000 | ) | |||||||||||||||||||||
Issuance of restricted stock to purchase subsidiary shares from non-controlling interest | 123,304 | 1,000 | 999,000 | — | — | — | — | 1,000,000 | ||||||||||||||||||||||||
Balance, March 31, 2016 | 13,197,476 | $ | 132,000 | $ | 65,620,000 | $ | 118,898,000 | $ | 512,000 | $ | (10,114,000 | ) | $ | — | $ | 175,048,000 | ||||||||||||||||
See accompanying notes to consolidated financial statements
ASTA FUNDING, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(rounded to the nearest thousands)
| Nine Months Ended June 30, 2014 (As Restated)(1) | Nine Months Ended June 30, 2013 (As Revised)(1) | |||||||
Cash flows from operating activities | ||||||||
Net income | $ | 6,192,000 | $ | 894,000 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 450,000 | 450,000 | ||||||
Deferred income taxes | (773,000 | ) | 29,000 | |||||
Impairment of consumer receivables acquired for liquidation | 19,591,000 | 10,705,000 | ||||||
Stock based compensation | 1,290,000 | 1,498,000 | ||||||
Loss / (gain) on sale of available-for-sale securities | 141,000 | (192,000 | ) | |||||
Structured settlements - accrued interest | (1,475,000 | ) | — | |||||
Structured settlements - gains | (1,440,000 | ) | — | |||||
Forgiveness of non-recourse debt | (26,101,000 | ) | — | |||||
Changes in: | ||||||||
Prepaid and income taxes receivable | 1,496,000 | 382,000 | ||||||
Due from third party collection agencies and attorneys | 31,000 | 802,000 | ||||||
Other assets | (596,000 | ) | (2,369,000 | ) | ||||
Income taxes payable | 3,084,000 | — | ||||||
Other liabilities | (119,000 | ) | (1,104,000 | ) | ||||
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Net cash provided by operating activities | 1,771,000 | 11,095,000 | ||||||
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Cash flows from investing activities | ||||||||
Purchase of consumer receivables acquired for liquidation | (3,702,000 | ) | (3,340,000 | ) | ||||
Principal collected on receivables acquired for liquidation | 15,950,000 | 16,567,000 | ||||||
Principal collected on receivables accounts represented by account sales | 1,000 | 432,000 | ||||||
Purchase of available-for-sale securities | (19,845,000 | ) | (29,907,000 | ) | ||||
Proceeds from sale of available-for-sale securities | 8,684,000 | 28,918,000 | ||||||
Proceeds from maturities of certificates of deposit | — | 33,918,000 | ||||||
Cash paid for acquisition (net of cash acquired) | (5,588,000 | ) | — | |||||
Investments in personal injury claims – advances | (16,392,000 | ) | (22,863,000 | ) | ||||
Investments in personal injury claims – receipts | 20,417,000 | 9,162,000 | ||||||
Investment in structured settlements – advances | (4,696,000 | ) | — | |||||
Investments in structured settlements – receipts | 2,155,000 | — | ||||||
Capital expenditures | — | (725,000 | ) | |||||
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Net cash (used in) provided by investing activities | (3,016,000 | ) | 32,162,000 | |||||
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Cash flows from financing activities | ||||||||
Proceeds from exercise of stock options | 40,000 | 103,000 | ||||||
Changes in restricted cash | 968,000 | 21,000 | ||||||
Distribution to non-controlling interest | (837,000 | ) | — | |||||
Repayment of non-recourse debt | (9,659,000 | ) | (7,213,000 | ) | ||||
Borrowings of other debt | 4,131,000 | — | ||||||
Repayments of other debt | (2,560,000 | ) | — | |||||
Dividends paid | — | (1,290,000 | ) | |||||
Purchase of treasury stock | — | (1,579,000 | ) | |||||
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Net cash used in financing activities | (7,917,000 | ) | (9,958,000 | ) | ||||
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Net (decrease) increase in cash and cash equivalents | (9,162,000 | ) | 33,299,000 | |||||
Cash and cash equivalents at beginning of period | 35,179,000 | 4,953,000 | ||||||
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Cash and cash equivalents at end of period | $ | 26,017,000 | $ | 38,252,000 | ||||
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Supplemental disclosure of cash flow information : | ||||||||
Cash paid for: | ||||||||
Interest | $ | 678,000 | $ | 1,645,000 | ||||
Supplemental disclosures of non-cash investing and financing activities: | ||||||||
Structured settlements | $ | 30,436,000 | $ | — | ||||
Other debt – CBC | 23,363,000 | — | ||||||
Retirement of treasury stock | 17,805,000 | — | ||||||
Six Months | Six Months | |||||||
Cash flows from operating activities: | ||||||||
Net loss from continuing operations | $ | (8,604,000 | ) | $ | (1,094,000 | ) | ||
Net (loss) income from discontinued operations | (2,316,000 | ) | 827,000 | |||||
Net loss | (10,920,000 | ) | (267,000 | ) | ||||
Adjustments to reconcile net (loss) income to net cash used in operating activities: | ||||||||
Depreciation and amortization | 51,000 | 186,000 | ||||||
Deferred income taxes | 1,342,000 | 444,000 | ||||||
Impairment of consumer receivables acquired for liquidation | — | 124,000 | ||||||
Stock based compensation | 8,000 | 428,000 | ||||||
Loss on sale of available-for-sale securities | 993,000 | 31,000 | ||||||
Unrealized gain on other investments | — | (152,000 | ) | |||||
Unrealized foreign exchange loss on other investments | — | (26,000 | ) | |||||
Reserve for loss on other investments | — | 1,000,000 | ||||||
Loss on other investments | 3,590,000 | — | ||||||
Loss (Earnings) from equity method investment | (49,000 | ) | (333,000 | ) | ||||
Changes in: | ||||||||
Prepaid and income taxes receivable | (6,846,000 | ) | 113,000 | |||||
Due from third party collection agencies and attorneys | (41,000 | ) | 269,000 | |||||
Other assets | 1,821,000 | (2,235,000 | ) | |||||
Other liabilities | 2,425,000 | 1,572,000 | ||||||
Net cash used in operating activities of discontinued operations | 438,000 | (3,951,000 | ) | |||||
Net cash used in operating activities | (7,188,000 | ) | (2,797,000 | ) | ||||
Cash flows from investing activities: | ||||||||
Purchase of consumer receivables acquired for liquidation | (2,213,000 | ) | (6,185,000 | ) | ||||
Principal collected on receivables acquired for liquidation | 4,064,000 | 4,677,000 | ||||||
Principal collected on consumer receivable accounts represented by account sales | 190,000 | — | ||||||
Purchase of available-for-sale securities | (7,693,000 | ) | (7,419,000 | ) | ||||
Proceeds from sale of available-for-sale securities | 57,016,000 | 12,303,000 | ||||||
Purchase of non-controlling interest | — | (800,000 | ) | |||||
Decrease in equity method investment | 2,707,000 | 3,471,000 | ||||||
Investments in personal injury claims - advances | (3,178,000 | ) | — | |||||
Capital expenditures | (13,000 | ) | (65,000 | ) | ||||
Net cash used in investing activities of discontinued operations | (3,790,000 | ) | (4,921,000 | ) | ||||
Net cash provided by investing activities | 47,090,000 | 1,061,000 | ||||||
Cash flows from financing activities: | ||||||||
Proceeds from exercise of stock options | — | 47,000 | ||||||
Purchase of treasury stock | (54,203,000 | ) | (8,363,000 | ) | ||||
Borrowings from line of credit | 9,600,000 | — | ||||||
Net cash provided by financing activities of discontinued operations | 6,748,000 | 7,797,000 | ||||||
Net cash used in financing activities | (37,855,000 | ) | (519,000 | ) | ||||
Foreign currency effect on cash | (217,000 | ) | — | |||||
| Net increase (decrease) in cash, cash equivalents and restricted cash including cash, cash equivalents classified within assets related to discontinued operations | 1,830,000 | (2,255,000 | ) | |||||
| Less: net decrease in cash, cash equivalents and restricted cash classified within assets related to discontinued operations | (2,000 | ) | (159,000 | ) | ||||
Net increase (decrease) in cash and cash equivalents | 1,828,000 | (2,414,000 | ) | |||||
Cash,cash equivalents and restricted cash at beginning of period | 16,282,000 | 19,947,000 | ||||||
Cash, cash equivalents and restricted cash at end of period | $ | 18,110,000 | $ | 17,533,000 | ||||
Supplemental disclosure of cash flow information : | ||||||||
Cash paid for: | ||||||||
Interest | $ | 1,879,000 | $ | 1,538,000 | ||||
Taxes | 6,200,000 | — | ||||||
Supplemental disclosure of non-cash flow investing activities : | ||||||||
Continuing Operations: | ||||||||
Issuance of restricted stock to purchase subsidiary shares from non-controlling interest | $ | — | $ | 1,000,000 | ||||
See Notesaccompanying notes to Condensed Consolidated Financial Statements
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Restated)
Note 1—Restatement of Financial Statements
The following tables summarize the effects of the restatements on the specific items presented in the Company’s consolidated financial statements previously included in the Original Form 10-Q:
| Consolidated Balance Sheet | |||||||||||||||||
March 31, 2017 | |||||||||||||||||
As Reported | De-Consolidation of Pegasus (1) | Adjustments | Restated | ||||||||||||||
ASSETS | |||||||||||||||||
Cash and cash equivalents | $ | 9,326,000 | $ | (732,000 | ) | $ | (49,000 | ) | (2)(6) | $ | 8,545,000 | ||||||
Restricted cash | 9,565,000 | — | — | 9,565,000 | |||||||||||||
Available for sale investments (at fair value) | 5,397,000 | — | — | 5,397,000 | |||||||||||||
Consumer receivables acquired for liquidation (at net realizable value) | 11,651,000 | — | (61,000 | ) | (2) | 11,590,000 | |||||||||||
Investment in personal injury claims, net | 47,888,000 | (44,710,000 | ) | — | 3,178,000 | ||||||||||||
Due from third party collection agencies and attorneys | 1,044,000 | — | 52,000 | (2) | 1,096,000 | ||||||||||||
Prepaid and income taxes receivable | 7,609,000 | — | (49,000 | ) | (8) | 7,560,000 | |||||||||||
Furniture and equipment, net | 158,000 | — | — | 158,000 | |||||||||||||
Equity method investment | — | 45,823,000 | 101,000 | (7) | 45,924,000 | ||||||||||||
Deferred income taxes | 17,556,000 | — | (3,575,000 | ) | (2)(8) | 13,981,000 | |||||||||||
Goodwill | 1,410,000 | — | — | 1,410,000 | |||||||||||||
Other assets | 4,690,000 | (109,000 | ) | 190,000 | (2) | 4,771,000 | |||||||||||
Assets related to discontinued operations | 95,102,000 | — | 78,000 | (5)(6) | 95,180,000 | ||||||||||||
Total assets | $ | 211,396,000 | $ | 272,000 | $ | (3,313,000 | ) | $ | 208,355,000 | ||||||||
LIABILITIES | |||||||||||||||||
Line of credit | 9,600,000 | — | — | 9,600,000 | |||||||||||||
Other liabilities | 6,940,000 | (727,000 | ) | 202,000 | (2)(6) | 6,415,000 | |||||||||||
Liabilities related to discontinued operations | 75,705,000 | — | 601,000 | (5) | 76,306,000 | ||||||||||||
Total liabilities | 92,245,000 | (727,000 | ) | 803,000 | 92,321,000 | ||||||||||||
Commitments and contingencies | |||||||||||||||||
STOCKHOLDERS’ EQUITY | |||||||||||||||||
Preferred stock | — | — | — | — | |||||||||||||
Common stock | 133,000 | — | — | 133,000 | |||||||||||||
Additional paid-in capital | 67,034,000 | — | 8,000 | (6) | 67,042,000 | ||||||||||||
Retained earnings | 120,837,000 | — | (5,019,000 | ) | (2)(3)(4)(5)(6)(7)(8) | 115,818,000 | |||||||||||
Accumulated other comprehensive income (loss) | (726,000 | ) | — | 895,000 | (2) | 169,000 | |||||||||||
Treasury stock (at cost) | (67,128,000 | ) | — | — | (67,128,000 | ) | |||||||||||
Non-controlling interest | (999,000 | ) | 999,000 | — | — | ||||||||||||
Total stockholders’ equity | 119,151,000 | 999,000 | (4,116,000 | ) | 116,034,000 | ||||||||||||
Total liabilities and stockholders’ equity | $ | 211,396,000 | $ | 272,000 | $ | (3,313,000 | ) | $ | 208,355,000 | ||||||||
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Restated)
Note 1—Restatement of Financial Statements
(continued)
| Consolidated Statement of Operations For the Three Months Ended March 31, 2017 | ||||||||||||||||
As Reported | De-Consolidation of Pegasus (1) | Adjustments | Restated | ||||||||||||||
Revenues: | |||||||||||||||||
Finance income, net | $ | 4,018,000 | $ | — | $ | (88,000 | ) | (2) | $ | 3,930,000 | |||||||
Personal injury claims income | 2,146,000 | (2,136,000 | ) | — | 10,000 | ||||||||||||
Disability fee income | 1,502,000 | — | — | 1,502,000 | |||||||||||||
Total revenues | 7,666,000 | (2,136,000 | ) | (88,000 | ) | 5,442,000 | |||||||||||
Other income | (702,000 | ) | — | 35,000 | (2) | (667,000 | ) | ||||||||||
| 6,964,000 | (2,136,000 | ) | (53,000 | ) | 4,775,000 | ||||||||||||
Expenses: | |||||||||||||||||
General and administrative | 14,546,000 | (2,178,000 | ) | (117,000 | ) | (2) | 12,251,000 | ||||||||||
Interest | 34,000 | (2,000 | ) | — | 32,000 | ||||||||||||
Loss from equity method investment | — | 35,000 | 320,000 | (7) | 355,000 | ||||||||||||
| 14,580,000 | (2,145,000 | ) | 203,000 | 12,638,000 | |||||||||||||
(Loss) income from continuing operations before income tax | (7,616,000 | ) | 9,000 | (256,000 | ) | (7,863,000 | ) | ||||||||||
Income tax (benefit)/expense | (2,813,000 | ) | — | 1,866,000 | (8) | (947,000 | ) | ||||||||||
Net (loss) income from continuing operations | (4,803,000 | ) | 9,000 | (2,122,000 | ) | (6,916,000 | ) | ||||||||||
Net loss from discontinued operations, net of income tax | (775,000 | ) | — | (283,000 | ) | (5)(8) | (1,058,000 | ) | |||||||||
Less: net income attributable to non-controlling interests | (9,000 | ) | 9,000 | — | — | ||||||||||||
Net loss attributable to Asta Funding, Inc. | $ | (5,569,000 | ) | $ | — | $ | (2,405,000 | ) | $ | (7,974,000 | ) | ||||||
Basic and diluted loss per share: | |||||||||||||||||
Continuing operations | $ | (0.49 | ) | $ | (0.71 | ) | |||||||||||
Discontinued operations | (0.08 | ) | (0.11 | ) | |||||||||||||
| $ | (0.57 | ) | $ | (0.82 | ) | ||||||||||||
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Restated)
Note 1—Restatement of Financial Statements
(continued)
Consolidated Statement of Operations For the Six Months Ended March 31,2017 | |||||||||||||||||
As Reported | De-Consolidation of Pegasus (1) | Adjustments | Restated | ||||||||||||||
Revenues: | |||||||||||||||||
Finance income, net | $ | 8,019,000 | $ | — | $ | 6,000 | (2) | $ | 8,025,000 | ||||||||
Personal injury claims income | 4,448,000 | (4,438,000 | ) | — | 10,000 | ||||||||||||
Disability fee income | 2,856,000 | — | — | 2,856,000 | |||||||||||||
Total revenues | 15,323,000 | (4,438,000 | ) | 6,000 | 10,891,000 | ||||||||||||
Other income. | (158,000 | ) | — | (58,000 | ) | (2) | (216,000 | ) | |||||||||
| 15,165,000 | (4,438,000 | ) | (52,000 | ) | 10,675,000 | ||||||||||||
Expenses | |||||||||||||||||
General and administrative | 24,102,000 | (4,373,000 | ) | (183,000 | ) | (2) | 19,546,000 | ||||||||||
Interest | 36,000 | (4,000 | ) | — | 32,000 | ||||||||||||
Earnings from equity method investment | — | (49,000 | ) | — | (49,000 | ) | |||||||||||
| 24,138,000 | (4,426,000 | ) | (183,000 | ) | 19,529,000 | ||||||||||||
(Loss) income from continuing operations before income tax | (8,973,000 | ) | (12,000 | ) | 131,000 | (8,854,000 | ) | ||||||||||
Income tax (benefit)/expense | (3,368,000 | ) | — | 3,118,000 | (8) | (250,000 | ) | ||||||||||
Net (loss) income from continuing operations | (5,605,000 | ) | (12,000 | ) | (2,987,000 | ) | (8,604,000 | ) | |||||||||
Net loss from discontinued operations, net of income tax | (1,609,000 | ) | — | (707,000 | ) | (3)(5)(8) | (2,316,000 | ) | |||||||||
Less: net income attributable to non-controlling interests | 12,000 | (12,000 | ) | — | — | ||||||||||||
Net loss attributable to Asta Funding, Inc. | $ | (7,226,000 | ) | $ | — | $ | (3,694,000 | ) | $ | (10,920,000 | ) | ||||||
Basic and diluted loss per share: | |||||||||||||||||
Continuing operations | $ | (0.52 | ) | $ | (0.80 | ) | |||||||||||
Discontinued operations | (0.15 | ) | (0.21 | ) | |||||||||||||
| $ | (0.67 | ) | $ | (1.01 | ) | ||||||||||||
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Restated)
Note 1—Restatement of Financial Statements(continued)
| Consolidated Statement of Comprehensive Loss | |||||||||||||||||
For the Three Months Ended March 31, 2017 | |||||||||||||||||
As Reported | De-Consolidation of Pegasus (1) | Adjustments | Restated | ||||||||||||||
Comprehensive income (loss) is as follows: | |||||||||||||||||
Net loss | $ | (5,569,000 | ) | $ | — | $ | (2,405,000 | ) | $ | (7,974,000 | ) | ||||||
Net unrealized securities (loss) gain, net of tax | 1,204,000 | — | — | 1,204,000 | |||||||||||||
Reclassification adjustments for securities sold, net of tax | (569,000 | ) | — | — | (569,000 | ) | |||||||||||
Foreign currency translation, net of tax | 188,000 | — | (209,000 | ) | (2)(6) | (21,000 | ) | ||||||||||
Other comprehensive income (loss) | 823,000 | — | (209,000 | ) | 614,000 | ||||||||||||
Total comprehensive loss | $ | (4,746,000 | ) | $ | — | $ | (2,614,000 | ) | $ | (7,360,000 | ) | ||||||
| Consolidated Statement of Comprehensive Loss | |||||||||||||||||
For the Six Months Ended March 31, 2017 | |||||||||||||||||
As Reported | De-Consolidation of Pegasus (1) | Adjustments | Restated | ||||||||||||||
Comprehensive income (loss) is as follows: | |||||||||||||||||
Net loss | $ | (7,226,000 | ) | $ | — | $ | (3,694,000 | ) | $ | (10,920,000 | ) | ||||||
Net unrealized securities (loss) gain, net of tax | (35,000 | ) | — | — | (35,000 | ) | |||||||||||
Reclassification adjustments for securities sold, net of tax | (596,000 | ) | — | — | (596,000 | ) | |||||||||||
Foreign currency translation, net of tax | (181,000 | ) | — | 178,000 | (2)(6) | (3,000 | ) | ||||||||||
Other comprehensive (loss) income | (812,000 | ) | — | 178,000 | (634,000 | ) | |||||||||||
Total comprehensive loss | $ | (8,038,000 | ) | $ | — | $ | (3,516,000 | ) | $ | (11,554,000 | ) | ||||||
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Restated)
Note 1—Restatement of Financial Statements(continued)
Consolidated Statement of Cash Flows For the Six Months Ended March31,2017 |
As Reported | Adjustments | Restated | |||||||||||
Cash flows from operating activities: | |||||||||||||
Net loss from continuing operations | $ | (5,617,000 | ) | $ | (2,987,000 | ) | $ | (8,604,000 | ) | ||||
Net loss from discontinued operations | (1,609,000 | ) | (707,000 | ) | (2,316,000 | ) | |||||||
Net loss | (7,226,000 | ) | (3,694,000 | ) | (10,920,000 | ) | |||||||
Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||||
Depreciation and amortization | 130,000 | (79,000 | ) | 51,000 | |||||||||
Deferred income taxes | (1,606,000 | ) | 2,948,000 | (8)(2) | 1,342,000 | ||||||||
Stock based compensation | 8,000 | — | 8,000 | ||||||||||
Loss on sale of available-for-sale securities | 993,000 | — | 993,000 | ||||||||||
Loss on other investments | 3,590,000 | — | 3,590,000 | ||||||||||
Loss from equity method investment | — | (49,000 | ) | (7) | (49,000 | ) | |||||||
Changes in: | |||||||||||||
Prepaid and income taxes receivable | (6,729,000 | ) | (117,000 | ) | (8) | (6,846,000 | ) | ||||||
Due from third party collection agencies and attorneys | (39,000 | ) | (2,000 | ) | (2) | (41,000 | ) | ||||||
Other assets | 1,985,000 | ) | (164,000 | ) | (2) | 1,821,000 | |||||||
Income tax payable | (252,000 | ) | 252,000 | (8) | — | ||||||||
Other liabilities | 1,832,000 | 593,000 | (2)(6) | 2,425,000 | |||||||||
Non-controlling interest | 12,000 | (12,000 | ) | (1) | — | ||||||||
Net cash (used in) provided by operating activities of discontinued operations | (352,000 | ) | 790,000 | (3) (5) | 438,000 | ||||||||
Net cash (used in) provided by operating activities | (7,654,000 | ) | 466,000 | (7,188,000 | ) | ||||||||
Cash flows from investing activities: | |||||||||||||
Purchase of consumer receivables acquired for liquidation | (2,213,000 | ) | — | (2,213,000 | ) | ||||||||
Principal collected on receivables acquired for liquidation | 4,233,000 | (169,000 | ) | (2)(4)(5)(6) | 4,064,000 | ||||||||
Principal collected on consumer receivable accounts represented by account sales | — | 190,000 | (2) | 190,000 | |||||||||
Purchase of available-for-sale securities | (7,693,000 | ) | — | (7,693,000 | ) | ||||||||
Proceeds from sales of available-for-sale securities | 57,016,000 | — | 57,016,000 | ||||||||||
Investments in personal injury claims — advances | (9,194,000 | ) | 6,016,000 | (1) | (3,178,000 | ) | |||||||
Investments in personal injury claims — receipts | 9,595,000 | (9,595,000 | ) | (1) | — | ||||||||
Decrease in equity method investment | — | 2,707,000 | (1) | 2,707,000 | |||||||||
Capital expenditures | (13,000 | ) | — | (13,000 | ) | ||||||||
Net cash used in investing activities related to discontinued operations | (3,792,000 | ) | 2,000 | (4) | (3,790,000 | ) | |||||||
Net cash provided by investing activities | 47,939,000 | (849,000 | ) | 47,090,000 | |||||||||
Cash flows from financing activities: | |||||||||||||
Purchase of treasury stock | (54,203,000 | ) | — | (54,203,000 | ) | ||||||||
Distributions to non-controlling interest | (366,000 | ) | 366,000 | (1) | — | ||||||||
Borrowings from line of credit | 9,600,000 | — | 9,600,000 | ||||||||||
Net cash provided by financing activities related to discontinued operations: | 6,748,000 | — | 6,748,000 | ||||||||||
Net cash used in financing activities | (38,221,000 | ) | 366,000 | (37,855,000 | ) | ||||||||
Foreign currency effect on cash | — | (217,000 | ) | (2) | (217,000 | ) | |||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash including cash, cash equivalents classified within assets related to discontinued operations | 2,064,000 | (234,000 | ) | 1,830,000 | |||||||||
| Less: net decrease in cash, cash equivalents and restricted cash classified within assets related to discontinued operations | (2,000 | ) | — | (2,000 | ) | ||||||||
Net increase in cash, cash equivalents and restricted cash | 2,062,000 | (234,000 | ) | (1)(2)(3)(4)(5)(6)(7)(8) | 1,828,000 | ||||||||
Cash, cash equivalents and restricted cash at beginning of period | 16,829,000 | (547,000 | ) | 16,282,000 | |||||||||
Cash, cash equivalents and restricted cash at end of period | $ | 18,891,000 | $ | (781,000 | ) | $ | 18,110,000 | ||||||
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Restated)
Note 1—Restatement of Financial Statements
As previously disclosed in the Current Report on Form 8-K filed by Asta Funding, Inc. (“Asta” or the “Company”) with the Securities and Exchange Commission (the “SEC”) on January 18, 2018, the Board of Directors (the “Board”) of the Company, upon the recommendation of the Audit Committee of the Board (the “Audit Committee”), determined that the Company’s previously issued financial statements for each of the years ended September 30, 2016, 2015 and 2014, and the interim periods contained therein, as well as the Company’s unaudited consolidated financial statements for the quarters ended December 31, 2016, March 31, 2017 and June 30, 2017, could no longer be relied upon.
On September 17, 2018, the Company filed an Annual Report on Form 10-K/A to amend and restate the Company’s previously issued financial statements for each of the years ended September 30, 2016, 2015 and 2014, as well as the interim periods contained therein (the “Form 10-K/A”), and a Quarterly Report on Form 10-Q/A to amend and restate the Company's previously issued financial statements for the quarter ended December 31, 2016. The Company is filing this Amendment No.1 on Form 10-Q/A (this “Amendment”) to amend and restate the Company’s previously issued financial statements contained in its Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 (the “Non-Reliance Period”), which was originally filed with the SEC on May 26, 2017 (the “Original Form 10-Q”). The Company expects to file, at a later time, an amendment to its Quarterly Report on Form 10-Q for the quarter ended June 30, 2017.
Prior period amounts have already been restated in the Company's Form 10-K/Aand, accordingly have not been restated in this Amendment.
Restatement Background
On January 11, 2018, after discussions with the Audit Committee, management re-evaluated the Company's historical conclusion to consolidate Pegasus Funding, LLC (“Pegasus”). Management has determined that the Company lacked the requisite control to consolidate Pegasus in its historical periods in accordance with Accounting Standards Codification (“ASC”) 810 “Consolidation.” Management also determined that the Company's previous treatment for certain foreign currency matters under ASC 830 “Foreign Currency Matters” was not appropriate. As such, the Company has subsequently revised its investment in Pegasus to the equity method, including the underlying reserve methodology; and has adjusted its financial statements to reflect the proper accounting for certain foreign currency transactions. Additionally, the Company corrected the financial statements for additional known errors consisting of (i) the adjustment of various accruals, (ii) the fair value of structured settlements, (iii) accounting for unallocated payments, and (iv) the tax effects of the adjustments mentioned above.
The “As Reported” amounts in the tables below represent the amounts reported in the Restated Form 10-Q/A, adjusted in its presentation for the discontinued operations of the Company's wholly-owned subsidiary CBC Settlement Funding, LLC (“CBC”), which was sold on December 13, 2017 (see Note 8 – Discontinued Operations and Note 20 – Subsequent events).
The following errors were identified as part of the restatement:
| 1. | In connection with the Company determining it lacked the requisite control to consolidate Pegasus during the Non-Reliance Period, the Company has now accounted for its investment in Pegasus under the equity method in accordance with US GAAP. On the Company’s March 31, 2017 consolidated balance sheet, this resulted in (i) a decrease in cash of $732,000; (ii) a decrease in the investment in personal injury claims of $44,710,000; (iii) a decrease in other assets of $109,000; (iv) a decrease in other liabilities of $727,000; and (v) a decrease in non-controlling interest of $999,000, offset by a corresponding increase in the equity method investment of $45,823,000. |
| On the Company’s consolidated statement of operations, this resulted in (i) a decrease in total revenues of $2,136,000; (ii) a decrease in expenses of $2,180,000; (iii) an increase in the income attributable to the non-controlling interest of $9,000; and (iv) an increase in earnings from equity method investment of $35,000 for the three months ended March 31, 2017. This change to the equity method of accounting had no effect on net (loss) income attributable to Asta Funding, Inc. during the Non-Reliance Period. | |
| On the Company’s consolidated statement of operations, this resulted in (i) a decrease in total revenues of $4,438,000; (ii) a decrease in expenses of $4,377,000; (iii) a decrease in the income attributable to the non-controlling interest of $12,000; and (iv) a decrease in earnings from equity method investment of $49,000 for the six months ended March 31, 2017. This change to the equity method of accounting had no effect on net (loss) income attributable to Asta Funding, Inc. during the Non-Reliance Period. | |
| 2. | The Company determined that it had not previously accounted for certain foreign currency gains/losses on intercompany balances and transactions in accordance with US GAAP. The Company improperly accounted for the foreign currency effect of certain transactions as if they were long-term investments by including the foreign currency effect in accumulated other comprehensive income instead of properly recording the effect as operating expenses as required under ASC 830. |
| The correction to properly apply US GAAP to these foreign currency matters resulted in decreased revenue of $88,000, an increase in other income of $35,000, and a decrease in general and administrative expenses of $117,000 for the three months ended March 31, 2017. |
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Restated)
Note 1—Restatement of Financial Statements(continued)
The correction to properly apply US GAAP to these foreign currency matters resulted in increased revenue of $6,000, a decrease in other income of $58,000, and an increase in general and administrative expenses of $86,000 for the six months ended March 31, 2017.
The correction of foreign currency transaction on the consolidated balance sheet are as follows:
Increase (decrease) in: | Impact from September 30, 2016 10K/A filing | Current period impact | Cumulative net impact | ||||||||
Cash and cash equivalents | $3,000 | $(63,000) | $(60,000) | ||||||||
Consumer receivables acquired for liquidation | (245,000) | 184,000 | (61,000) | ||||||||
Due from third party collection agencies and attorneys | 45,000 | 7,000 | 52,000 | ||||||||
Deferred income taxes | (722,000) | (102,000) | (824,000) | ||||||||
Other assets | (33,000) | 223,000 | 190,000 | ||||||||
Other liabilities | (18,000) | 208,000 | 190,000 | ||||||||
Accumulated other comprehensive loss | 718,000 | 177,000 | 895,000 | ||||||||
Retained earnings | (1,653,000) | (139,000) | (1,792,000) |
3. | Prior to the sale of its structured settlement business, the Company purchased periodic payments under structured settlements and annuity policies from individuals in exchange for a lump sum payment. The Company has elected to carry the structured settlements at fair value in accordance with the guidance of FASB ASC, Recognition and Measurement of Financial Assets and Financial Liabilities (ASC 822-10-50-28 through 50-22). |
| As previously disclosed in the Restated Form 10-Q/A, the Company did not reflect the quarterly increase in certain underlying benchmark interest rates used in determining fair value of the Company’s structured settlements for the quarter ended December 31, 2016 which resulted in a decrease in the fair value of the Company's structured settlements of approximately $2.6 million (reflected in assets related to discontinued operations in this restated consolidated balance sheet) with an associated increase in prepaid income taxes and deferred tax assets of approximately $1.0 million (reflected in the loss from discontinued operations in this consolidated statement of operations). | |
| In connection with the Company’s filing of the Form 10-K/A, the Company adjusted the fair value of its structured settlements to reflect the appropriate benchmark interest rates at September 30, 2016, which resulted in an decrease in net loss attributable to discontinued operations and an increase in assets related to discontinued operations of $727,000. As this increase in fair value was originally recorded during the three month period ended December 31, 2016, this Amendment includes an increase in both the retained earnings and the net loss attributable to discontinued operations of $727,000 as of and for the six months ended March 31, 2017. |
4. | The Company determined that it had not accounted for certain unallocated payments reported on its consolidated balance sheet properly during the Non-Reliance Period. The correction of this error resulted in a decrease to consumer receivables acquired for liquidation of $648,000 and retained earnings of $648,000 as of September 30, 2016 and is therefore included in the net adjustment to retained earnings as of March 31, 2017. |
| 5. | The Company discovered that it did not properly record an amortizable asset and related liability in conjunction with an asset purchase agreement entered into in June 2015 with a related party. The correction of this error resulted in a decrease in income from discontinued operations of $60,000 and $118,000 for the three and six months ended March 31, 2017. |
| The correction of these errors on the consolidated balance sheet are as follows: |
Increase (decrease) in: | Impact from September 30, 2016 10K/A filing | Current period impact | Cumulative net impact | ||||||||
Assets related to discontinued operations | $307,000 | $(274,000) | $33,000 | ||||||||
Liabilities related to discontinued operations | 756,000 | (155,000) | 601,000 | ||||||||
Retained earnings | (442,000) | (118,000) | (560,000) |
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Restated)
Note 1—Restatement of Financial Statements(continued)
6. | The Company identified other transactions that had not been properly accounted for in the correct period and/or for improper amounts and/or improper accounts. The adjustments of these errors were immaterial on an individual basis. The correction of these errors resulted in decreased general and administrative expense of $0 and $270,000 for the three and six months ended March 31, 2017. |
| The correction of these errors on the consolidated balance sheet are as follows: |
Increase (decrease) in: | Impact from September 30, 2016 10K/A filing | Current period impact | Cumulative net impact | ||||||||
Cash and cash equivalents | $- | $11,000 | $11,000 | ||||||||
| Other liabilities | 269,000 | (257,000) | 12,000 | ||||||||
Retained earnings | (137,000) | 270,000 | 133,000 | ||||||||
Assets related to discontinued operations | 45,000 | - | 45,000 | ||||||||
Additional paid in capital | 8,000 | - | 8,000 |
7. | The Company identified the personal injury claims asset balance of Pegasus was determined to be overstated at March 31, 2017 by $400,000. The correction of this resulted in a decrease in earnings from the equity investment in Pegasus and income from continuing operations of $320,000 and $0 for the three and six months ended March 31, 2017, respectively. Additionally, the equity method investment was increased $101,000 to reflect the impact of related accruals in the Form 10-K/A. |
| 8. | Some of the corrections noted above impacted earnings (loss) before taxes which, in turn, required a calculation of the tax impact. The net impact to the Company’s consolidated balance sheet was a (i) decrease to prepaid and income taxes receivable of $49,000; and (ii) decrease to deferred tax assets of $2,750,000. |
| On the Company’s consolidated statement of operations, there was (i) a net increase to income tax expense of $1,866,000; and (ii) a decrease to income tax benefit from discontinued operations of $223,000 for the three months ended March 31, 2017. | |
| On the Company’s consolidated statement of operations, there was (i) a net increase to income tax expense of $3,118,000; and (ii) an increase to income tax benefit from discontinued operations of $138,000 for the six months ended March 31, 2017. |
All of the following notes to consolidated financial statements have been revised to reflect the effects of the above mentioned restatements.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Restated)
Note2—Business and Basis of Presentation
Business
Asta Funding, Inc., together with its wholly owned significant operating subsidiaries Palisades Collection, LLC, Palisades Acquisition XVI, LLC (“Palisades XVI”), Palisades Acquisition XIX, LLC (“Palisades XIX”), Palisades Acquisition XXIII, LLC (“Palisades XIX”), VATIV Recovery Solutions LLC (“VATIV”), ASFI Pegasus Holdings, LLC (“APH”), EMIRIC, LLC (“EMIRIC”), Fund Pegasus, LLC (“Fund Pegasus”), GAR National Disability Advocates, LLC (“GAR National Disability”) (formerly known as AGR Disability Help Center, LLC)Advocates”), Five Star Veterans Disability, LLC (“Five Star”), Simia Capital, LLC (“Simia”) and other subsidiaries, which are not all wholly owned (collectively, the “Company”(the “Company,” “we” or “us”), is engaged in several business segments in the financial services industry including funding of personal injury claims, through our 80% owned, 50% controlled equity investment in Pegasus Funding, LLC (“Pegasus”) and our wholly owned subsidiary Simia, social security and disability advocacy through our wholly owned subsidiaries GAR Disability Advocates and Five Star and the business of purchasing, managing for its own account and servicing distressed consumer receivables, including charged-off receivables, semi-performingcharged off receivables, and performingsemi-performing receivables.
Consumer receivables
The Company started out in the consumer receivable business in 1994. Recently, our effort has been in the international areas (mainly South America), as we have curtailed our active purchasing of consumer receivables in the United States. We define consumer receivables as primary charged-off, receivables are accounts that have been written-off by the originatorssemi-performing and may have been previously serviced by collection agencies. Semi-performing receivables are accounts where the debtor is currently making partial or irregular monthly payments, but the accounts may have been written-off by the originators. Performing receivables are accounts where the debtor is making regular monthly payments that may or may not have been delinquent in the past. Distresseddistressed depending on their collectability. We acquire these consumer receivables are the unpaid debts of individuals to banks, finance companies and other credit providers. A large portion of the Company’s distressed consumer receivables are MasterCard®, Visa®, other credit card accounts, and telecommunication accounts which were charged-off by the issuers for non-payment. The Company acquires these portfolios at substantial discounts fromto their face values. The discounts arevalues, based on the characteristics (issuer, account size, debtor residence and age of debt) of the underlying accounts of each portfolio. Litigation related receivables are semi-performing investments whereby
Personal injury claims
Simia and our equity method investment in Pegasus conducts its business solely in the United States. These companies obtain their business from external brokers and internal sales professionals soliciting individuals with personal injury claims. Business is also obtained from their websites and through attorneys.
Social security benefit advocacy
GAR Disability Advocates provides its disability advocacy services throughout the United States. It relies upon search engine optimization (“SEO”) to bring awareness to its intended market.
Discontinued Operations
US GAAP requires the results of operations of a component of an entity that either has been disposed of or is classified as held for sale to be reported as discontinued operations in the consolidated financial statements if the sale or disposition represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.
On December 13, 2017, the Company is assignedsold all of the revenue stream from the proceeds received.
The Company owns 80% of Pegasus Funding, LLC (“Pegasus”), which invests in funding personal injury claimsissued and 80%outstanding equity capital of CBC, Settlement Funding, LLC (“CBC”), which investsits wholly owned subsidiary engaging in structured settlements (seesettlements. As a result of this sale all prior periods presented in the Company's consolidated financial statements will account for CBC as a discontinued operation. This determination resulted in the reclassification of the assets and liabilities comprising the structured settlement business to assets and liabilities related to discontinued operations in the consolidated balance sheets, and a corresponding adjustment to our consolidated statements of operations to reflect discontinued operations for all periods presented. See Note 6: Acquisition of CBC).8 - Discontinued Operations in the Company's notes to the consolidated financial statements.
GAR National Disability is a non-attorney advocacy group, which obtains and represents individuals nationwide in their claims for social security disability and supplemental security income benefits from the Social Security Administration.
Basis of Presentation
The condensed consolidated balance sheet as of June 30, 2014, March 31, 2017, the condensed consolidated statements of operations for the ninethree and threesix month periods ended June 30, 2014 March 31, 2017 and 2013,2016, the condensed consolidated statements of comprehensive income (loss) for the ninethree and threesix month periods ended June 30, 2014 March 31, 2017 and 2013,2016, the condensed consolidated statementstatements of stockholders’ equity as of and for the ninesix months ended June 30, 2014 March 31, 2017 and 20132016, and the condensed consolidated statements of cash flows for the ninesix month periods ended June 30, 2014 March 31, 2017 and 2013,2016, are unaudited. The September 30, 20132016 financial information included in this report has been extractedAmendment was derived from our audited financial statements included in our Annual Report onthe Form 10-K for the fiscal year ended September 30, 2013.10-K/A. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly our financial position at June 30, 2014 and September 30, 2013, March 31, 2017, the results of operations for the ninethree and threesix month periods ended June 30, 2014 March 31, 2017 and 20132016 and cash flows for the ninesix month periods ended June 30, 2014 March 31, 2017 and 20132016 have been made. The results of operations for the ninethree and threesix month periods ended June 30, 2014 March 31, 2017 and 20132016 are not necessarily indicative of the operating results for any other interim period or the full fiscal year.
Palisades XVI is a variable interest entity (“VIE”). Asta Funding, Inc. is considered the primary beneficiary because it has the power to direct the significant activities
The consolidated financial statements are prepared in accordance with US GAAP and industry practices.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Restated)
Note 2—Business and service contract. Palisades XVI holds the Great Seneca portfolio valued at $21.6 million asBasis of June 30, 2014. See Note 11-Debt,PresentationNon-Recourse Debt-Bank of Montreal(continued) for additional details.
Blue Bell Receivables I, LLC, Blue Bells Receivables II, LLC and Blue Bell Receivables III, LLC (the “Blue Bell Entities”) are VIEs. CBC is considered the primary beneficiary because it has the power to direct the significant activities of the VIEs via its ownership and service contract. It also has the rights to receive benefits from the collections that exceed the payments to the note holders. The Blue Bell Entities held structured settlements of $14.4 million and non-recourse notes payable of $13.0 million as of June 30, 2014.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Rule 10-0110-01 of Regulation S-XS-X promulgated by the Securities and Exchange Commission and therefore do not include all information and note disclosures required under generally accepted accounting principles. The Company suggests that these financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2013,10-K/A filed with the Securities and Exchange Commission.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 — Business and Basis of Presentation (continued)
Basis of Presentation (continued)
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of AmericaUS GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates including management’s estimates of future cash flows and the resulting rates of return.
Recently Issued Accounting StandardsPrinciples of Consolidation
The consolidated financial statements include the accounts of Asta Funding, Inc. and its wholly owned and majority owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Concentration of Credit Risk – Cash and Restricted Cash
The Company considers all highly liquid investments with a maturity date of three months or less at the date of purchase to be cash equivalents.
Cash balances are maintained at various depository institutions and are insured by the Federal Deposit Insurance Corporation (“FDIC”). The Company had cash balances with seven banks at March 31,2017 that exceeded the balance insured by the FDIC by approximately $4.0 million. Additionally, three foreign banks with an aggregate $1.6 million balances are not FDIC insured. There is a $9.6 million aggregate balance in a domestic bank that is not FDIC insured and has been reclassified to restricted cash in the balance sheet since these assets serve as collateral for the line of credit (see Note 7-Non Recourse Debt ). The Company has an additional $0.5 million in restricted cash that is included in assets related to discontinued operations. The Company does not believe it is exposed to any significant credit risk due to concentration of cash.
Equity method investment
Investee companies that are not consolidated, but over which the Company exercises significant influence, are accounted for under the equity method of accounting. Whether or not the Company exercises significant influence with respect to an investee depends on an evaluation of several factors including, among others, representation on the investee company's board of directors and ownership level, which is generally a 20% to 50% interest in voting securities of the investee company. Under the equity method of accounting, an investee company's accounts are not reflected within the Company's consolidated balance sheets and statements of operations, however, the Company's share of the earnings of the investee company is reflected as earnings and loss from equity method investment in the Company's consolidated statement of operations. The Company's carrying value in an equity method investee company is reflected on the Company's consolidated balance sheet, as equity method investment.
Pegasus is the Company's 50% controlled equity investment with Pegasus Legal Funding (“PLF”). Under the operating agreement, the Company and PLF, each maintain 50% voting rights of the entity, and the company is 80% owned by Asta. Based on these shared voting rights with PLF, the Company lacks requisite control of Pegasus, and therefore accounts for its investment in Pegasus under the equity method of accounting.
Serlefin BPO&O Peru S.A.C. (“Serlefin Peru”) is the Company's 49% owned joint venture. The other 51% is owned by three individuals who share common ownership with Serlefin BPO&O Serlefin S.A. (“Serlefin”). Each owner maintains voting rights equivalent to their share ownership, and the 51% shareholders collectively manage the operations of the business. Based on the Company's ownership and voting rights, the Company lacks requisite control of Serlefin Peru, and therefore accounts for its investment in Serlefin Peru under the equity method of accounting.
Additionally, the Company and Serlefin jointly purchase international consumer debt portfolios under a purchase agreement. The Company and Serlefin purchase the portfolios on a pro-rata basis of 80% and 20%, respectively. The purchased portfolios are transferred to an administrative and payment trust, where the Company and Serlefin are trustees. Serlefin provides collection services to the trust, and receives a performance fee determined by the parties for each loan portfolio acquired. Serlefin received approximately $148,000 and $59,000 and $0.3 million and $0.1 million in performance fees for the three and six months ended March 31, 2017 and 2016, respectively.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Restated)
Note 2—Business and Basis of Presentation(continued)
Equity method investment(continued)
The carrying value of the investment in Serlefin Peru was $0.2 million as of March 31, 2017 and September 30, 2016. The Company has included the carrying value of this investment in other assets on its consolidated balance sheets. The cumulative net loss from our investment in Serlefin Peru through March 31, 2017 was approximately $0.1 million, and was not significant to the Company's consolidated statement of operations.
When the Company's carrying value in an equity method investee company is reduced to zero, no further losses are recorded in the Company's consolidated financial statements unless the Company guaranteed obligations of the investee company or has committed additional funding. When the investee company subsequently reports income, the Company will not record its share of such income until it equals the amount of its share of losses not previously recognized. There were no impairment losses recorded on our equity method investments for the three and six months ended March 31, 2017 and 2016.
Personal Injury Claim Advances
Management assesses the quality of the personal injury claims portfolio through an analysis of the underlying personal injury fundings on a case by case basis. Cases are reviewed through periodic updates with attorneys handling the cases, as well as with third party research tools which monitor public filings, such as motions or judgments rendered on specific cases. The Company specifically reserves for those fundings where the underlying cases are identified as uncollectible, due to anticipated non-favorable verdicts and/or settlements at levels where recovery of the advance outstanding is unlikely. For cases that have not exhibited any specific negative collection indicators, the Company establishes reserves based on the historical collection rates of the Company’s fundings. Fee income on advances is reserved for on all cases where a specific reserve is established on the initially funded amount. In addition, management also monitors its historical collection rates on fee income and establishes reserves on fee income consistent with the historically experienced collection rates. Management regularly analyzes and updates the historical collection rates of its initially funded cases as well as its fee income.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in a business combination, and is accounted for under ASC 350. Goodwill has an indefinite useful life and is evaluated for impairment at the reporting-unit level on an annual basis during the fourth quarter or more frequently if events or changes in circumstances indicate potential impairment between annual measurement dates. The Company has the option of performing a qualitative assessment of impairment to determine whether any further quantitative testing for impairment is necessary. The initial qualitative approach assesses whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company determines it is more likely than not that the fair value is less than carrying value, a two step quantitative impairment test is performed. A step 1 analysis involves calculating the fair value of the associated reporting unit and comparing it to the reporting unit’s carrying value. If the fair value of the reporting unit exceeds the carrying value of the reporting unit including goodwill and the carrying value of the reporting unit is positive, goodwill is considered not to be impaired and no further analysis is required. If the fair value of the reporting unit is less than its carrying value, step 2 of the impairment test must be performed. Step 2 involves calculating and comparing the implied fair value of the reporting unit’s goodwill with its carrying value. Impairment is recognized if the estimated fair value of the reporting unit is less than its net book value. Such loss is calculated as the difference between the estimated impaired fair value of goodwill and its carrying amount. As of March 31, 2017, goodwill of the Company consists of $1.4 million from the purchase of VATIV. Additionally, the Company has goodwill of $1.4 million from the purchase of CBC, which is included under assets related to discontinued operations on the consolidated balance sheet.
Reclassifications
Certain prior period amounts in the accompanying consolidated financial statements have been reclassified to conform to the current year presentation. These reclassifications had no effect on previously reported net loss or shareholders’ equity.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (the “FASB”)FASB issued an update to ASC 606, “Revenue Revenue from Contracts with Customers” that will supersede virtually all existing revenue guidance. Under this update, an entity is required to recognize revenue upon transfer of promised goods or services to customers, in an amount that reflects the entitled consideration received in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from the customer contracts. This update is effective for annual reporting periods beginning after December 15, 2016,2017 including interim periods within that reporting period. Early application is not permitted. We arepermitted for annual reporting periods beginning after December 15,2016, including interim periods within that reporting period. Given the changes in the Company's business management is continuing to assess this new standard and the impact it will have on accounting for its revenues.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Restated)
Note 2—Business and Basis of Presentation(continued)
Recent Accounting Pronouncements (continued)
In January 2016, the FASB issued ASU No.2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The main objective in developing this update is enhancing the reporting model for financial instruments to provide users of financial statements with more decision-useful information. The amendments in this update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The effective date for this update is for annual reporting periods beginning after December 15,2017, including interim periods within that reporting period. The Company is currently evaluating the impact this update will have on ourits consolidated financial statements as well as the expected adoption method.statements.
In June 2014, February 2016, the FASB issued ASU 2014-11, “TransfersNo.2016-02 Leases (Topic 842) to amend lease accounting requirements and Servicingrequires entities to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets. The new standard will require significant additional disclosures about the amount, timing and uncertainty of cash flows from leases. The standard update is effective for fiscal years beginning after December 15,2018 and interim periods within those years and early adoption is permitted. The standard is to be applied using a modified retrospective approach and includes a number of optional practical expedients that entities may elect to apply. The Company is currently evaluating the impact of adopting this update on its consolidated financial statements and expects that most of its operating leases will be subject to the accounting standard update and will recognize as operating lease liabilities and right-of-use assets upon adoption
In March 2016, the FASB issued ASU No.2016-09, Compensation-Stock Compensation (Topic 860)718): Repurchase-to-Maturity Transactions, Repurchase Financings,Improvements to Employee Share Based Payment Accounting, to simplify and Disclosures.”improve areas of generally accepted accounting principles for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The effective date for this update is for annual reporting periods beginning after December 15,2016, including interim periods within that reporting period. The Company is currently evaluating the impact this update will have on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For the Company, this update will be effective for interim periods and annual periods beginning after December 15, 2019. Upon adoption, the Company will accelerate the recording of its credit losses in its financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The new standard is effective for fiscal years beginning after December 15, 2017. Early adoption is permitted. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case the Company would be required to apply the amendments prospectively as of the earliest date practicable. The Company is in the process of evaluating the provisions of the ASU, but does not expect it to have a material effect on the Company’s consolidated statements of cash flows.
In November 2016, the FASB issued ASU No.2016-18, Restricted Cash ("ASU 2016-18"), to require that restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total cash amounts shown on the statement of cash flows. Consequently, transfers between cash and restricted cash will not be presented as a separate line item in the operating, investing or financing sections of the cash flow statement. ASU 2016-18 does not provide a definition of restricted cash or restricted cash equivalents. The new guidance will only be applicable to amounts described by the Company as restricted cash. We adopted ASU 2016-18 on October 1, 2016, the effect of which was a change in presentation on our consolidated statement of cash flows, but not on our consolidated financial results.
In January 2017, the FASB issued ASU 2017-04 Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The objective of this update is to simplify the subsequent measurement of goodwill, by eliminating step 2 from the goodwill impairment test. The amendments in this ASU require two accounting changes. First, the amendments in this ASU change the accounting for repurchase-to maturity transactions to secured borrowing accounting. Second, for repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. This ASU also includes new disclosure requirements. The accounting changes in this Updateupdate are effective for public business entities for the first interim or annual periodperiods beginning after December 15, 2014. An entity is required to present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Earlier application for a public business entity is prohibited.2019, and interim periods within those fiscal years. The Company revieweddoes not believe this ASU and determined that it did notupdate will have a material impact on its consolidated financial statements.
ConcentrationNote 3—Available-for-Sale Investments
Investments classified as available-for-sale at March 31,2017 and September 30,2016, consist of Credit Risk — Cashthe following:
Cash balances are maintained at various high credit quality depository institutions and are insured by the Federal Deposit Insurance Corporation (“FDIC”).
Amortized | Unrealized | Unrealized | Fair Value | |||||||||||||
March 31, 2017 | $ | 5,408,000 | $ | 4,000 | $ | (15,000 | ) | $ | 5,397,000 | |||||||
September 30, 2016 | $ | 55,723,000 | $ | 1,089,000 | $ | (49,000 | ) | $ | 56,763,000 | |||||||
The available-for-sale investments do not have any contractual maturities. The Company believes it is not exposed to any significant credit risk for cash.
Reclassifications
Certain items insold six investments during the three months and ninesix months ended June 30, 2013 condensed consolidated financial statements have been reclassified to conform toMarch 31, 2017, with a realized loss of $993,000. The Company received $177,000 in capital gains distributions during the current period’s presentation, primarilysix months ended March 31, 2017. For the six months ended March 31, 2016, the Company sold two investments with a realized loss of $31,000 and also received $47,000 in capital gains distributions during that period. The Company recorded an aggregate realized loss of $816,000 related to certain balance sheet and statementits available-for-sale securities for the firstsix months ended March 31, 2017 compared to an aggregate realized gain of operations items.$16,000 for the six month period ended March 31, 2016. The Company sold six investments during the three months ended March 31, 2017 with a realized loss of $948,000. There was no sale of investments during the three months ended March 31, 2016.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Restated)
Note 2—Restatement of Quarterly Financial Statements and Revision of Prior Period Financial Statements
3—Available-for-Sale Investments Restatement of Quarterly Financial Statements for the Period Ended June 30, 2014(continued)
Our previously reported results for the quarter ended June 30, 2014, reported finance income on the interest method in accordance with FASBAccounting Standards Codification (“ASC”) 310-30, Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality. However, due to the Company’s inability to reasonably estimate the cash collections under the interest method, as highlighted by the error identified below “Revision of Prior Period Annual Financial Statements” the Company was precluded from using the interest method and determined that the cost recovery method is the appropriate accounting method under the circumstances and has made adjustments to reflect the cost recovery method prospectively in the first interim period for the fiscal year ended September 30, 2014. The Company has concluded that the change to the cost recovery method should have occurred on October 1, 2013 instead of June 30, 2014 when it was originally reported. This change was also an error and has been corrected in this report on Form 10-Q/A. As disclosed in the detail that follows, the effect on the quarterly period ended June 30, 2014 was a reduction of finance income of approximately $1.6 million with an associated tax benefit of approximately $0.5 million which resulted in net income attributable to Asta Funding, Inc. of $4.7 million or $0.35 per share (diluted) from $5.5 million or $0.41 per share (diluted). The effect on the nine month period ended June 30, 2014 was a reduction of finance income of $5.8 million with an associated tax benefit of $1.9 million which resulted in net income attributable to Asta Funding, Inc. of $5.7 million or $0.43 per share (diluted) from $9.3 million or $0.70 per share (diluted).
Revision of Prior Period Annual Financial Statements
In addition, we identified pre-tax errors in prior annual periods related to the application of the interest method for consumer receivables acquired for liquidation and accounted for under ASC 310-30. During those prior annual periods, the Company had determined the effective yield for its distressed consumer receivable portfolios by analyzing actual cash flows versus the amount of cash flows expected to be collected over the life of the loan as opposed to performing this analysis using the current cash flow variations (i.e. actual versus estimated cash flows within a particular quarter). As disclosed in the detail that follows, this misstatement resulted in an increase in finance receivables of approximately $6.4 million, with a decrease in deferred taxes of approximately $2.7 million and a resulting increase to retained earnings of approximately $3.7 million in this Form 10-Q/A as of September 30, 2013. The impact of the misstatements in the prior years’ financial statements was not material to any of those years or interim periods, respectively, however, the cumulative effect of correcting all of the prior period misstatements in fiscal year 2014 would be material to our fiscal year 2014 consolidated financial statements. As such, consistent with the guidance in ASC Topic 250Accounting Changes and Error Corrections, we have accounted for these errors as a revision of prior period financial statements.
In evaluating whether the previously issued financial statements were materially misstated, the Company applied SEC Staff Accounting Bulletin (SAB) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB No. 108 states that registrants must quantify the impact of correcting all misstatements, including both the carryover (iron curtain method) and reversing (rollover method) effects of prior-year misstatements on the current-year financial statements, and by evaluating the misstatement measured under each method in light of quantitative and qualitative factors.
Under SAB No. 108, prior-year misstatements which, if corrected in the current year would be material, must be corrected by adjusting prior year financial statements, even though such correction previously was and continues to be immaterial to the prior-year financial statements. Correcting prior-year financial statements for such “immaterial misstatements” does not require previously filed reports to be amended. In accordance with accounting guidance presented in ASC 250-10 (SEC Staff Accounting Bulletin No. 99, Materiality), the Company assessed the materiality of the misstatements and concluded that they were not material to any of the Company’s previously issued annual or interim period financial statements.
Due to the immaterial nature of the misstatement corrections, the cumulative adjustments required to correct the misstatements in the financial statements prior to the fiscal year ended September 30, 2013 are reflected in the revised stockholders’ equity as of September 30, 2013.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The cumulative effect of those adjustments increased previously reported retained earnings by approximately $3.7 million. These adjustments also cumulatively impacted the following balance sheet line items as of June 30, 2014:
ASTA FUNDING, INC. AND SUBSIDIARIES
Condensed Consolidated Statements Balance Sheet
| June 30, 2014 | ||||||||||||
| As Reported | Adjustments | As Restated | ||||||||||
ASSETS | ||||||||||||
Cash and cash equivalents | $ | 26,017,000 | $ | 0 | $ | 26,017,000 | ||||||
Available for sale investments | 70,205,000 | 0 | 70,205,000 | |||||||||
Consumer receivables acquired for liquidation (at net realizable value) | 31,514,000 | 900,000 | 32,414,000 | |||||||||
Structured settlements | 35,892,000 | 0 | 35,892,000 | |||||||||
Investment in personal injury claims | 31,733,000 | 0 | 31,733,000 | |||||||||
Due from third party collection agencies and attorneys | 1,138,000 | 0 | 1,138,000 | |||||||||
Furniture and equipment, net | 656,000 | 0 | 656,000 | |||||||||
Deferred income taxes | 8,894,000 | (803,000 | ) | 8,091,000 | ||||||||
Goodwill | 2,770,000 | 0 | 2,770,000 | |||||||||
Other assets | 4,990,000 | 0 | 4,990,000 | |||||||||
|
|
|
|
|
| |||||||
Total assets | $ | 213,809,000 | $ | 97,000 | $ | 213,906,000 | ||||||
|
|
|
|
|
| |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||
Other debt – CBC (including non-recourse notes payable amounting to $13.0 million) | 27,434,000 | 0 | 27,434,000 | |||||||||
Other liabilities | 2,723,000 | 0 | 2,723,000 | |||||||||
Income taxes payable | 3,084,000 | 0 | 3,084,000 | |||||||||
|
|
|
|
|
| |||||||
Total liabilities | 33,241,000 | 0 | 33,241,000 | |||||||||
|
|
|
|
|
| |||||||
Commitments and contingencies | ||||||||||||
STOCKHOLDERS’ EQUITY | ||||||||||||
Preferred stock, $0.01 par value; authorized 5,000,000; issued and outstanding - none | — | — | — | |||||||||
Common stock, $.01 par value, authorized 30,000,000 shares; issued and outstanding 12,985,739 | 130,000 | 0 | 130,000 | |||||||||
Additional paid in capital | 62,648,000 | 0 | 62,648,000 | |||||||||
Retained earnings | 118,306,000 | 97,000 | 118,403,000 | |||||||||
Accumulated other comprehensive income | 22,000 | 0 | 22,000 | |||||||||
Non-controlling interest | (538,000 | ) | 0 | (538,000 | ) | |||||||
|
|
|
|
|
| |||||||
Total stockholders’ equity | 180,568,000 | 97,000 | 180,665,000 | |||||||||
|
|
|
|
|
| |||||||
Total liabilities and stockholders’ equity | $ | 213,809,000 | $ | 97,000 | $ | 213,906,000 | ||||||
|
|
|
|
|
| |||||||
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
ASTA FUNDING, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
The adjustments discussed above for applying the cost recovery method, net of related income tax benefit, resulted in an overstatement of net income of approximately $0.8 million for the three month period ended June 30, 2014. The restatement of the three month period ended June 30, 2014 is as follow:
| Three Months Ended June 30, 2014 | ||||||||||||
| As Reported | Adjustments | As Restated | ||||||||||
Revenues: | ||||||||||||
Finance income on consumer receivables, net | $ | 6,652,000 | $ | (1,578,000 | ) | $ | 5,074,000 | |||||
Personal injury claims income | 1,779,000 | 0 | 1,779,000 | |||||||||
Unrealized gain on structured settlements | 620,000 | 0 | 620,000 | |||||||||
Interest income on structured settlements | 786,000 | 0 | 786,000 | |||||||||
|
|
|
|
|
| |||||||
Total revenues | 9,837,000 | (1,578,000 | ) | 8,259,000 | ||||||||
Forgiveness of non-recourses debt | 26,101,000 | 26,101,000 | ||||||||||
Other income (includes $116,000 accumulated other comprehensive income reclassification for unrealized net loss on available for sale securities) | 336,000 | 0 | 336,000 | |||||||||
|
|
|
|
|
| |||||||
| 36,274,000 | (1,578,000 | ) | 34,696,000 | |||||||||
|
|
|
|
|
| |||||||
Expenses: | ||||||||||||
General and administrative | 7,012,000 | 0 | 7,012,000 | |||||||||
Interest expense | 413,000 | 0 | 413,000 | |||||||||
Impairments of consumer receivables acquired for liquidation | 19,901,000 | (310,000 | ) | 19,591,000 | ||||||||
|
|
|
|
|
| |||||||
| 27,326,000 | (310,000 | ) | 27,016,000 | |||||||||
|
|
|
|
|
| |||||||
Income before income tax expense (benefit) | 8,948,000 | (1,268,000 | ) | 7,680,000 | ||||||||
Income tax expense (includes tax benefit of $47,000 accumulated other comprehensive income reclassification for unrealized net loss on available for sale securities) | 3,464,000 | (491,000 | ) | 2,973,000 | ||||||||
|
|
|
|
|
| |||||||
Net income | 5,484,000 | (777,000 | ) | 4,707,000 | ||||||||
Less: net income attributable to non-controlling interest | 20,000 | 0 | 20,000 | |||||||||
|
|
|
|
|
| |||||||
Net income attributable to Asta Funding, Inc. | $ | 5,464,000 | $ | (777,000 | ) | $ | 4,687,000 | |||||
|
|
|
|
|
| |||||||
Net income per share attributable to Asta Funding, Inc.: | ||||||||||||
Basic | $ | 0.42 | $ | (0.06 | ) | $ | 0.36 | |||||
Diluted | $ | 0.41 | $ | (0.06 | ) | $ | 0.35 | |||||
Weighted average number of shares outstanding: | ||||||||||||
Basic | 12,984,882 | 12,984,882 | ||||||||||
Diluted | 13,214,703 | 13,214,703 | ||||||||||
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
ASTA FUNDING, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
The adjustments discussed above for applying the cost recovery method, net of related income tax benefit, resulted in an understatement of net loss of approximately $0.6 million for the three month period ended June 30, 2013. The restatement of the three month period ended June 30, 2013 is as follow:
| Three Months Ended June 30, 2013 | ||||||||||||
| As Reported | Adjustments | As Revised | ||||||||||
Revenues: | ||||||||||||
Finance income on consumer receivables, net | $ | 10,003,000 | $ | (1,031,000 | ) | $ | 8,972,000 | |||||
Personal injury claims income | 2,287,000 | 0 | 2,287,000 | |||||||||
|
|
|
|
|
| |||||||
Total revenues | 12,290,000 | (1,031,000 | ) | 11,259,000 | ||||||||
Other income (includes $17,000 accumulated other comprehensive income reclassification for unrealized net gain on available for sale securities) | 378,000 | 0 | 378,000 | |||||||||
|
|
|
|
|
| |||||||
| 12,668,000 | (1,031,000 | ) | 11,637,000 | |||||||||
|
|
|
|
|
| |||||||
Expenses: | ||||||||||||
General and administrative | 6,545,000 | 0 | 6,545,000 | |||||||||
Interest expense | 518,000 | 0 | 518,000 | |||||||||
Impairments of consumer receivables acquired for liquidation | 10,148,000 | 38,000 | 10,186,000 | |||||||||
|
|
|
|
|
| |||||||
| 17,211,000 | 38,000 | 17,249,000 | ||||||||||
|
|
|
|
|
| |||||||
(Loss) before income tax (benefit) | (4,543,000 | ) | (1,069,000 | ) | (5,612,000 | ) | ||||||
Income tax (benefit) (includes tax expense of $5,000 accumulated other comprehensive income reclassification for unrealized net gain on available for sale securities) | (1,859,000 | ) | (437,000 | ) | (2,296,000 | ) | ||||||
|
|
|
|
|
| |||||||
Net loss | (2,684,000 | ) | (632,000 | ) | (3,316,000 | ) | ||||||
Less: net income attributable to non-controlling interest | 53,000 | 0 | 53,000 | |||||||||
|
|
|
|
|
| |||||||
Net (loss) attributable to Asta Funding, Inc. | $ | (2,737,000 | ) | $ | (632,000 | ) | $ | (3,369,000 | ) | |||
|
|
|
|
|
| |||||||
Net (loss) per share attributable to Asta Funding, Inc.: | ||||||||||||
Basic | $ | (0.21 | ) | $ | (0.05 | ) | $ | (0.26 | ) | |||
Diluted | $ | (0.21 | ) | $ | (0.05 | ) | $ | (0.26 | ) | |||
Weighted average number of shares outstanding: | ||||||||||||
Basic | 12,954,455 | 12,954,455 | ||||||||||
Diluted | 12,954,455 | 12,954,455 | ||||||||||
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
ASTA FUNDING, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
The adjustments discussed above for applying the cost recovery method, net of related income tax benefit, resulted in an overstatement of net income of approximately $3.6 million for the nine month period ended June 30, 2014. The restatement of the nine month period ended June 30, 2014 is as follow:
| Nine Months Ended June 30, 2014 | ||||||||||||
| As Reported | Adjustments | As Restated | ||||||||||
Revenues: | ||||||||||||
Finance income on consumer receivables, net | $ | 20,556,000 | $ | (5,764,000 | ) | $ | 14,792,000 | |||||
Personal injury claims income | 5,724,000 | 0 | 5,724,000 | |||||||||
Unrealized gain on structured settlements | 1,440,000 | 0 | 1,440,000 | |||||||||
Interest income on structured settlements | 1,501,000 | 0 | 1,501,000 | |||||||||
|
|
|
|
|
| |||||||
Total revenues | 29,221,000 | (5,764,000 | ) | 23,457,000 | ||||||||
Forgiveness of non-recourses debt | 26,101,000 | 0 | 26,101,000 | |||||||||
Other income (includes $141,000 accumulated other comprehensive income reclassification for unrealized net lose on available for sale securities) | 1,370,000 | 0 | 1,370,000 | |||||||||
|
|
|
|
|
| |||||||
| 56,692,000 | (5,764,000 | ) | 50,928,000 | |||||||||
|
|
|
|
|
| |||||||
Expenses: | ||||||||||||
General and administrative | 20,517,000 | 0 | 20,517,000 | |||||||||
Interest expense | 820,000 | 0 | 820,000 | |||||||||
Impairments of consumer receivables acquired for liquidation | 19,901,000 | (310,000 | ) | 19,591,000 | ||||||||
|
|
|
|
|
| |||||||
| 41,238,000 | (310,000 | ) | 40,928,000 | |||||||||
|
|
|
|
|
| |||||||
Income before income tax expense (benefit) | 15,454,000 | (5,454,000 | ) | 10,000,000 | ||||||||
Income tax expense (includes tax benefit of $57,000 accumulated other comprehensive income reclassifications for unrealized net loss on available for sale securities) | 5,676,000 | (1,868,000 | ) | 3,808,000 | ||||||||
|
|
|
|
|
| |||||||
Net income | 9,778,000 | (3,586,000 | ) | 6,192,000 | ||||||||
Less: net income attributable to non-controlling interest | 483,000 | 0 | 483,000 | |||||||||
|
|
|
|
|
| |||||||
Net income attributable to Asta Funding, Inc. | $ | 9,295,000 | $ | (3,586,000 | ) | $ | 5,709,000 | |||||
|
|
|
|
|
| |||||||
Net income per share attributable to Asta Funding, Inc.: | ||||||||||||
Basic | $ | 0.72 | $ | (0.28 | ) | $ | 0.44 | |||||
Diluted | $ | 0.70 | $ | (0.27 | ) | $ | 0.43 | |||||
Weighted average number of shares outstanding: | ||||||||||||
Basic | 12,979,472 | 12,979,472 | ||||||||||
Diluted | 13,208,015 | 13,208,015 | ||||||||||
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
ASTA FUNDING, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
The adjustments discussed above for applying the cost recovery method, net of related income tax benefit, resulted in an overstatement of net income of approximately $15,000 for the nine month period ended June 30, 2013. The restatement of the nine month period ended June 30, 2013 is as follow:
| Nine Months Ended June 30, 2013 | ||||||||||||
| As Reported | Adjustments | As Revised | ||||||||||
Revenues: | ||||||||||||
Finance income on consumer receivables, net | $ | 26,756,000 | $ | (1,716,000 | ) | $ | 25,040,000 | |||||
Personal injury claims income | 4,921,000 | 0 | 4,921,000 | |||||||||
|
|
|
|
|
| |||||||
Total revenues | 31,677,000 | (1,716,000 | ) | 29,961,000 | ||||||||
Other income (includes $192,000 accumulated other comprehensive income reclassification for unrealized net gain on available for sale securities) | 1,628,000 | 0 | 1,628,000 | |||||||||
|
|
|
|
|
| |||||||
| 33,305,000 | (1,716,000 | ) | 31,589,000 | |||||||||
|
|
|
|
|
| |||||||
Expenses: | ||||||||||||
General and administrative | 17,926,000 | 0 | 17,926,000 | |||||||||
Interest expense | 1,621,000 | 0 | 1,621,000 | |||||||||
Impairments of consumer receivables acquired for liquidation | 12,351,000 | (1,646,000 | ) | 10,705,000 | ||||||||
|
|
|
|
|
| |||||||
| 31,898,000 | (1,646,000 | ) | 30,252,000 | |||||||||
|
|
|
|
|
| |||||||
Income (loss) before income tax expense (benefit) | 1,407,000 | (70,000 | ) | 1,337,000 | ||||||||
Income tax expense (includes tax expense of $76,000 accumulated other comprehensive income reclassification for unrealized net gain on available for sale securities) | 498,000 | (55,000 | ) | 443,000 | ||||||||
|
|
|
|
|
| |||||||
Net income | 909,000 | (15,000 | ) | 894,000 | ||||||||
Less: net income attributable to non-controlling interest | 176,000 | 0 | 176,000 | |||||||||
|
|
|
|
|
| |||||||
Net income attributable to Asta Funding, Inc. | $ | 733,000 | $ | (15,000 | ) | $ | 718,000 | |||||
|
|
|
|
|
| |||||||
Net income (loss) per share attributable to Asta Funding, Inc.: | ||||||||||||
Basic | $ | 0.06 | $ | 0.00 | $ | 0.06 | ||||||
Diluted | $ | 0.06 | $ | (0.01 | ) | $ | 0.05 | |||||
Weighted average number of shares outstanding: | ||||||||||||
Basic | 12,946,521 | 12,946,521 | ||||||||||
Diluted | 13,217,656 | 13,217,656 | ||||||||||
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
ASTA FUNDING, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
The adjustments discussed above also resulted in changes to previously reported amounts in our consolidated statements of cash flows. The previously reported changes in operating assets and liabilities in the reconciliation of net income to cash provided by operating activities have been restated and revised as detailed in the tables below:
| Nine Months Ended June 30, 2014 | ||||||||||||
| As Reported | Adjustments | As Restated | ||||||||||
Cash flows from operating activities | ||||||||||||
Net income | $ | 9,778,000 | $ | (3,586,000 | ) | $ | 6,192,000 | |||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 450,000 | 0 | 450,000 | |||||||||
Deferred income taxes | 1,095,000 | (1,868,000 | ) | (773,000 | ) | |||||||
Impairment of consumer receivables acquired for liquidation | 19,901,000 | (310,000 | ) | 19,591,000 | ||||||||
Stock based compensation | 1,290,000 | 0 | 1,290,000 | |||||||||
Loss / (gain) on sale of available-for-sale securities | 141,000 | 0 | 141,000 | |||||||||
Structured settlements - accrued interest | (1,475,000 | ) | 0 | (1,475,000 | ) | |||||||
Structured settlements – gains | (1,440,000 | ) | 0 | (1,440,000 | ) | |||||||
Forgiveness of non-recourses debt | (26,101,000 | ) | 0 | (26,101,000 | ) | |||||||
Changes in: | ||||||||||||
Prepaid and income taxes receivable | 1,496,000 | 0 | 1,496,000 | |||||||||
Due from third party collection agencies and attorneys | 31,000 | 0 | 31,000 | |||||||||
Other assets | (596,000 | ) | 0 | (596,000 | ) | |||||||
Income taxes payable | 3,084,000 | 0 | 3,084,000 | |||||||||
Other liabilities | (119,000 | ) | 0 | (119,000 | ) | |||||||
|
|
|
|
|
| |||||||
Net cash provided by operating activities | 7,535,000 | (5,764,000 | ) | 1,771,000 | ||||||||
|
|
|
|
|
| |||||||
Cash flows from investing activities | ||||||||||||
Purchase of consumer receivables acquired for liquidation | (3,702,000 | ) | 0 | (3,702,000 | ) | |||||||
Principal collected on receivables acquired for liquidation | 10,186,000 | 5,764,000 | 15,950,000 | |||||||||
Principal collected on receivables accounts represented by account sales | 1,000 | 0 | 1,000 | |||||||||
Purchase of available-for-sale securities | (19,845,000 | ) | 0 | (19,845,000 | ) | |||||||
Proceeds from sale of available-for-sale securities | 8,684,000 | 0 | 8,684,000 | |||||||||
Cash paid for acquisition (net of cash acquired) | (5,588,000 | ) | 0 | (5,588,000 | ) | |||||||
Investments in personal injury claims – advances | (16,392,000 | ) | 0 | (16,392,000 | ) | |||||||
Investments in personal injury claims – receipts | 20,417,000 | 0 | 20,417,000 | |||||||||
Investment in structured settlements – advances | (4,696,000 | ) | 0 | (4,696,000 | ) | |||||||
Investments in structured settlements – receipts | 2,155,000 | 0 | 2,155,000 | |||||||||
|
|
|
|
|
| |||||||
Net cash (used in) provided by investing activities | (8,780,000 | ) | 5,764,000 | (3,016,000 | ) | |||||||
|
|
|
|
|
| |||||||
Cash flows from financing activities | ||||||||||||
Proceeds from exercise of stock options | 40,000 | 0 | 40,000 | |||||||||
Changes in restricted cash | 968,000 | 0 | 968,000 | |||||||||
Distribution to non-controlling interest | (837,000 | ) | 0 | (837,000 | ) | |||||||
Repayment of non-recourse debt | (9,659,000 | ) | 0 | (9,659,000 | ) | |||||||
Borrowings of other debt | 4,131,000 | 0 | 4,131,000 | |||||||||
Repayments of other debt | (2,560,000 | ) | 0 | (2,560,000 | ) | |||||||
|
|
|
|
|
| |||||||
Net cash used in financing activities | (7,917,000 | ) | 0 | (7,917,000 | ) | |||||||
|
|
|
|
|
| |||||||
Net (decrease) increase in cash and cash equivalents | (9,162,000 | ) | 0 | (9,162,000 | ) | |||||||
Cash and cash equivalents at beginning of period | 35,179,000 | 0 | 35,179,000 | |||||||||
|
|
|
|
|
| |||||||
Cash and cash equivalents at end of period | $ | 26,017,000 | $ | 0 | 26,017,000 | |||||||
|
|
|
|
|
| |||||||
Supplemental disclosure of cash flow information: | ||||||||||||
Cash paid for: | ||||||||||||
Interest | $ | 678,000 | $ | 0 | $ | 678,000 | ||||||
Supplemental disclosures of non-cash investing and financing activities: | ||||||||||||
Structured settlements | $ | 30,436,000 | 0 | $ | 30,436,000 | |||||||
Other debt – CBC | 23,363,000 | 0 | 23,363,000 | |||||||||
Retirement of treasury stock | 17,805,000 | 0 | 17,805,000 | |||||||||
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
ASTA FUNDING, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| Nine Months Ended June 30, 2013 | ||||||||||||
| As Reported | Adjustments | As Revised | ||||||||||
Cash flows from operating activities | ||||||||||||
Net income | $ | 909,000 | $ | (15,000 | ) | $ | 894,000 | |||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 450,000 | 0 | 450,000 | |||||||||
Deferred income taxes | 85,000 | (56,000 | ) | 29,000 | ||||||||
Impairment of consumer receivables acquired for liquidation | 12,351,000 | (1,646,000 | ) | 10,705,000 | ||||||||
Stock based compensation | 1,498,000 | 0 | 1,498,000 | |||||||||
Loss / (gain) on sale of available-for-sale securities | (192,000 | ) | 0 | (192,000 | ) | |||||||
Changes in: | ||||||||||||
Prepaid and income taxes receivable | 382,000 | 0 | 382,000 | |||||||||
Due from third party collection agencies and attorneys | 802,000 | 0 | 802,000 | |||||||||
Other assets | (2,369,000 | ) | 0 | (2,369,000 | ) | |||||||
Other liabilities | (1,104,000 | ) | 0 | (1,104,000 | ) | |||||||
|
|
|
|
|
| |||||||
Net cash provided by operating activities | 12,812,000 | (1,717,000 | ) | 11,095,000 | ||||||||
|
|
|
|
|
| |||||||
Cash flows from investing activities | ||||||||||||
Purchase of consumer receivables acquired for liquidation | (3,340,000 | ) | 0 | (3,340,000 | ) | |||||||
Principal collected on receivables acquired for liquidation | 14,850,000 | 1,717,000 | 16,567,000 | |||||||||
Principal collected on receivables accounts represented by account sales | 432,000 | 0 | 432,000 | |||||||||
Purchase of available-for-sale securities | (29,907,000 | ) | 0 | (29,907,000 | ) | |||||||
Proceeds from sale of available-for-sale securities | 28,918,000 | 0 | 28,918,000 | |||||||||
Proceeds from maturities of certificates of deposit | 33,918,000 | 0 | 33,918,000 | |||||||||
Investments in personal injury claims – advances | (22,863,000 | ) | 0 | (22,863,000 | ) | |||||||
Investments in personal injury claims – receipts | 9,162,000 | 0 | 9,162,000 | |||||||||
Capital expenditures | (725,000 | ) | 0 | (725,000 | ) | |||||||
|
|
|
|
|
| |||||||
Net cash (used in) provided by investing activities | 30,445,000 | 1,717,000 | 32,162,000 | |||||||||
|
|
|
|
|
| |||||||
Cash flows from financing activities | ||||||||||||
Proceeds from exercise of stock options | 103,000 | 0 | 103,000 | |||||||||
Changes in restricted cash | 21,000 | 0 | 21,000 | |||||||||
Repayment of non-recourse debt | (7,213,000 | ) | 0 | (7,213,000 | ) | |||||||
Dividends paid | (1,290,000 | ) | 0 | (1,290,000 | ) | |||||||
Purchase of treasury stock | (1,579,000 | ) | 0 | (1,579,000 | ) | |||||||
|
|
|
|
|
| |||||||
Net cash used in financing activities | (9,958,000 | ) | 0 | (9,958,000 | ) | |||||||
|
|
|
|
|
| |||||||
Net (decrease) increase in cash and cash equivalents | 33,299,000 | 0 | 33,299,000 | |||||||||
Cash and cash equivalents at beginning of period | 4,953,000 | 0 | 4,953,000 | |||||||||
|
|
|
|
|
| |||||||
Cash and cash equivalents at end of period | $ | 38,252,000 | $ | 0 | $ | 38,252,000 | ||||||
|
|
|
|
|
| |||||||
Supplemental disclosure of cash flow information : | ||||||||||||
Cash paid for: | ||||||||||||
Interest | $ | 1,645,000 | 0 | $ | 1,645,000 | |||||||
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3 — Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its wholly owned and majority owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Note 4 — Investments
Available-for-Sale
Investments classified as available-for-sale at June 30, 2014 and September 30, 2013, consist of the following:
| Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | |||||||||||||
June 30, 2014 | $ | 70,171,000 | $ | 292,000 | $ | (258,000 | ) | $ | 70,205,000 | |||||||
September 30, 2013 | $ | 59,151,000 | $ | 27,000 | $ | (1,143,000 | ) | $ | 58,035,000 | |||||||
The available-for-sale investments do not have any contractual maturities. The Company sold two investments during the first nine months of fiscal year 2014, with an aggregate realized loss of $141,000. In the first nine months of fiscal year 2013, the Company sold three investments with an aggregate realized gain of $192,000. The Company sold one investment during the three month period ended June 30, 2014, with a realized loss of $116,000. The Company sold one investment during the three month period ended June 30, 2013, with a realized gain of $17,000.
At June 30, 2014,March 31,2017, there were seventhree investments, fivetwo of which were in a netan unrealized loss position.position that had existed for 12 months or more. All of these securities are considered to be acceptable credit risks. Based on the evaluation of the available evidence, including recent changes in market rates and credit rating information, management believes the aggregate decline in fair value for these instruments is temporary. In addition, management has the ability to hold these investment securities for a period of time sufficient to allow for an anticipated recovery or maturity. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period in which the other-than-temporary impairment is identified.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Unrealized holding gains and losses on available-for-sale securities are included in other comprehensive income (loss) within stockholders’ equity. Realized gains (losses) on available-for-sale securities are included in other income (loss) and, when applicable, are reported as a reclassification adjustment in other comprehensive income (loss).
Note 5 — 4—Consumer Receivables Acquired for Liquidation (Restated and Revised)
Accounts acquired for liquidation are stated at their net estimated realizable value and consist primarily of defaulted consumer loans to individuals primarily throughout the United States.States and South America.
The Company may account for its investments in consumer receivable portfolios, using either:
the interest method; or
the cost recovery method.
The
Prior to October 1,2013, the Company accountsaccounted for certain of its investments in finance receivables using the interest method underin accordance with the guidance of ASC 310-30.310, Receivables. Under the guidance of ASC 310-30,310-30, static pools of accounts are established. These pools are aggregated based on certain common risk criteria. Each static pool is recorded at cost and is accounted for as a single unit for the recognition of income, principal payments and loss provision. Effective October 1,2013, due to the substantial reduction of portfolios reported under the interest method, and the ability to reasonably estimate cash collections required to account for those portfolios under the interest method, the Company concluded the cost recovery method is the appropriate accounting method underin the circumstances.
Although the Company has switched to the cost recovery method on its current inventory of portfolios, the Company must still analyze a portfolio upon acquisition to ensure which method is appropriate, and once a static pool is established for a quarter, individual receivable accounts receivable were are not added to the pool (unless replaced by the seller) or removed from the pool (unless sold or returned to the seller). ASC 310-30 requires that the excess of the contractual cash flows over expected cash flows not be recognized as an adjustment of revenue or expense or on the balance sheet. ASC 310-30 initially freezes the internal rate of return, referred to as IRR, estimated when the accounts receivable are purchased, as the basis for subsequent impairment testing. Significant increases in actual or expected future cash flows may be recognized prospectively through an upward adjustment of the IRR over a portfolio’s remaining life. Any increase to the IRR then becomes the new benchmark for impairment testing. Rather than lowering the estimated IRR if the collection estimates are not received or projected to be received, the carrying value of a pool would be impaired, or written down to maintain the then current IRR. Under the interest method, income is recognized on the effective yield method based on the actual cash collected during a period and future estimated cash flows and timing of such collections and the portfolio’s cost. Material variations of cash flow estimates are recorded in the quarter such variations are determined. The estimated future cash flows are reevaluated quarterly.
The Company uses the cost recovery method when collections on a particular pool of accounts cannot be reasonably predicted. Under the cost recovery method, no income is recognized until the cost of the portfolio has been fully recovered. A pool can become fully amortized (zero(zero carrying balance on the balance sheet) while still generating cash collections. In this case, all cash collections are recognized as revenue when received.
The Company’sCompany has extensive liquidating experience is in the field of distressed credit card receivables, telecommunication receivables, consumer loan receivables, retail installment contracts, consumer receivables, and auto deficiency receivables. The Company will analyze a portfolio to determine if the interest method is appropriate for accounting for asset acquisitions within these classes of receivables when it believes it can reasonably estimate the timing of the cash flows. In those situations where the Company diversifies its acquisitions into other asset classes and the Company does not possess the same expertise, or the Company cannot reasonably estimate the timing of the cash flows with an appropriate degree of precision, the Company utilizes the cost recovery method of accounting for those portfolios of receivables. At June 30, 2014, all of the portfolios are accounted for on the cost recovery method, of which $21.6 million is concentrated in one portfolio, the remaining value of a $300 million portfolio purchase in March 2007 (the “Portfolio Purchase”).
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5 — Consumer Receivables Acquired for Liquidation (Restated and Revised) (continued))
The Company aggregates portfolios of receivables acquired sharing specific common characteristics which were acquired within a given quarter. The Company has considered for aggregation portfolios of accounts, purchased withinIn addition, the same fiscal quarter, that generally meet the following characteristics:
The Company uses a variety of qualitative and quantitative factors to estimate collections and the timing thereof. This analysis includes the following variables:
The Company obtains and utilizes, as appropriate, input, including but not limited to, monthly collection projections and liquidation rates, from third party collection agencies and attorneys, as a further evidentiary matter, to assist in evaluating and developing collection strategies and in evaluating and modeling the expected cash flows for a given portfolio.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Restated)
Note 5 — 4—Consumer Receivables Acquired for Liquidation (Restated and Revised) (continued)(continued)
The following tables summarize the changes in the consolidated balance sheet account of consumer receivables acquired for liquidation during the following periods:
| RESTATED | ||||||||||||
| For the Nine Months Ended June 30, 2014 | ||||||||||||
| Interest Method | Cost Recovery Method | Total | ||||||||||
Balance, beginning of period | $ | 8,071,000 | $ | 49,829,000 | $ | 57,900,000 | ||||||
Balance transferred to cost recovery – prior period adjustment | (1,304,000 | ) | 1,304,000 | — | ||||||||
Adjustment for misapplication of the interest method to prior periods | 6,354,000 | — | 6,354,000 | |||||||||
|
|
|
|
|
| |||||||
Balance beginning of period, as restated | 13,121,000 | 51,133,000 | 64,254,000 | |||||||||
Reclassification of interest method portfolios to cost recovery method | (13,121,000 | ) | 13,121,000 | — | ||||||||
Acquisition of receivable portfolios | — | 3,702,000 | 3,702,000 | |||||||||
Net cash collections from collection of consumer receivables acquired for liquidation | — | (30,739,000 | ) | (30,739,000 | ) | |||||||
Net cash collections represented by account sales of consumer receivables acquired for liquidation | — | (4,000 | ) | (4,000 | ) | |||||||
Impairment | — | (19,591,000 | ) | (19,591,000 | ) | |||||||
Finance income recognized (1) | — | 14,792,000 | 14,792,000 | |||||||||
|
|
|
|
|
| |||||||
Balance, end of period | $ | 0 | $ | 32,414,000 | $ | 32,414,000 | ||||||
|
|
|
|
|
| |||||||
Finance income as a percentage of collections | 0 | % | 48.1 | % | 48.1 | % | ||||||
For the Three Months Ended March 31, | ||||||||
2017 | 2016 | |||||||
Balance, beginning of period | $ | 13,462,000 | $ | 18,809,000 | ||||
Acquisitions of receivable portfolio | — | 134,000 | ||||||
Net cash collections from collection of consumer receivables acquired for liquidation | (6,071,000 | ) | (7,397,000 | ) | ||||
Impairment | — | (124,000 | ) | |||||
Effect of foreign currency translation | 270,000 | 140,000 | ||||||
Finance income recognized | 3,929,000 | 4,878,000 | ||||||
Balance, end of period | $ | 11,590,000 | $ | 16,440,000 | ||||
Finance income as a percentage of collections | 64.72 | % | 65.95 | % | ||||
| REVISED | ||||||||||||
| For the Nine Months Ended June 30, 2013 | ||||||||||||
| Interest Method | Cost Recovery Method | Total | ||||||||||
Balance, beginning of period | $ | 12,326,000 | $ | 74,561,000 | $ | 86,887,000 | ||||||
Balance transferred to cost recovery – prior period adjustment | (2,692,000 | ) | 2,692,000 | — | ||||||||
Adjustment for misapplication of the interest method to prior periods | 5,852,000 | 1,500,000 | 7,352,000 | |||||||||
|
|
|
|
|
| |||||||
Balance beginning of period, as revised | 15,486,000 | 78,753,000 | 94,239,000 | |||||||||
Acquisition of receivable portfolios | — | 3,340,000 | 3,340,000 | |||||||||
Net cash collections from collection of consumer receivables acquired for liquidation | (24,832,000 | ) | (15,182,000 | ) | (40,014,000 | ) | ||||||
Net cash collections represented by account sales of consumer receivables acquired for liquidation | (977,000 | ) | (1,047,000 | ) | (2,024,000 | ) | ||||||
Impairment | (556,000 | ) | (10,149,000 | ) | (10,705,000 | ) | ||||||
Finance income recognized (1) | 21,765,000 | 3,275,000 | 25,040,000 | |||||||||
|
|
|
|
|
| |||||||
Balance, end of period | $ | 10,886,000 | $ | 58,990,000 | $ | 69,876,000 | ||||||
|
|
|
|
|
| |||||||
Finance income as a percentage of collections | 84.3 | % | 20.2 | % | 59.6 | % | ||||||
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Six Months Ended March 31, | ||||||||
2017 | 2016 | |||||||
Balance, beginning of period | $ | 13,427,000 | $ | 15,056,000 | ||||
Acquisitions of receivable portfolio | 2,213,000 | 6,185,000 | ||||||
Net cash collections from collection of consumer receivables acquired for liquidation | (12,086,000 | ) | (14,774,000 | ) | ||||
Net cash collections represented by account sales of consumer receivables acquired for liquidation | (190,000 | ) | — | |||||
Impairment | — | (124,000 | ) | |||||
Effect of foreign currency translation | 202,000 | 113,000 | ||||||
Finance income recognized | 8,024,000 | 9,984,000 | ||||||
Balance, end of period | $ | 11,590,000 | $ | 16,440,000 | ||||
Finance income as a percentage of collections | 65.36 | % | 67.58 | % | ||||
Note 5 — Consumer Receivables Acquired for Liquidation (RestatedDuring the three and Revised) (continued)
| RESTATED | ||||||||||||
| For the Three Months Ended June 30, 2014 | ||||||||||||
| Interest Method | Cost Recovery Method | Total | ||||||||||
Balance, beginning of period | $ | 6,970,000 | $ | 45,101,000 | $ | 52,071,000 | ||||||
Balance transferred to cost recovery - prior period adjustment | (989,000 | ) | 989,000 | — | ||||||||
Adjustment for misapplication of the interest method to prior periods | (5,981,000 | ) | 8,149,000 | 2,168,000 | ||||||||
|
|
|
|
|
| |||||||
Balance beginning of period, as restated | — | 54,239,000 | 54,239,000 | |||||||||
Acquisition of receivable portfolio | — | 2,733,000 | 2,733,000 | |||||||||
Net cash collections from collection of consumer receivables acquired for liquidation | — | (10,039,000 | ) | (10,039,000 | ) | |||||||
Net cash collections represented by account sales of consumer receivables acquired for liquidation | — | (2,000 | ) | (2,000 | ) | |||||||
Impairment | — | (19,591,000 | ) | (19,591,000 | ) | |||||||
Finance income recognized (1) | — | 5,074,000 | 5,074,000 | |||||||||
|
|
|
|
|
| |||||||
Balance, end of period | $ | 0 | $ | 32,414,000 | $ | 32,414,000 | ||||||
|
|
|
|
|
| |||||||
Finance income as a percentage of collections | 0 | % | 50.5 | % | 50.5 | % | ||||||
| REVISED | ||||||||||||
| For the Three Months Ended June 30, 2013 | ||||||||||||
| Interest Method | Cost Recovery Method | Total | ||||||||||
Balance, beginning of period | $ | 6,813,000 | $ | 68,011,000 | $ | 74,824,000 | ||||||
Balance transferred to cost recovery – prior period adjustment | (2,025,000 | ) | 2,025,000 | — | ||||||||
Adjustment for misapplication of the interest method to prior periods | 7,539,000 | 812,000 | 8,351,000 | |||||||||
|
|
|
|
|
| |||||||
Balance beginning of period, as revised | 12,327,000 | 70,848,000 | 83,175,000 | |||||||||
Acquisition of receivable portfolio | — | 3,340,000 | 3,340,000 | |||||||||
Net cash collections from collection of consumer receivables acquired for liquidation | (7,937,000 | ) | (5,481,000 | ) | (13,418,000 | ) | ||||||
Net cash collections represented by account sales of consumer receivables acquired for liquidation | (970,000 | ) | (1,037,000 | ) | (2,007,000 | ) | ||||||
Impairment | (37,000 | ) | (10,149,000 | ) | (10,186,000 | ) | ||||||
Finance income recognized (1) | 7,503,000 | 1,469,000 | 8,972,000 | |||||||||
|
|
|
|
|
| |||||||
Balance, end of period | $ | 10,886,000 | $ | 58,990,000 | $ | 69,876,000 | ||||||
|
|
|
|
|
| |||||||
Finance income as a percentage of collections | 84.2 | % | 22.5 | % | 58.2 | % | ||||||
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5 — Consumer Receivables Acquired for Liquidation (Restated and Revised)(continued)
The following tables summarize the changes in the balance sheet account of consumer receivables acquired for liquidation during the following periods:
Accretable yield represents the amount of finance income the Company can expect to generate over the remaining life of its existing portfolios based on estimated future net cash flows. Changes in accretable yield for the nine month and threesix month periods ended June 30, 2014 and 2013 are as follows:
| RESTATED | REVISED | |||||||
| Nine Months Ended June 30, 2014 | Nine Months Ended June 30, 2013 | |||||||
Balance at beginning of period | $ | 7,679,000 | $ | 13,508,000 | ||||
Transfer to cost recovery | (7,679,000 | ) | — | |||||
Finance income recognized on finance receivables, net | — | (21,765,000 | ) | |||||
Reclassifications from nonaccretable difference (1) | — | 17,577,000 | ||||||
|
|
|
| |||||
Balance at end of period | $ | 0 | $ | 9,320,000 | ||||
|
|
|
| |||||
| Three Months Ended June 30, 2014 | Three Months Ended June 30, 2013 | |||||||
Balance at beginning of period | $ | — | $ | 10,439,000 | ||||
Finance income recognized on finance receivables, net | — | (7,503,000 | ) | |||||
Reclassifications from nonaccretable difference (1) | — | 6,384,000 | ||||||
|
|
|
| |||||
Balance at end of period | $ | — | $ | 9,320,000 | ||||
|
|
|
| |||||
During the nine and three month periods ended June 30, 2014,March 31,2017, the Company purchased $53.0$0 million and $35.9$35.0 million, respectively, of face value portfolios at a cost of $3.7$0.0 million and $2.7$2.2 million, respectively. During both the ninethree and threesix month periods ended June 30, 2013,March 31,2016, the Company purchased $53.5$24.8 million and $121.0 million, respectively, of face value receivablesportfolios at a cost of $3.3 million.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5 — Consumer Receivables AcquiredAs of March 31, 2017, the Company held consumer receivables acquired for Liquidation (Restatedliquidation from Peru and Revised) (continued)Colombia of $4.8 million and $4.1 million, respectively. The total amount of foreign consumer receivables acquired for liquidation was $8.9 million, or 75.9% of the total consumer receivables held of $11.6 million at March 31, 2017.
As of March 31, 2016, the Company held consumer receivables acquired for liquidation from Peru and Colombia of $4.4 million and $3.9 million, respectively. The total amount of foreign consumer receivables acquired for liquidation was $8.3 million, or 50.6% of the total consumer receivables held of $16.4 million at March 31, 2016.
The following table summarizes collections on a gross basis as received by the Company’s third-partythird-party collection agencies and attorneys, less commissions and direct costs for the ninethree and threesix month periods ended June 30, 2014March 31,2017 and 2013,2016, respectively.
| For the Nine Months Ended June 30, | For the Three Months Ended March 31, | For the Six Months Ended March 31, | ||||||||||||||||||||||
| 2014 | 2013 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||
Gross collections (1) | $ | 51,884,000 | $ | 66,371,000 | $ | 10,657,000 | $ | 12,356,000 | 21,916,000 | 24,601,000 | ||||||||||||||
Commissions and fees (2) | 21,141,000 | 24,333,000 | 4,586,000 | 4,959,000 | 9,640,000 | 9,827,000 | ||||||||||||||||||
Net collections | $ | 30,743,000 | $ | 42,038,000 | $ | 6,071,000 | $ | 7,397,000 | $ | 12,276,000 | $ | 14,774,000 | ||||||||||||
|
| |||||||||||||||||||||||
| For the Three Months Ended June 30, | ||||||||||||||||||||||||
| 2014 | 2013 | |||||||||||||||||||||||
Gross collections (1) | $ | 18,192,000 | $ | 23,432,000 | ||||||||||||||||||||
Commissions and fees (2) | 8,151,000 | 8,007,000 | ||||||||||||||||||||||
|
| |||||||||||||||||||||||
Net collections | $ | 10,041,000 | $ | 15,425,000 | ||||||||||||||||||||
|
| |||||||||||||||||||||||
(1) | Gross collections include: collections from |
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Restated)
Note 4—Consumer Receivables Acquired for Liquidation (continued)
(2) | Commissions |
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6 — Acquisition of CBC as restated and revised
On December 31, 2013, the Company acquired 80% ownership of CBC and its affiliate, CBC Management Services, LLC, for approximately $5.9 million. In addition, the Company will provide financing to CBC of up to $5 million. The 20% non-controlling interests are held by two of the original owners of CBC. The fair value of non-controlling interests at the acquisition date was determined to be immaterial. The non-controlling interests will not be entitled to any distributions from CBC until the Company receives distributions of $2,337,190. The non-controlling interests are entitled to two of the five seats of CBC’s Board of Managers and have the right to approve certain material transactions of CBC. The non-controlling interest owners are employed by CBC. If the employment is terminated, other than for cause, CBC could be required to purchase their membership interest in CBC. If the employment is terminated for any other reason, CBC has the right to purchase their non-controlling interests. The purchase price would be determined by a third party appraiser and is payable over a period of time. The fair value of the put right was determined to be $0 at December 31, 2013. No re-measurement is required at June 30, 2014 as it is not probable that the put option will become redeemable. The acquisition provides the Company with the opportunity to further diversify its portfolio.
CBC purchases periodic structured settlements and annuity policies from individuals in exchange for a lump sum payment. The Company accounted for this purchase in accordance with ASC Topic 805 “Business Combinations”. Under this guidance, an entity is required to recognize the assets acquired and liabilities assumed and the consideration given at their fair value on the acquisition date. The following table summarizes the fair value of the assets acquired and the liabilities assumed as of the December 31, 2013 acquisition date:
Cash | $ | 351,000 | ||
Structured settlements | 30,436,000 | |||
Other assets | 11,000 | |||
Other liabilities | (356,000 | ) | ||
Other debt (see Note 12: Other debt – CBC (including non-recourse notes payable amounting to $13.8 million) | (25,863,000 | ) | ||
|
| |||
Total identifiable net assets acquired | 4,579,000 | |||
Goodwill (see Note 10: Goodwill) | 1,360,000 | |||
|
| |||
Purchase Price | $ | 5,939,000 | ||
|
|
As the transaction consummated on December 31, 2013, there were no actual operational results that were attributable to the Company in the first quarter of fiscal year 2014 and the comparable period of fiscal year 2013. Total revenues, as reported, for the nine months ended June 30, 2014, were $23,457,000. On a pro forma basis, total revenues for the nine months ended June 30, 2014 would have been $25,092,000. Net income attributable to Asta Funding, Inc., as reported, for the nine months ended June 30, 2014, was $5,709,000. On a pro forma basis, net income attributable to Asta Funding, Inc. for the nine months ended June 30, 2014 would have been $5,751,000. Total revenues, as reported, for the nine months ended June 30, 2013, were $29,961,000. On a pro forma basis, total revenues for the same prior year period would have been $32,881,000. Net income attributable to Asta Funding, Inc., as reported, for the nine months ended June 30, 2013 was $718,000. On a pro forma basis, net income attributable to Asta Funding, Inc. would have been $697,000 for the same prior year period. The Company, through CBC, earned $1.4 million and $2.9 million in settlement income during the three and nine month periods ended June 30, 2014. The Company had a net invested balance of $35.9 million in structured settlements as of June 30, 2014. The collections yielded a net loss attributable to non-controlling interest of $34,000 and $13,000 for the three and nine month periods, respectively, ended June 30, 2014.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7 — Structured Settlements
CBC purchases periodic payments under structured settlements and annuity policies from individuals in exchange forOn December 28,2011, the Company entered into a lump sum payment.joint venture, Pegasus Funding, LLC ("Pegasus") with Pegasus Legal Funding, LLC (“PLF”). The Company elected to carry the structured settlements at fair value. Unearned income on structured settlements is recognized ashas an 80% non-controlling interest income using the effective interest method over the life of the related structured settlement. Changes in fair value are recorded in unrealized gain (loss) on structured settlements in the Company’s statements of operations.
Structured settlements consist of the following as of June 30, 2014:
Maturity value | $ | 52,551,000 | ||
Unearned income | (16,659,000 | ) | ||
|
| |||
Net carrying value | $ | 35,892,000 | ||
|
|
Encumbrances on structured settlements as of June 30, 2014 are:
Notes payable secured by settlement receivables with principal and interest outstanding payable until June 2025 (1) | $ | 2,599,000 | ||
Notes payable secured by settlement receivables with principal and interest outstanding payable until August 2026 (1) | 5,498,000 | |||
Notes payable secured by settlement receivables with principal and interest outstanding payable until April 2032 (1) | 4,894,000 | |||
$15,000,000 revolving line of credit (1) | 14,443,000 | |||
|
| |||
Encumbered structured settlements | 27,434,000 | |||
Structured settlements not encumbered | 8,458,000 | |||
|
| |||
Total structured settlements | $ | 35,892,000 | ||
|
| |||
At June 30, 2014, the expected cash flows of structured settlements based on maturity value are as follows:
September 30, 2014 (three months remaining) | $ | 1,101,000 | ||
September 30, 2015 | 4,309,000 | |||
September 30, 2016 | 4,469,000 | |||
September 30, 2017 | 3,977,000 | |||
September 30, 2018 | 3,187,000 | |||
Thereafter | 35,508,000 | |||
|
| |||
Total | $ | 52,551,000 | ||
|
|
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8 — Other Investments
Personal Injury Claims
joint venture. Pegasus purchases interests in personal injury claims from claimants who are a party to personal injury litigation. Pegasus advances, to each claimant, funds, on a non-recourse basis at an agreed upon interest rate, in anticipation of a future settlement. The interest in each claim purchased by Pegasus consists of the right to receive, from such claimant, part of the proceeds or recoveries which such claimant receives by reason of a settlement, judgment or award with respect to such claimant’s claim. The Company, throughclaims. Pegasus earned $1.7$2.1 million and $5.7$1.8 million in interest and fees during the for three months ended March 31, 2017 and nine month periods ending June 30, 2014,2016, respectively, compared to $2.3and earned $4.4 million and $4.9$4.9 million in interest and fees for six months ended March 31, 2017 and 2016,respectively during the three and nine month periods ending June 30, 2013.. The Company had a net invested balance in personal injury claims of $31.7$45.9 million and $35.8$48.6 million on June 30, 2014 March 31, 2017 and September 30,2016, respectively.
Equity method investments as of March 31, 2017 and September 30, 2013, respectively. The collections yielded net income attributable to non-controlling interest of $53,000 and $496,000 for the three and nine month periods ended June 30, 2014, respectively, compared to $53,000 and $176,000 for the three and nine month periods ended June 30, 2013, respectively. The reserve for bad debts is recorded based upon the historical trend for write off in the personal injury financing industry, the aging of the claims and other factors that could impact recoverability. Pegasus records reserves for bad debts, which, at June 30, 2014, amounted to $2.1 million2016 are as follows:
| Nine Months Ended June 30, 2014 | Three Months Ended June 30, 2014 | |||||||
Balance at beginning of period | $ | 2,248,000 | $ | 1,916,000 | ||||
Provisions for losses | 955,000 | 756,000 | ||||||
Write offs | (1,153,000 | ) | (622,000 | ) | ||||
|
|
|
| |||||
Balance at end of period | $ | 2,050,000 | $ | 2,050,000 | ||||
|
|
|
| |||||
March 31, 2017 | September 30, 2016 | |||||||||||||||
Carrying Value | Ownership Percentage | Carrying Value | Ownership Percentage | |||||||||||||
Pegasus Funding, LLC | $ | 45,924,000 | 80 | % | $ | 48,582,000 | 80 | % | ||||||||
The carrying value of the Company's equity investment at March 31, 2017 was $45,924,000, a decrease of $2,658,000 over the prior year's carrying value of $48,582,000. The decrease in carrying value was attributed to the Company's equity earnings of $49,000 for the six months ended March 31, 2017, less loan repayments made to Asta which are classified on its balance sheet as due to Asta of $2,707,000 for the six months ended March 31, 2017.
The carrying value of the Company's equity investment at September 30, 2016 was $48,582,000, an increase of $7,831,000 over the prior year's carrying value of $40,751,000. The increase in carrying value was attributed to the Company's current year equity earnings of $10,551,000, less repayments made to Asta which are classified on its balance sheet as due to Asta of $2,720,000 during fiscal 2016.
On November 8, 2016, the Company entered into a binding Term Sheet (the “Term Sheet”) with ASFI Pegasus Holdings, LLC, Fund Pegasus, LLC, Pegasus Funding, LLC, Pegasus Legal Funding, LLC, Max Alperovich and Alexander Khanas. Pegasus is currently the Company’s personal injury claims funding business and is a joint venture that is 80% owned by the Company and 20% owned by PLF. The Company and PLF have decided not to renew the Pegasus joint venture that, by its terms, terminates on December 28, 2016. The Term Sheet amends certain provisions to Pegasus’ operating agreement dated as of December 28, 2011 (as amended, the “Operating Agreement”) and governs the terms relating to the collection of its existing Pegasus portfolio (the “Portfolio”).
Pursuant to the Term Sheet, the parties thereto have agreed that Pegasus will continue in existence in order to collect advances on its existing Portfolio. The Company will fund overhead expenses relating to the collection of its Portfolio based on a budget agreed upon by the Company and PLF. Any cash received by Pegasus will be distributed to its members in the order provided for in the Operating Agreement. The Company will be repaid an amount equal to 20% of all principal collected on each investment paid back beginning October 1, 2016 and continuing through the collection of the Portfolio, which will be applied against the outstanding balance of overhead expenses previously advanced by the Company to Pegasus. After January 2, 2017, additional overhead expenses advanced will be paid back monthly as incurred by the Company prior to the calculation and distribution of any profits.
In connection with the Term Sheet, the parties thereto have also entered into a customary mutual release and non-disparagement agreement as well as a release from the non-competition obligations under the Operating Agreement. See Note 20 - Subsequent Events.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Restated)
Note 5—Litigation Funding (continued)
Equity Method Investment (continued)
The results of operations and financial position of the Company’s equity method investment in Pegasus are summarized below:
Condensed Statement of Operations Information
| ||||||||
Three months ended | ||||||||
March 31, 2017 | March 31, 2016 | |||||||
Personal injury claims income | $ | 2,136,000 | $ | 1,846,000 | ||||
Operating expenses | 2,580,000 | 1,430,000 | ||||||
(Loss) income from operations | $ | (444,000 | ) | $ | 416,000 | |||
(Loss) earnings from equity method investment | $ | (355,000 | ) | $ | 333,000 | |||
Six months ended | ||||||||
March 31, 2017 | March 31, 2016 | |||||||
Personal injury claims income | $ | 4,439,000 | $ | 4,931,000 | ||||
Operating expenses | 4,378,000 | 2,647,000 | ||||||
Income (loss) from operations | $ | 61,000 | $ | 2,284,000 | ||||
Company’s equity income from operations | $ | 49,000 | $ | 1,827,000 | ||||
Condensed Balance Sheet Information
| ||||||||
March 31, 2017 | September 30, 2016 | |||||||
Cash | $ | 732,000 | $ | 539,000 | ||||
Investment in personal injury claims | 44,710,000 | 48,289,000 | ||||||
Other assets | 109,000 | 188,000 | ||||||
Total Assets | $ | 45,551,000 | $ | 49,016,000 | ||||
Due to Asta | $ | 31,698,000 | $ | 34,404,000 | ||||
Other liabilities | 600,000 | 1,053,000 | ||||||
Equity | 13,253,000 | 13,559,000 | ||||||
Total Liabilities and Equity | $ | 45,551,000 | $ | 49,016,000 | ||||
Matrimonial Claims (included in Other Assets)
On May 18, 8,2012, the Company formed BP Case Management,EMIRIC, LLC, (“BPCM”),a wholly owned subsidiary of the Company. EMIRIC, LLC entered into a joint venture with California-based Balance Point Divorce Funding, LLC (“BP Divorce Funding”) to create the operating subsidiary BP Case Management, LLC (“BPCM”). BPCM is 60% owned by the Company and 40% owned by BP Divorce Funding. BPCM provides non-recourse funding to a spouse in a matrimonial action. The Company provided a $1.0$1.0 million revolving line of credit to partially fund BP Divorce Funding’sBPCM’s operations, with such loan bearing interest at the prevailing prime rate, with an initial term of twenty-four months. In September 2014, the agreement was revised to extend the term of the loan to August 2016, increase the credit line to $1.5 million and include a personal guarantee of the principal of BP Divorce Funding. Effective August 14, 2016, the Company extended its revolving line of credit with BP Divorce Funding until March 31, 2017, at substantially the same terms as the September 2014 amendment. The contract term has been extended an additional six months to October 2014.loan balance at March 31,2017 was approximately $1.5 million. The revolving line of credit is collateralized by BP Divorce Funding’s profitprofits share in BPCM and other assets. As of June 30, 2014, March 31, 2017, the Company’s investment in cases through BPCM was approximately $2.3 million, against which a $0.5 million reserve has been established. The investment in matrimonial cases was $1.6 million at September 30, 2013.$2.5 million. There was no income recognized in the first nine monthsthree and six month periods ended March 31, 2017 and 2016.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Restated)
Note 9 — 6—Furniture & Equipment
Furniture and equipment consist of the following as of the dates indicated:
March 31, | September 30, | |||||||||||||||
| June 30, 2014 | September 30, 2013 | 2017 | 2016 | |||||||||||||
Furniture | $ | 310,000 | $ | 310,000 | $ | 273,000 | $ | 273,000 | ||||||||
Equipment | 3,622,000 | 3,622,000 | 236,000 | 235,000 | ||||||||||||
Software | 1,211,000 | 1,211,000 | 1,363,000 | 1,350,000 | ||||||||||||
Leasehold improvements | 99,000 | 99,000 | ||||||||||||||
|
| |||||||||||||||
| 5,242,000 | 5,242,000 | 1,872,000 | 1,858,000 | |||||||||||||
Less accumulated depreciation | 4,586,000 | 4,136,000 | ||||||||||||||
Less accumulated depreciation and amortization | 1,714,000 | 1,662,000 | ||||||||||||||
|
| |||||||||||||||
Balance, end of period | $ | 656,000 | $ | 1,106,000 | $ | 158,000 | $ | 196,000 | ||||||||
|
| |||||||||||||||
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 10 — Goodwill
Goodwill represents the excess of the purchase price of an acquired business over the fair value of amounts assigned to assets acquired and liabilities assumed. Goodwill is reviewed for impairment if events or circumstances indicate that impairment may be present. Any excess in carrying value over the estimated fair value is recorded as impairment loss and charged to results of operations in the period such determination is made. For each of the nine and three month periods ended June 30, 2014 and 2013, management has determined that there was no impairment loss required to be recognized in the carrying value of goodwill.
The goodwill balances at September 30, 2013 and June 30, 2014 are as follows:
Balance, September 30, 2013 | $ | 1,410,000 | ||
Goodwill from acquisition (see Note 6: Acquisition of CBC) | 1,360,000 | |||
|
| |||
Balance, June 30, 2014 | $ | 2,770,000 | ||
|
|
Note 11 —Non-Recourse Debt — Bank–Bank of Montreal (“BMO”)
In March 2007, Palisades XVI borrowed approximately $227$227 million under the Receivables Financing Agreement, (“RFA”), as amended in July 2007, December 2007, May 2008, February 2009, October 2010 and August 2013 (the “RFA”) from BMO, in order to finance the Portfolio Purchase which had a $300 million portfolio purchase in March 2007 (the “Portfolio Purchase”).price of $300 million. The original term of the agreement was three years. This term was extended by each of the Second, Third, Fourth and Fifth Amendments and the most recent agreement signed in August 2013.
On August 7,2013, Palisades XVI, a 100% owned bankruptcy remote subsidiary, entered into a Settlement Agreement and Omnibus Amendment (the “Settlement Agreement”) with BMO as an amendment to the RFA. In consideration for a $15$15 million prepayment funded by the Company, BMO agreed to significantly reduce minimum monthly collection requirements and the interest rate. If and when BMO receives the next $15$15 million of collections from the Portfolio Purchase or from voluntary prepayments by Asta Funding, Inc., less certain credits for payments made prior to the consummation of the Settlement Agreement (the “Remaining Amount”), Palisades XVI and its affiliates would be automatically released from liability in connection with the RFA (subject to customary exceptions). A condition to the release was PalisadePalisades XVI’s agreement to grant BMO, as of the time of the payment of the Remaining Amount, the right to receive 30% of net collections from the Portfolio Purchase once Palisades XVI has received from future net collections, the sum of $15$15 million plus voluntary prepayments included in the payment of the Remaining Amount (the “Income Interest”). The Company estimated the Income Interest to be between $0 and $1.4 million. However, the Company believes that no amount would be incurred because of the continued deterioration of collections from the Portfolio Purchase.
On June 3,2014, Palisades XVI paid the Remaining Amount. The final principal payment of $2,901,199$2,901,199 included a voluntary prepayment of $1,866,036$1,866,036 provided from funds of the Company. Accordingly, Palisades XVI will bewas entitled to receive $16.9$16.9 million of future collections from the Portfolio Purchase before BMO iswould be entitled to receive any payments with respect to its Income Interest.
With
During the paymentmonth of June, 2016, the Company received the balance of the Remaining Amount$16.9 million, and, upon completionas of March 31, 2017, the documents granting the Palisades XVI Income Interest, includingCompany recorded a written confirmation fromliability to BMO that the obligationof approximately $169,000, which has been paidrecorded in full, Palisades XVI has been released from further debt obligations from the RFA. The Company has recorded as other income, forgiveness of non-recourse debt,liabilities in the amount of approximately $26.1 million in the third quarter of fiscal year 2014.Company’s consolidated balance sheet. The funds were subsequently remitted to BMO on April 10, 2017. The liability to BMO is recorded when actual collections are received.
Bank Hapoalim B.M. (“Bank Hapoalim”) Line of Credit
On May 2,2014, the Company obtained a $20$20 million line of credit facility from Bank Hapoalim, pursuant to a Loan Agreement (the “Loan Agreement”) among the Company and its subsidiary, Palisades Collection, LLC, as borrowers (the “Borrowers”), and Bank Hapoalim, as agent and lender. The Loan Agreement providesprovided for a $20.0$20.0 million committed line of credit and an accordion feature providing an increase in the line of credit of up to $30$30 million, at the discretion of the lenders. The facility iswas for a term of three years at an interest rate of either LIBOR plus 275 basis points or prime, at the Company’s option. The Loan Agreement includesincluded covenants that requirerequired the Company to maintain a minimum net worth of $150$150 million and pay an unused line fee. The facility iswas secured pursuant to a Security Agreement (“Security Agreement”) among the parties to the Loan Agreement. Agreement, with property of the Borrowers serving as collateral. On March 30, 2016, the Company signed the First Amendment to the Loan Agreement (the “First Amendment”) with Bank Hapoalim which amended certain terms of their banking arrangement. The First Amendment includes (a) the reduction of the interest rate to LIBOR plus 225 basis points; (b) a decrease in the minimum net worth requirement by $50 million, to $100 million and (c) modifies the Net Loss requirement from a quarterly to an annual basis. All other terms of the original agreement remain in effect. The Company has borrowed $9.6 million against the facility, which was outstanding as of March 31, 2017. There is a $9.6 million aggregate balance in Bank Hapoalim which has been reclassified as restricted cash in the consolidated balance sheets since these assets serve as collateral for the line of credit (see Note 1 – Business and Basis of Presentation). On April 28, 2017, the Company renewed the line of credit facility with a new maturity date of August 2, 2017.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Restated)
Note 8—Discontinued Operations
On December 31,2013, the Company acquired 80% ownership of CBC and its affiliate, CBC Management Services, LLC for approximately $5.9 million.
On December 31,2015, the Company acquired the remaining 20% ownership of CBC for $1,800,000, through the issuance of restricted stock valued at approximately $1,000,000 and $800,000 in cash. Each of the two original principals received 61,652 shares of restricted stock at a fair market value of $7.95 per share and $400,000 in cash. An aggregate of 123,304 shares of restricted stock were issued as part of the transaction. These shares are subject to a one year lock-up period in which the holders cannot sell the shares. In addition, the shares are subject to certain sales restrictions following the initial lock-up period, which expired on December 31, 2016 (see Note 13 – Stock Based Compensation).
On January 1,2016, the Company renewed the expiring two-year employment agreements of the two CBC principals for one year terms. The employment contracts of the original two principals expired at the end of December 2016. The Company did not renew those contracts. Ryan Silverman has been appointed CEO/General Counsel effective January 1, 2017.
On December 13, 2017, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement) with CBC Holdings LLC, a Delaware limited liability company (the “Buyer”). Under the Purchase Agreement, the Company sold all of the issued and outstanding equity capital of CBC for an aggregate purchase price of approximately $10.5 million. Of the aggregate purchase price, approximately $4.49 million was paid in cash, and $5.75 million was paid under a promissory note at an annual interest rate of 7% to be paid quarterly to the Company and secured by a first priority security interest in and lien on such Buyer’s affiliates’ rights to certain servicing fees. The remaining amount of the aggregate purchase price was paid as reimbursement of certain invoices of CBC. The Company subsequently recognized a loss of approximately $1.9 million on the above sale of CBC as of September 30, 2017.
As a result of this sale all prior periods presented in the Company's consolidated financial statements will account for CBC as a discontinued operation. This determination resulted in the reclassification of the assets and liabilities comprising the structured settlement business to assets related to discontinued operations in the consolidated balance sheets, and a corresponding adjustment to our consolidated statements of operations to reflect discontinued operations for all periods presented.
As of June 30, 2014,March 31, 2017, the components of the Company has not used this facility.designated as discontinued operations had assets and liabilities of $95.2 million and $76.3 million, respectively. As of September 30, 2016, the components of the Company designated as discontinued operations had assets and liabilities of $91.5 million and $69.2 million, respectively. For the three months ended March 31, 2017 and 2016, the Company designated as discontinued operations reported a (loss) profit, net of income taxes of ($1.1) million and $0.6 million, respectively. For the six months ended March 31, 2017 and 2016, the Company designated as discontinued operations reported a (loss) income, net of income taxes of ($2.3) million and $0.8 million, respectively.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Restated)
Note 8—Discontinued Operations (continued)
The following table presents the operating results, for the three and six months ended March 31, 2017 and 2016, for the components of the Company designated as discontinued operations :
Three months ended | ||||||||
March 31, 2017 | March 31, 2016 | |||||||
Revenues: | ||||||||
Unrealized (loss) gain on structured settlements | $ | (1,338,000 | ) | $ | 1,637,000 | |||
Interest income on structured settlements | 1,941,000 | 1,481,000 | ||||||
Total revenues | 603,000 | 3,118,000 | ||||||
Other income | 15,000 | — | ||||||
| 618,000 | 3,118,000 | |||||||
Expenses: | ||||||||
General and administrative expenses | 1,508,000 | 1,372,000 | ||||||
Interest expense | 948,000 | 789,000 | ||||||
| 2,456,000 | 2,161,000 | |||||||
(Loss) income from discontinued operations before income taxes | (1,838,000 | ) | 957,000 | |||||
Income tax (benefit) expense from discontinued operations | (780,000 | ) | 402,000 | |||||
(Loss) income from discontinued operations before non-controlling interest | (1,058,000 | ) | 555,000 | |||||
Non-controlling interest | — | — | ||||||
(Loss) income from discontinued operations, net of taxes | $ | (1,058,000 | ) | $ | 555,000 | |||
Six months ended | ||||||||
March 31, 2017 | March 31, 2016 | |||||||
Revenues: | ||||||||
Unrealized (loss) gain on structured settlements | $ | (3,020,000 | ) | $ | 3,164,000 | |||
Interest income on structured settlements | 3,842,000 | 2,708,000 | ||||||
Total revenues | 822,000 | 5,872,000 | ||||||
Other income | 30,000 | — | ||||||
| 852,000 | 5,872,000 | |||||||
Expenses: | ||||||||
General and administrative expenses | 2,996,000 | 2,751,000 | ||||||
Interest expense | 1,880,000 | 1,515,000 | ||||||
| 4,876,000 | 4,266,000 | |||||||
(Loss) income from discontinued operations before income taxes | (4,024,000 | ) | 1,606,000 | |||||
Income tax (benefit) expense from discontinued operations | (1,708,000 | ) | 675,000 | |||||
(Loss) income from discontinued operations before non-controlling interest | (2,316,000 | ) | 931,000 | |||||
Non-controlling interest | — | 104,000 | ||||||
(Loss) income from discontinued operations, net of taxes | $ | (2,316,000 | ) | $ | 827,000 | |||
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Restated)
Note 8—Discontinued Operations (continued)
The major components of assets and liabilities related to discontinued operations are summarized below:
March 31, 2017
| September 30, 2016
| ||||||||
Cash and cash equivalents | $ | 1,196,000 | (1) | $ | 1,198,000 | ||||
Restricted cash | 499,000 | 499,000 | |||||||
Structured settlements | 89,641,000 | 86,091,000 | |||||||
Furniture and equipment, net | 41,000 | 47,000 | |||||||
Goodwill | 1,405,000 | 1,405,000 | |||||||
Other assets | 2,398,000 | 2,266,000 | |||||||
Total assets related to discontinued operations | $ | 95,180,000 | $ | 91,506,000 | |||||
Other debt - CBC | 74,183,000 | 67,435,000 | |||||||
Other liabilities | 2,123,000 | 1,803,000 | |||||||
Total liabilities related to discontinued operations | $ | 76,306,000 | $ | 69,238,000 | |||||
(1) Cash balance with one bank at March 31,2017 that exceeded the balance insured by the FDIC by approximately $0.7 million.
Structured Settlements
Prior to the sale of CBC, CBC purchased periodic payments under structured settlements and annuity policies from individuals in exchange for a lump sum payment. The Company elected to carry the structured settlements at fair value. Unearned income on structured settlements is recognized as interest income using the effective interest method over the life of the related structured settlement. Changes in fair value are recorded in unrealized gain (loss) on structured settlements in the Company’s statements of operations. Unrealized gains on structured settlements is comprised of both unrealized gains resulting from fair market valuation at the date of acquisition of the structured settlements and the subsequent fair value adjustments resulting from the change in the discount rate. Of the $3.0 million of unrealized losses recognized in the six month period ended March 31,2017, approximately $4.3 million is due to day one gains on new structured settlements financed during the period, offset by a decrease of $1.0 million in realized gains recognized as realized interest income on structured settlements during the period, and a reduction in fair value of $6.3 million on CBC’s life contingent annuities portfolio as a result of the sale on all of the life contingent assets in April 2017. See Note 20 - Subsequent Events. There were no other changes in assumptions during the period.
The Company elected the fair value treatment under ASC 825-10-50-28 through 50-32 to be transparent to the user regarding the underlying fair value of the structured settlement which collateralizes the debt of CBC. The Company believes any change in fair value is driven by market risk as opposed to credit risk associated with the underlying structured settlement annuity issuer.
The purchased personal injury structured settlements result in payments over time through an annuity policy. Most of the annuities acquired involve guaranteed payments with specific defined ending dates. CBC also purchased a small number of life contingent annuity payments with specific ending dates but the actual payments to be received could be less due to the mortality risk associated with the measuring life. CBC records a provision for loss each period. The life contingent annuities are not a material portion of assets at March 31,2017.
Structured settlements consist of the following as of March 31,2017 and September 30,2016:
March 31, 2017 | September 30, 2016 | |||||||
Maturity (1) (2) | $ | 152,548,000 | $ | 133,059,000 | ||||
Unearned income | (62,907,000 | ) | (46,968,000 | ) | ||||
Structured settlements, net | $ | 89,641,000 | $ | 86,091,000 | ||||
(1) | The maturity value represents the aggregate unpaid principal balance at March 31,2017 and September 30,2016. |
(2) | There are no amounts of structured settlements that are past due, or in nonaccrual status at March 31,2017 and September 30,2016. |
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Restated)
Note 12 — Other Debt —8—Discontinued Operations (continued)
Encumbrances on structured settlements as of March 31,2017 and September 30,2016 are as follows:
Interest Rate | March 31, 2017 | September 30, 2016 | ||||||||||
Notes payable secured by settlement receivables with principal and interest outstanding payable until June 2025 (3) | 8.75 | % | $ | 1,771,000 | $ | 1,862,000 | ||||||
Notes payable secured by settlement receivables with principal and interest outstanding payable until August 2026 (3) | 7.25 | % | 4,056,000 | 4,242,000 | ||||||||
Notes payable secured by settlement receivables with principal and interest outstanding payable until April 2032 (3) | 7.125 | % | 3,926,000 | 3,987,000 | ||||||||
Notes payable secured by settlement receivables with principal and interest outstanding payable until February 2037 (3) | 5.39 | % | 18,393,000 | 18,978,000 | ||||||||
Notes payable secured by settlement receivables with principal and interest outstanding payable until March 2034 (3) | 5.07 | % | 14,006,000 | 14,507,000 | ||||||||
Notes payable secured by settlement receivables with principal and interest outstanding payable until February 2043 (3) | 4.85 | % | 13,322,000 | 13,705,000 | ||||||||
$25,000,000 revolving line of credit (3) | 4.1 | % | 18,709,000 | 10,154,000 | ||||||||
Encumbered structured settlements | 74,183,000 | 67,435,000 | ||||||||||
Structured settlements not encumbered | 15,458,000 | 18,656,000 | ||||||||||
Total structured settlements | $ | 89,641,000 | $ | 86,091,000 | ||||||||
(3) | See the table below – Other Debt – CBC |
At March 31,2017, the expected cash flows of structured settlements based on maturity value are as follows:
September 30, 2017 (6 months) | $ | 5,702,000 | ||
September 30, 2018 | 8,892,000 | |||
September 30, 2019 | 9,237,000 | |||
September 30, 2020 | 8,713,000 | |||
September 30, 2021 | 9,576,000 | |||
Thereafter | 110,428,000 | |||
Total | $ | 152,548,000 |
The Company assumed $25.9$25.9 million of debt related to the CBC acquisition (see Note 6 — Acquisitionon December 31,2013, including a $12.5 million line of CBC) on December 31, 2013. On the same date, the Company paid down $2.5 millioncredit with an interest rate floor of the debt. On 5.5%. Between March 27,2014 and September 29,2014, CBC entered into an amendment whereby it increased its revolvingthree amendments (Sixth Amendment through Eighth Amendment), resulting in the line of credit increasing to $22.0 million and the interest rate floor reduced to 4.75%. On March 11,2015, CBC entered into the Ninth Amendment. This amendment, effective March 1,2015, extended the maturity date on its credit line from $12.5February 28,2015 to March 1,2017. Additionally, the credit line was increased from $22.0 million to $15.0$25.0 million and the interest rate floor was reduceddecreased from 5.5%4.75% to 4.75%4.1%. Other terms and conditions were materially unchanged. In March 2017, the commitmentcredit line was extended to FebruaryApril 28, 2015. The amendment also included changes in carrier concentration ratios2017. On April 28, 2017, CBC entered into the Tenth Amendment, extending the credit line maturity date to June 30, 2017 (see Note 20 – Subsequent Events).
On November 26,2014, CBC completed its fourth private placement, backed by structured settlement and removalfixed annuity payments. CBC issued, through its subsidiary, BBR IV, LLC, approximately $21.8 million of the personal guaranteesfixed rate asset-backed notes with a yield of the general managers5.4%. On September 25,2015, CBC completed its fifth private placement, backed by structured settlement and non-controlling interest partners. fixed annuity payments. CBC issued, through its subsidiary, BBR V, LLC, approximately $16.6 million of fixed rate asset-backed notes with a yield of 5.1%. On July 8, 2016, CBC issued, through its subsidiary, BBR VI, approximately $14.8 million of fixed rate asset-backed notes with a yield of 4.85%. On April 7, 2017, CBC issued approximately $18.3 million of fixed rate asset-backed notes with a yield of 5.0%.
As of June 30, 2014,March 31,2017, the remaining debt amounted to $27.4$74.2 million, which consistsconsisted of a $14.4$18.7 million drawdown from a line of credit ($0.6 million available) from an institutional source and $13.0$55.5 million of notes payable issued by entities 100%-owned and consolidated by CBC. These entities are bankruptcy-remote entities created to issue notes secured by structured settlements. The following table details the otherfair value of this debt at June 30, 2014:approximated its carrying value.
| Interest Rate | June 30, 2014 Balance | |||||||
Notes payable with varying monthly installments: | ||||||||
Notes payable secured by settlement receivables with principal and interest outstanding payable until June 2025 | 8.75 | % | $ | 2,599,000 | ||||
Notes payable secured by settlement receivables with principal and interest outstanding payable until August 2026 | 7.25 | % | 5,498,000 | |||||
Notes payable secured by settlement receivables with principal and interest outstanding payable until April 2032 | 7.125 | % | 4,894,000 | |||||
|
| |||||||
Subtotal notes payable | 12,991,000 | |||||||
$15,000,000 revolving line of credit expiring on February 28, 2015 | 4.75 | % | 14,443,000 | |||||
|
| |||||||
Total debt – CBC | $ | 27,434,000 | ||||||
|
| |||||||
On July 15, 2014, CBC entered into an amendment whereby it increased its revolving line
Note 13 ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Restated)
Note 9—Commitments and Contingencies
Employment AgreementsAgreement
In
The employment contracts of the original two CBC principals expired at the end of December 2016. The Company did not renew those contracts. Ryan Silverman was appointed CEO/General Counsel, effective January 2007, 1, 2017.
On November 11, 2016, the Company announced that it would continue its personal injury claims funding business through the formation of a wholly owned subsidiary Simia. In connection with its formation, Simia entered into an employment agreement (the “Employment Agreement”) with Gary Stern,Patrick F. Preece to serve as its Chairman, President and Chief Executive which expired on December 31, 2009. ThisOfficer. Under the Employment Agreement, was not renewed and Mr. Stern is continuing in his current rolesPreece receives an annual base salary of $250,000, subject to annual increases at the discretion of the compensation committee (the “Compensation Committee”) of the Board of Directors untilof the Company (the “Board”). Mr. Preece is eligible to receive an annual cash or non-cash bonus in the sole and exclusive discretion of the Compensation Committee. Mr. Preece is also eligible to receive a new agreementcash or non-cash profit bonus of an aggregate amount up to 15% of the profit of the business of Simia (the “Business”) for each fiscal year in which the Business achieves an internal rate of return of at least 18%. In the event that the Business is signed.sold to a third party solely for cash consideration during Mr. Preece’s employment period, he will be eligible to receive a cash or non-cash sale profit bonus of up to 15% of the closing consideration received by the Company. He is also entitled to participate in any other benefit plans established by the Company for management employees. The Employment Agreement has a five year term. Under the Employment Agreement, Mr. Preece may be terminated with or without “cause” (as defined in the Employment Agreement) and may resign with or without “good reason” (as defined in the Employment Agreement). If Mr. Preece is terminated without “cause” or resigns for “good reason” he will receive severance equal to two CBC operating principals entered into renewable two-year years of his base salary. He is also entitled to a pro-rata share of the profit bonus and his deferred compensation will vest immediately. Mr. Preece is also subject to a non-compete and non-solicitation provision during the term of his employment contracts at the time of acquisition (see Note 6, Acquisition of CBC).and, unless his employment is terminated without “cause” or he resigns for “good reason,” for two years thereafter.
Leases
The Company leases its facilities in Englewood Cliffs, New Jersey,NJ, Houston, Texas,TX, New York, New YorkNY and Conshohocken, Pennsylvania. Please referPA.
Legal Matters
In June 2015, a putative class action complaint was filed against the Company, and one of its third-party law firm servicers, alleging violation of the federal Fair Debt Collection Practices Act and Racketeer Influenced and Corrupt Organizations Act (“RICO”) and state law arising from debt collection activities and default judgments obtained against certain debtors.
The Company filed a motion to strike the class action allegations and compel arbitration or, to the extent the court declines to order arbitration, to dismiss the RICO claims. On or about March 31, 2015, the court denied the Company’s consolidated financial statements and notes thereto in our Annual Report on Form 10-Kmotion. The Company filed an appeal with the United States Court of Appeals for the fiscal yearSecond Circuit. A mediation session was held in July 2015, at which the Company agreed to settle the action on an individual basis for a payment of $13,000 to each named plaintiff, for a total payment of $39,000. Payment was made on or about July 24, 2015. The third-party law firm servicer has not yet settled and remains a defendant in the case.
The plaintiffs’ attorneys advised that they were contemplating the filing of another putative class action complaint against the Company alleging substantially the same claims as those that were asserted in this matter. In anticipation of such an eventuality, the Company agreed to non-binding mediation in order to reach a global settlement with other putative class members, which would avert the possibility of further individual or class actions with respect to the affected accounts. To date, the parties have attended two mediation sessions and are continuing to discuss a global settlement. In connection with such discussions, the parties agreed in principle to settle the action for a payment of $3.9 million (which would be split equally between the Company and the law firm servicer). The Company and law firm servicer have also agreed to cease collection activity on the affected accounts. Accordingly, the Company set up a reserve for settlement costs of $2.0 million during the three months ended March 31, 2016, which was included in general and administrative expenses in the Company's consolidated statement of operations.
The Company reassessed the situation at September 30, 2013,2016 and deemed that an additional $0.3 million was necessary to account for legal expenses, which was made during the three month period ended September 30, 2016. The Company reviewed the case as filed withof March 31, 2017 and deemed that the Securities and Exchange Commission, for additional information. CBC$2.3 million reserve remains sufficient. See Note 20 - Subsequent Events.
The Company is a defendant in a lawsuit filed in Montana state court alleging fraud and abuse of process arising from the Company’s business relationship with an entity that finances divorce litigation proceedings. As of March 31, 2017, and based on its assessments of current facts and circumstances, the Company believes that it has recorded adequate reserves to cover future obligations associated with this lawsuit. See Note 20 - Subsequent Events.
The Company filed a lawsuit in Delaware state court against a thirdparty servicer arising from the third party servicer’s failure to pay the Company certain amounts that are due the Company under a lease agreementservicing agreement. The third party servicer filed a counterclaim in the Delaware action alleging that the Company owes certain amounts to the third party servicer for a facility located in Conshohocken, Pennsylvania.court costs pursuant to an alleged arrangement between the companies. The lease expires in August 2014. CBC is not renewing the lease. RatherCompany believes that it is planning on relocatinghas meritorious defenses against this counterclaim and will continue to a different (leased) facility within the same town.vigorously defend itself against any such action.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Restated)
Note 9—Commitments and Contingencies (continued)
LitigationLegal Matters (continued)
In the ordinary course of itsour business, the Company iswe are involved in numerous legal proceedings. The CompanyWe regularly initiatesinitiate collection lawsuits, using itsour network of third party law firms, against consumers. Also, consumers occasionally initiate litigation against the Company,us, in which they allege that the Company haswe have violated a federal or state law in the process of collecting their account. The Company does We do not believe that these ordinary course matters are material to itsour business orand financial condition. The Company is We are not involved in any other material litigation in which it iswe are a defendant.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 14 10— Finance Income Recognition, Impairments, and Commissions and Fees (Restated and Revised)
Income Recognition
The Company accounts for certain of its investments in finance receivables using the interest method under the guidance of FASB Accounting Standards Codification (“ASC”), Receivables — Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30.310”). Under the guidance of ASC 310-30,310, static pools of accounts are established. These pools are aggregated based on certain common risk criteria. Each static pool is recorded at cost and is accounted for as a single unit for the recognition of income, principal payments and loss provision. Effective October 1, 2013, dueDue to the substantial reduction of portfolios reported under the interest method, and the abilityinability to reasonably estimate cash collections required to account for those portfolios under the interest method the Company concluded the cost recovery method is the appropriate accounting method under the circumstances.
Although
Under the guidance of ASC 310-30, the Company has switched to the cost recovery method on its current inventory of portfolios, the Company must still analyze a portfolio upon acquisition to ensure which method is appropriate, and once a static pool is established for a quarter, individual receivable accounts are not added to the pool (unless replaced by the seller) or removed from the pool (unless sold or returned to the seller). ASC 310 requires that
The Company uses the excesscost recovery method when collections on a particular pool of accounts cannot be reasonably predicted. Under the cost recovery method, no income is recognized until the cost of the contractual cash flows over expected cash flows not be recognized as an adjustment of revenue or expense orportfolio has been fully recovered. A pool can become fully amortized (zero carrying balance on the balance sheet.sheet) while still generating cash collections. In this case, all cash collections are recognized as revenue when received.
For portfolios accounted for using the interest method, ASC 310-30 initially freezes the internal rate of return, referred to as IRR, estimated when the accounts receivable are purchased, as the basis for subsequent impairment testing. Significant increases in actual or expected future cash flows may be recognized prospectively through an upward adjustment of the IRR over a portfolio’s remaining life. Any increase to the IRR then becomes the new benchmark for impairment testing. Rather than lowering the estimated IRR if the collection estimates are not received or projected to be received, the carrying value of a pool would be impaired, or written down to maintain the then current IRR. Under the interest method, income is recognized on the effective yield method based on the actual cash collected during a period and future estimated cash flows and timing of such collections and the portfolio’s cost. Material variations of cash flow estimates are recorded in the quarter such variations are determined. The estimated future cash flows are reevaluated quarterly.
Finance income is recognized on cost recovery portfolios after the carrying value has been fully recovered through collections or amounts written down.
The Company accounts for its investments in personal injury claims at an agreed upon interest rate, in anticipation of a future settlement. The interest purchased by Pegasus in each claim consists of the right to receive from such claimant part of the proceeds or recoveries which such claimant receives by reason of a settlement, judgment or rewardaward with respect to such claimant’s claim. OpenManagement assesses the quality of the personal injury claims portfolio through an analysis of the underlying personal injury fundings on a case revenueby case basis. Cases are reviewed through periodic updates with attorneys handling the cases, as well as with third party research tools which monitor public filings, such as motions or judgments rendered on specific cases. The Company specifically reserves for those fundings where the underlying cases are identified as uncollectible, due to anticipated non-favorable verdicts and/or settlements at levels where recovery of the advance outstanding is estimated, recognized and accrued at a rateunlikely. For cases that have not exhibited any specific negative collection indicators, the Company establishes reserves based on the expected realizationhistorical collection rates of the Company’s fundings. Fee income on advances is reserved for on all cases where a specific reserve is established on the initially funded amount. In addition, management also monitors its historical collection rates on fee income and underwriting guidelinesestablishes reserves on fee income consistent with the historically experienced collection rates. Management regularly analyzes and facts and circumstances for each individual case. These personal injury claims are non-recourse. When a case is closed andupdates the cash is received for the advance provided to a claimant, income is recognized based upon the contractually agreed upon interest rate, and, if applicable, adjusted for any changes due to a settled amount and fees charged to the claimant.historical collection rates of its initially funded cases as well as its fee income.
The funding of BPCM matrimonial actions is on a non-recourse basis. BPCM incomeRevenue from matrimonial actions is recognized under the cost recovery method.
The Company recognizes revenue for GAR Disability Advocates when disability claimants cases close with the social security administration and the applicable fees are collected.
Impairments
As previously discussed, the
The Company has switched from the interest method to the cost recovery method as of October 1, 2013 onaccounts for its current inventory of portfolios. Inimpairments in accordance with ASC 310-30,310, which provides guidance on how to account for differences between contractual and expected cash flows from an investor’s initial investment in loans or debt securities acquired in a transfer if those differences are attributable, at least in part, to credit quality, increases in expected cash flows are recognized prospectively through an adjustmentquality. The recognition of the internal rate of return while decreases in expected cash flows are recognized as impairments.income under ASC 310-30 makes it more likely that impairment losses and accretable yield adjustments for portfolios’ performances which exceed original collection projections will be recorded, as all downward revisions in collection estimates will result in impairment charges, given the requirement that the IRR of the affected pool be held constant. If it310 is determined a portfolio accounted fordependent on the cost recovery method will not recoverCompany having the current book valueability to develop reasonable expectations of the portfolio, an impairment would be recorded. Impairments of $10.2 million were recorded in the three month period ended June 30, 2013, $19.6 million in the three and nine months ended June 30, 2014 and $10.7 million in the nine months ended June 30, 2013.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 14 — Income Recognition, Impairments, and Commissions and Fees (Restated and Revised)(continued)
Impairments (continued)
The Company’s analysis ofboth the timing and amount of cash flows to be generated by our portfolio purchases are based oncollected. In the following attributes:
The Company believes it has significant experience in acquiring certain distressed consumer receivables portfolios at a significant discount to the amount actually owed to the underlying debtors. The Company acquires these portfolios only after both qualitative and quantitative analyses of the underlying receivables are performed and a calculated purchase price is paid so that we believe our estimated cash flow offers us an adequate return on our acquisition costs after servicing expense. Additionally, when considering larger portfolio purchases of accounts, or portfolios from issuers with whom the Company has limited experience, it has the added benefit of soliciting its third party collection agencies and attorneys for their input on liquidation rates and, at times, incorporates such input into the estimates that the Company uses for its expected cash flows.
The Company acquires accounts that have experienced deterioration of credit quality between origination and the date of its acquisition of the accounts. The amount paid for a portfolio of accounts reflects the Company’s determination that it is probable that the Company will be unable to collect all amounts due according to the portfolio of accounts’ contractual terms. The Company considers the expected payments and estimates the amount and timing of undiscounted expected principal, interest and other cash flows for each acquired portfolio coupled with expected cash flows from accounts available for sales. The excess of this amount over the cost of the portfolio, representing the excess of the accounts’ cash flows expected to be collected, overASC 310 permits the amount paid, was accreted intochange to the cost recovery method. The Company will recognize income recognized on finance receivables accounted foronly after it has recovered its carrying value. If collection projections indicate the carrying value will not be recovered, an impairment is required. The impairment will be equal to the difference between the carrying value at the time of the forecast and the corresponding estimated remaining future collections.
In October 2014, the Company invested $5.0 million in Class A shares of the Topaz MP Fixed Income Fund (“Topaz Fund”), a closed end fund. The Topaz Fund invests indirectly in various portfolios of Non-Performing Small Consumer Loans. The objective of the fund is to obtain a fixed return cash flow representing interest on the interest method overinvested capital. According to the expected remaining lifeinvestment memorandum of the portfolio.fund, the Topaz Fund proposed to make semi-annual distributions of 14% annual compounded interest on June and December of each year. Since December 2015, no distribution has been received by the Company. The Company received letters from the fund’s General Partner explaining that the distributions were not made due to the negative performance of the fund for the periods.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Restated)
Note 14 — 10—Income Recognition, Impairments, and Commissions and Fees (Restated(continued)
Impairments (continued)
During the fiscal year 2016, the Company recorded an impairment loss on this investment of $1.0 million, which was included in general and Revised)(continued)administrative expenses in the consolidated statements of operations. In fiscal year 2017, the Company received an announcement that the investment was being liquidated. After careful consideration, the $3.4 million carrying value of this investment was written off as of March 31, 2017.
Commissions and fees
Commissions and fees are the contractual commissions earned by third party collection agencies and attorneys, and direct costs associated with the collection effort, generally court costs. The Company expects to continue to purchase portfolios and utilize utilizes third party collection agencies and attorney networks.
Note 15 11—Income Taxes
Deferred federal
At the end of each interim reporting period, the Company estimates its effective income tax rate expected to be applicable for the full year. The estimate is used in providing for income taxes on a year-to-date basis and state taxes principally arisemay change in subsequent interim periods. The Company’s effective tax rate from (i) recognition of finance income collectedcontinuing operations for tax purposes, but not yet recognized for financial reporting; (ii) provision for impairments/credit losses;the three months and (iii) stock based compensation expense for stock option grantssix months ended March 31, 2017 was 12.0% and restricted stock awards recorded34.7%, respectively, compared to 2.8% and 36.8 in the statementsame periods of operations for which no cash distribution has been made. Other components consist of state net operating loss (“NOL”) carry-forwards, which expire in September 2029.the prior year. The provision for income tax expense (benefit) for the three month periods ended June 30, 2014 and 2013 reflects income tax expense (benefit) at an effective rate of 38.7%for fiscal 2017 and (40.9)%, respectively. The provision for income tax expense for2016 differed from the nine month periods ended June 30, 2014 and 2013 reflects income tax expense at an effectiveU.S. federal statutory rate of 36.7%35% due to state income taxes, and 35.4%, respectively.other permanent differences.
The corporate federalCompany files income tax returns ofin the CompanyU.S federal jurisdiction, various state jurisdictions, and various foreign countries. The tax returns for the 2014 and 2015 fiscal years 2009 through 2013 are subject tocurrently under examination by the IRS, generally for three years after they are filed.Internal Revenue Service. The state incomeCompany does not have any uncertain tax returns and other state filings of the Company are subject to examination by the state taxing authorities, for various periods generally up to four years after they are filed.
In April 2010, the Company received notification from the IRS that the Company’s federal income tax returns would be audited. The current IRS audit period is 2008 through 2012. This audit is currently in progress. Additional tax liabilities, penalties and interest thereon when determined could have a material impact on the Company’s financial statements.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 16 12—Net Income (Loss) Incomeper Share - (Restated and Revised)
Basic per share data is calculated by dividing net income (loss) by the weighted average shares outstanding during the period. Diluted earnings per share is calculated similarly, except that it includes the dilutive effect of the assumed exercise of securities, including the effect of shares issuable under the Company’s stock based compensation plans. With respect to the assumed proceeds from the exercise of dilutive options, the treasury stock method is calculated using the average market price for the period.
The following table presents the computation of basic and diluted per share data for the nine months ended June 30, 2014 and 2013:
| RESTATED(1) | REVISED(2) | |||||||||||||||||||||||||||||||
| Nine Months Ended June 30, 2014 | Nine Months Ended June 30, 2013 | |||||||||||||||||||||||||||||||
| Net Income | Weighted Average Shares | Per Share Amount | Net Income | Weighted Average Shares | Per Share Amount | |||||||||||||||||||||||||||
Basic | $ | 5,709,000 | 12,979,472 | $ | 0.44 | $ | 718,000 | 12,946,521 | $ | 0.06 | ||||||||||||||||||||||
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Effect of Dilutive Stock | 228,543 | (0.01 | ) | 271,135 | (0.01 | ) | ||||||||||||||||||||||||||
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Diluted | $ | 5,709,000 | 13,208,015 | $ | 0.43 | $ | 718,000 | 13,217,656 | $ | 0.05 | ||||||||||||||||||||||
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The following table presents the computation of basic and diluted per share data for the three months ended June 30, 2014March 31,2017 and 2013:2016:
Three Months Ended March 31, 2017 | Three Months Ended March 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| RESTATED(1) | REVISED(2) | Net | Weighted | Per | Net | Weighted | Per | |||||||||||||||||||||||||||||||||||||||||||||||||
Net (loss) income from continuing operations | $ | (6,916,000 | ) | 9,691,576 | $ | (0.71 | ) | $ | (2,385,000 | ) | 12,076,120 | $ | (0.20 | ) | ||||||||||||||||||||||||||||||||||||||||||
Net (loss) income from discontinued operations | (1,058,000 | ) | 9,691,576 | (0.11 | ) | 555,000 | 12,076,120 | 0.05 | ||||||||||||||||||||||||||||||||||||||||||||||||
| $ | (7,974,000 | ) | $ | (0.82 | ) | $ | (1,830,000 | ) | $ | (0.15 | ) | |||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended June 30, 2014 | Three Months Ended June 30, 2013 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
(1) | Net Income | Weighted Average Shares | (1) | Per Share Amount | (2) | Net Income | Weighted Average Shares | (2) | Per Share Amount | |||||||||||||||||||||||||||||||||||||||||||||||
Basic | $ | 4,687,000 | 12,984,882 | $ | 0.36 | $ | (3,369,000 | ) | 12,954,455 | $ | (0.26 | ) | ||||||||||||||||||||||||||||||||||||||||||||
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Effect of Dilutive Stock | 229,821 | (0.01 | ) | — | 0.00 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
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Diluted | $ | 4,687,000 | 13,214,703 | $ | 0.35 | $ | (3,369,000 | ) | 12,954,455 | $ | (0.26 | ) | $ | (7,974,000 | ) | 9,691,576 | $ | (0.82 | ) | $ | (1,830,000 | ) | 12,076,120 | $ | (0.15 | ) | ||||||||||||||||||||||||||||||
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The following table presents the computation of basic and diluted per share data for the six months ended March 31, 2017 and 2016:
Six Months Ended March 31, 2017 | Six Months Ended March 31, 2016 | |||||||||||||||||||||||
Net | Weighted | Per | Net | Weighted | Per | |||||||||||||||||||
Net (loss) income from continuing operations | $ | (8,604,000 | ) | 10,795,903 | $ | (0.80 | ) | $ | (1,094,000 | ) | 12,115,987 | $ | (0.09 | ) | ||||||||||
Net (loss) income from discontinued operations | (2,316,000 | ) | 10,795,903 | (0.21 | ) | 827,000 | 12,115,987 | 0.07 | ||||||||||||||||
| $ | (10,920,000 | ) | $ | (1.01 | ) | $ | (0.02 | ) | ||||||||||||||||
Effect of Dilutive Stock | — | — | — | — | ||||||||||||||||||||
Diluted | $ | (10,920,000 | ) | 10,795,903 | $ | (1.01 | ) | $ | (267,000 | ) | 12,115,987 | $ | (0.02 | ) | ||||||||||
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Restated)
Note 17 13—Stock Based Compensation
The Company accounts for stock-based employee compensation under ASC 718, Compensation — Stock Compensation (“ASC 718”). ASC 718 requires that compensation expense associated with stock options and other stock based awards be recognized in the consolidated statement of operations, rather than a disclosure in the notes to the Company’s consolidated financial statements.
In February 2014,
On December 16,2015, the Compensation Committee of the Board of Directors of the Company (“Compensation Committee”) granted 5,00067,100 stock options to a former employeenon-officer employees of the Company, of which 9,100 options vested immediately and the remaining 58,000 stock options vest in three equal annual installments and accounted for past services.as one graded vesting award. The exercise price of these options issued on February 4, 2014, was at the market price on that date. The options vested immediately. The weighted average assumptions used in the option pricing model were as follows:
Risk-free interest rate | % | |||
Expected term (years) | ||||
Expected volatility | % | |||
Dividend yield | 0.00 | % |
In
On December 2013,16,2015, the Compensation Committee granted 156,700 stock options, of which 70,000 options were awarded5,000 restricted shares to the Officers of the Company and the remaining 86,700 stock options were awarded toa non-officer employees of the Company. The exercise price of these options, issued on December 12, 2013, was at the market price on that date. The options vest in three equal annual installments and accounted for as one graded vesting award. The weighted average assumptions used in the option pricing model were as follows:
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In December 2012, the Compensation Committee granted 160,000 stock options, of which 65,000 options were awarded to three officers of the Company and 20,000 options were awarded to an employee of the Company. The remaining 75,000These shares werevested fully in March 2016. On December 31,2015, the Company issued an aggregate of 123,304 shares to six non-employee directorsthe two former CBC principals (see Note 5 – Acquisition of CBC). These shares are subject to a one year lock up period in which the Company. The exercise price of these options, issued on December 18, 2012, was atholders cannot sell the market price on that date. The options vest in three equal annual installments and accounted for as one graded vesting award. The weighted average assumptions used in the option pricing model were as follows:shares.
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In addition, the Company granted 102,321 restricted shares are subject to certain sales restrictions following the Chief Executive Officer of the Company. The shares vest in three equal annual installments.initial lock-up period which expired on December 31, 2016 (see Note 8 – Discontinued Operations).
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 18 — Stock Option Plans
2012 Stock Option and Performance Award Plan
On February 7,2012, the Board of Directors adopted the Company’s 2012 Stock Option and Performance Award Plan (the “2012“2012 Plan”), which was approved by the stockholders of the Company on March 21,2012. The 2012 Plan replacesreplaced the Equity Compensation Plan (as defined below).
The 2012 Plan provides the Company with flexibility with respect to equity awards by providing for grants of stock awards (i.e. restricted or unrestricted), stock purchase rights and stock appreciation rights, in addition to the granting of stock options.
The Company authorized 2,000,000 shares of Common Stock for issuance under the 2012 Plan. Under the 2012 Plan, the Company has granted options to purchase an aggregate of 371,700484,200 shares, and an award of 102,321245,625 shares of restricted stock, and has cancelled 66,868 options, leaving 1,525,9791,337,043 shares available as of June 30, 2014.March 31,2017. As of June 30, 2014,March 31,2017, approximately 4995 of the Company’s employees were able to participate in the 2012 Plan.
Equity Compensation Plan
On December 1,2005, the Board of Directors adopted the Company’s Equity Compensation Plan (the “Equity Compensation Plan”), which was approved by the stockholders of the Company on March 1,2006. The Equity Compensation Plan was adopted to supplement the Company’s 2002 Stock Option Plan (as defined below).
In addition to permitting the grant of stock options as are permitted under the 2002 Stock Option Plan, the Equity Compensation Plan allowsallowed the Company flexibility with respect to equity awards by also providing for grants of stock awards (i.e. restricted or unrestricted), stock purchase rights and stock appreciation rights.
The Company authorized 1,000,000 shares of Common Stock for issuance under the Equity Compensation Plan. As of March 21,2012,no more awards could be issued under this plan.
2002 Stock Option Plan
On March 5,2002, the Board of Directors adopted the Company’s 2002 Stock Option Plan (the “2002“2002 Plan”), which plan was approved by the stockholders of the Company on May 1,2002. The 2002 Plan was adopted in order to attract and retain qualified directors, officers and employees of, and consultants to, the Company.
The 2002 Plan authorizesauthorized the granting of incentive stock options (as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”)) and non-qualified stock options to eligible employees of the Company, including officers and directors of the Company (whether or not employees) and consultants of the Company.
The Company authorized 1,000,000 shares of Common Stock authorized for issuance under the 2002 Plan. As of March 5,2012,no more awards could be issued under this plan.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Restated)
Note 18 — 14—Stock Option Plans (continued)(Continued)
Summary of the Plans
Compensation expense for stock options and restricted stock is recognized over the vesting period. Compensation expense for restricted stock is based upon the market price of the shares underlying the awards on the grant date.
The following table summarizes stock option transactions under the 2012 Plan, the 2002 Plan, and the Equity Compensation Plan:
| Nine Months Ended June 30, | Six Months Ended March 31, | |||||||||||||||||||||||||||||||
| 2014 | 2013 | 2017 | 2016 | |||||||||||||||||||||||||||||
| Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | Number | Weighted | Number | Weighted | |||||||||||||||||||||||||
Outstanding options at the beginning of period | 1,622,771 | $ | 11.31 | 1,499,471 | $ | 11.27 | 949,667 | $ | 8.47 | 1,043,566 | $ | 8.47 | ||||||||||||||||||||
Options granted | 161,700 | 8.48 | 210,000 | 9.36 | — | — | 67,100 | 7.93 | ||||||||||||||||||||||||
Options exercised | (11,500 | ) | 3.46 | (29,500 | ) | 3.51 | — | — | (7,499 | ) | 6.32 | |||||||||||||||||||||
Options forfeited/canceled | (210,767 | ) | 14.87 | (50,000 | ) | 7.77 | ||||||||||||||||||||||||||
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Options forfeited/cancelled | (52,800 | ) | 14.13 | (8,300 | ) | 8.14 | ||||||||||||||||||||||||||
Outstanding options at the end of period | 1,562,204 | $ | 10.66 | 1,629,971 | $ | 11.27 | 896,867 | $ | 8.14 | 1,094,867 | $ | 8.45 | ||||||||||||||||||||
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Exercisable options at the end of period | 987,198 | $ | 11.97 | 1,112,037 | $ | 12.57 | 858,195 | $ | 8.15 | 963,522 | $ | 8.48 | ||||||||||||||||||||
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| Three Months Ended June 30, | ||||||||||||||||||||||||||||||||
| 2014 | 2013 | |||||||||||||||||||||||||||||||
| Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | |||||||||||||||||||||||||||||
Outstanding options at the beginning of period | 1,563,704 | $ | 10.65 | 1,655,871 | $ | 11.12 | ||||||||||||||||||||||||||
Options granted | — | — | 50,000 | 8.69 | ||||||||||||||||||||||||||||
Options exercised | (1,500 | ) | 6.89 | (25,900 | ) | 3.06 | ||||||||||||||||||||||||||
Options forfeited/canceled | — | — | (50,000 | ) | 7.77 | |||||||||||||||||||||||||||
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Outstanding options at the end of period | 1,562,204 | $ | 10.66 | 1,629,971 | $ | 11.27 | ||||||||||||||||||||||||||
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Exercisable options at the end of period | 987,198 | $ | 11.97 | 1,112,037 | $ | 12.57 | ||||||||||||||||||||||||||
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Three Months Ended March 31, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
Number | Weighted | Number | Weighted | |||||||||||||
Outstanding options at the beginning of period | 897,167 | $ | 8.14 | 1,110,666 | $ | 8.43 | ||||||||||
Options granted | — | — | — | — | ||||||||||||
Options exercised | — | — | (7,499 | ) | 6.32 | |||||||||||
Options forfeited/cancelled | (300 | ) | 8.08 | (8,300 | ) | 8.14 | ||||||||||
Outstanding options at the end of period | 896,867 | $ | 8.14 | 1,094,867 | $ | 8.45 | ||||||||||
Exercisable options at the end of period | 858,195 | $ | 8.15 | 963,522 | $ | 8.48 | ||||||||||
The following table summarizes information about the 2012 Plan, 2002 Plan, and the Equity Compensation Plan outstanding options as of June 30, 2014:March 31,2017:
| Options Outstanding | Options Exercisable | |||||||||||||||||||
Range of Exercise Price | Weighted Number Outstanding | Weighted Remaining Contractual Life (in Years) | Weighted Average Exercise Price | Number Exercisable | Weighted Average Exercise Price | |||||||||||||||
$ 2.8751 – $ 5.7500 | 7,500 | 4.8 | $ | 2.95 | 7,500 | $ | 2.95 | |||||||||||||
$ 5.7501 – $ 8.6250 | 938,100 | 7.1 | 7.92 | 503,100 | 7.78 | |||||||||||||||
$ 8.6251 – $14.3750 | 260,000 | 8.3 | 9.77 | 119,994 | 10.25 | |||||||||||||||
$14.3751 – $17.2500 | 1,944 | 0.0 | 15.99 | 1,944 | 15.99 | |||||||||||||||
$17.2501 – $20.1250 | 339,660 | 0.3 | 18.23 | 339,660 | 18.23 | |||||||||||||||
$25.8751 – $28.7500 | 15,000 | 2.5 | 28.75 | 15,000 | 28.75 | |||||||||||||||
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| 1,562,204 | 5.8 | $ | 10.66 | 987,198 | $ | 11.97 | ||||||||||||||
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ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 18 — Stock Option Plans (continued)
Options Outstanding | Options Exercisable | |||||||||||||||||||||||
Range of Exercise Price | Number | Weighted | Weighted | Number | Weighted | |||||||||||||||||||
| $ | 2.8751 | – | 5.7500 | 3,800 | 2.1 | $ | 2.95 | 3,800 | $ | 2.95 | ||||||||||||||
| $ | 5.7501 | – | 8.6250 | 768,567 | 5.0 | 7.96 | 729,895 | 7.96 | ||||||||||||||||
| $ | 8.6251 | – | 11.5000 | 124,500 | 5.8 | 9.40 | 124,500 | 9.40 | ||||||||||||||||
| 896,867 | 5.1 | $ | 8.14 | 858,195 | $ | 8.15 | ||||||||||||||||||
The Company recognized $1,046,000$8,000 and $367,000$14,000 of compensation expense related to the stock option grants during the ninesix and three month periods ended June 30, 2014,March 31,2017, respectively. The Company recognized $1,307,000$327,000 and $532,000$131,000 of compensation expense related to the stock optionsoption grants during the ninesix and three months month periods ended June March 31, 2013.2016, respectively. As June 30, 2014,of March 31,2017, there was $1,796,000$62,000 of unrecognized compensation cost related to stock option awards. The weighted average period over which such costs are expected to be recognized is 1.451.7 years.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Restated)
Note 14—Stock Option Plans (Continued)
The intrinsic value of the outstanding and exercisable options as of June 30, 2014March 31,2017 was approximately $391,000$228,000 and $281,000,$219,000, respectively. The weighted average remaining contractual life of exercisable options is 4.34.9 years. The intrinsic and the fair value of theThere were no options exercised during the nine month period ended June 30, 2014 was approximately $57,000six and $95,000, respectively. The intrinsic and fair value of the stock options exercised during the three month period ended June 30, 2014 was approximately $2,000 and $12,000, respectively. The intrinsic and fair value of the stock options exercised during the nine month period ended June 30, 2013 was approximately $172,000 and $276,000, respectively. The intrinsic and fair value of the stock options exercised during the three month period ended June 30, 2013 was approximately $162,000 and $241,000, respectively. The proceeds from the exercise of options exercised during the nine and three month periods ended June 30, 2014 were approximately $40,000 and $10,000, respectively. There was no tax effect associated with these exercises. March 31, 2017. The fair value of the stock options that vested during the ninesix and three month periods ended June 30, 2014March 31,2017 was approximately $743,000$657,000 and $137,000,$111,000, respectively. The fair value of the stock options that vested during the ninesix and three month periods ended June 30, 2013March 31,2016 was approximately $1,259,000$1,052,000 and $144,000,$122,000, respectively. There were no options granted during the six and three month periods ended March 31, 2017. The fair value of the awardsoptions granted during the ninesix and three month periods ended June 30, 2014 was $1,372,000 and $0, respectively. The fair value of the awards granted during the nine and three month period ended June 30, 2013March 31,2016 was approximately $1,702,000$532,000 and $341,000,$0, respectively.
The following table summarizes information about restricted stock transactions:
| Nine Months Ended June 30, | ||||||||||||||||
| 2014 | 2013 | |||||||||||||||
| Shares | Weighted Average Grant Date Fair Value | Shares | Weighted Average Grant Date Fair Value | |||||||||||||
Unvested at the beginning of period | 102,321 | $ | 9.57 | 10,922 | $ | 7.63 | ||||||||||
Awards granted | — | — | 102,321 | 9.57 | ||||||||||||
Vested | (34,107 | ) | 9.57 | (10,922 | ) | 7.63 | ||||||||||
Forfeited | — | — | — | — | ||||||||||||
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Unvested at the end of period | 68,214 | $ | 9.57 | 102,321 | $ | 9.57 | ||||||||||
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| Three Months Ended June 30, | ||||||||||||||||
| 2014 | 2013 | |||||||||||||||
| Shares | Weighted Average Grant Date Fair Value | Shares | Weighted Average Grant Date Fair Value | |||||||||||||
Unvested at the beginning of period | 68,214 | $ | 9.57 | 102,321 | $ | 9.57 | ||||||||||
Awards granted | — | — | — | — | ||||||||||||
Vested | — | — | — | — | ||||||||||||
Forfeited | — | — | — | — | ||||||||||||
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Unvested at the end of period | 68,214 | $ | 9.57 | 102,321 | $ | 9.57 | ||||||||||
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ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six Months Ended March 31, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
Number of | Weighted | Number of | Weighted | |||||||||||||
Unvested at the beginning of period | — | $ | — | 44,107 | $ | 9.28 | ||||||||||
Awards granted | — | — | 5,000 | 7.89 | ||||||||||||
Vested | — | — | (34,107 | ) | 9.57 | |||||||||||
Forfeited | — | — | — | — | ||||||||||||
Unvested at the end of period | — | $ | — | 15,000 | $ | 7.92 | ||||||||||
Note 18 — Stock Option Plans (continued)
Three Months Ended March 31, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
Number of | Weighted | Number of | Weighted | |||||||||||||
Unvested at the beginning of period | — | $ | — | 15,000 | $ | 7.92 | ||||||||||
Awards granted | — | — | — | — | ||||||||||||
Vested | — | — | — | — | ||||||||||||
Forfeited | — | — | — | |||||||||||||
Unvested at the end of period | — | $ | — | 15,000 | $ | 7.92 | ||||||||||
The Company recognized $244,000no compensation expense related to the restricted stock awards during both the six and $82,000three month periods ended March 31,2017, respectively. The Company recognized $101,000 and $14,000 of compensation expense related to the restricted stock awards during the ninesix and three month periods ended June 30, 2014,March 31,2016, respectively. The Company recognized $191,000 and $81,000 of compensation expense related to the restricted stock awards for the nine and three month periods ended June 30, 2013. As of June 30, 2014,March 31,2017, there was $479,000 ofno unrecognized compensation cost related to restricted stock awards. The weighted average remaining period over which such costs expected to be recognized is 1.47 years. There were noAn aggregate of 5,000 shares of restricted stock awardswas granted during the first ninesix months of fiscal year 2014. The fair value2016, all of the restricted stock awardswhich were granted during the first quarter of fiscal year 2013 was approximately $979,000.to a non-officer employee. The fair value of the awards vested during the ninesix month periods ended June 30, 2014 March 31, 2017 and 20132016 was $326,000$0 and $83,000,$40,000, respectively. There were no awards vested in the third quarter of fiscal years 2014 and 2013.
The Company recognized an aggregate total of $1,290,000$8,000 and $449,000, respectively,$14,000 in compensation expense for the ninesix and three month periods ended June 30, 2014,March 31, 2017, respectively, for the stock options and restricted stock grants. The Company recognized an aggregate total of $1,498,000$428,000 and $613,000, respectively,$145,000 in compensation expense for the ninesix and three month periods ended June 30, 2013,March 31, 2016, respectively, for the stock options and restricted stock grants. As of June 30, 2014,March 31,2017, there was a total of $2,275,000$62,000 of unrecognized compensation cost related to unvested stock options and restricted stock grants. The method used to calculate stock based compensation is the straight linepro-rated method.
Note 19 15—Stockholders’ Equity and Prior Period Adjustments
As more fully disclosed in Note 2,
Dividends are declared at the Company identified pre-tax errors in prior annual periods related to the applicationdiscretion of the interest method for consumer receivables acquired for liquidationBoard and accounted for under ASC 310-30. This misstatement resulted in an increase in finance receivables of approximately $6.4 million, with a decrease in deferred taxes of approximately $2.7 milliondepend upon the Company’s financial condition, operating results, capital requirements and a resulting increase to retained earnings of approximately $3.7 million in this Form 10-Q/A as of September 30, 2013. The impact ofother factors that the misstatements in the prior years’ financial statements was not material to any of those years, however, the cumulative effect of correcting all of the prior period misstatements in the current year would be material to our current year consolidated financial statements. As such, consistentBoard deems relevant. In addition, agreements with the guidance in ASC Topic 250, we have accounted for these errors as a restatementCompany’s lenders may, from time to time, restrict the ability to pay dividends. As of prior period financial statements.
ThereMarch 31, 2017, there were no such restrictions. No dividends were declared or paid during the nine monthsthree and six month periods ended June 30, 2014. During September 2012, the Company declared a cash dividend aggregating $260,000 ($0.02 per share) which was paid November 1, 2012. On December 13, 2012, the Board of Directors of the Company approved the payment of a special accelerated annual dividend of $0.08 per share to shareholders of record on December 24, 2012. The aggregate dividend of $1,030,000 was paid on December 28, 2012.March 31, 2017 and 2016.
On March 9, 2012,August 11,2015, the Company adopted a Rule 10b5-1 Plan in conjunction with its share repurchase program. The Board of Directors approved the repurchase of up to $20$15,000,000 of the Company’s common stock and authorized management of the Company to enter into the Shares Repurchase Plan under Sections 10b-18 and 10b5-1 of the Securities Exchange Act (the “Shares Repurchase Plan”). The Shares Repurchase Plan was to have been effective to December 31,2015. On December 17,2015 the Board approved the extension of the Plan to March 31,2016 and reset the maximum to an additional $15 million in repurchases. On March 17,2016, having repurchased approximately $9.9 million of the Company’s common stock, which was effective through the Board approved further extension of the Plan to December 31,2016 and reset the maximum to $15 million in repurchases. On March 11, 2013. During22,2016, a Company shareholder commenced a tender offer on the nineCompany’s common stock. Per the provisions of the Shares Repurchase Plan, it terminated immediately, and three month period ended June 31, 2013 no further purchases were permitted under the Shares Repurchase Plan. Through September 30, 2016, the Company purchased approximately 172,000 and 01,186,000 shares respectively, at an aggregate cost of approximately $1,574,000 and $0, respectively,$10.1 million under the plan. The Plan expired in March 2013.Shares Repurchase Plan.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Restated)
Note 20 — 15—Stockholders’ Equity (continued)
On May 25,2016, the Company entered into a Mutual Confidentiality Agreement (the “Agreement”) with MPF InvestCo 4, LLC, a wholly owned subsidiary of The Mangrove Partners Master Fund, Ltd. (“Mangrove”), pursuant to which Mangrove and the Company agreed to (1) provide certain Confidential Information (as defined below) to the other party to the Agreement and the other party’s representatives, (2) the confidentiality of the Confidential Information, and (3) certain restrictions on the activities of the parties to the Agreement.
Pursuant to the Agreement, the Company made available to Mangrove and its representatives certain confidential information relating to the Company or its subsidiaries, and Mangrove agreed to make available to the Company and its representatives certain confidential information relating to Mangrove and its affiliates (collectively, the “Confidential Information”). The Company and Mangrove agreed not to disclose the Confidential Information, and to cause each of their representatives, respectively, not to disclose the Confidential Information, except as required by law. Pursuant to the Agreement, the Company provided information requested by Mangrove to one or more of Mangrove’s representatives and such representatives prepared summaries of such information (the “Summaries”). The Company approved the Summaries, and the approved Summaries were provided to Mangrove. The Company agreed to release the approved Summaries publicly on or prior to the end of the Extended Period (as defined in the Agreement), to the extent that the information contained in the Summaries has not already been disclosed.
Further, under the terms of the Agreement, Mangrove and the Company have agreed to certain restrictions during the Discussion Period, which began on May 25, 2016 and the Extended Period, including that, unless consented to by the other party to the Agreement or required by applicable law, neither party will, and shall cause its affiliates and representatives not to, (i) commence any litigation against the other party, (ii) make any filing with the Securities and Exchange Commission of proxy solicitation materials, preliminary proxy statement, definitive proxy statement or otherwise or call any annual or special meeting of stockholders of the Company, (iii) publicly refer to: (a) the Confidential Information or Discussion Information (as defined in the Agreement), (b) any annual or special meetings of stockholders of the Company or (c) any prior discussions between the parties, including in any filing with the Securities and Exchange Commission (including any proxy solicitation materials, preliminary proxy statement, definitive proxy statement or otherwise), in any press release or in any other written or oral disclosure to a third party, (iv) make any purchases of the Company’s securities, including, but not limited to, pursuant to any stock buyback plans, tender offers, open-market purchases, privately negotiated transactions or otherwise, (v) make any demand under Section 220 of the Delaware General Corporation Law, (vi) make or propose to make any amendments to the Company’s Certificate of Incorporation, as amended, or By-laws, as amended, (vii) adopt, renew, propose or otherwise enter into a Shareholder Rights Plan with respect to the Company’s securities, (viii) adopt or propose any changes to the Company’s capital structure or (ix) negotiate, discuss, enter into, propose or otherwise transact in any extraordinary transactions with respect to the Company, outside the ordinary course of business, including, but not limited to, any mergers, asset sales or asset purchases.
On November 21, 2016, Mangrove notified the Company that Mangrove was terminating the Agreement with the Company. Under the Agreement, the Company and Mangrove agreed to (1) provide certain Confidential Information (as defined below) to the other party to the Agreement and the other party’s representatives, (2) maintain the confidentiality of the Confidential Information, and (3) certain restrictions on the activities of the parties to the Agreement. Upon termination of the Discussion Period, the agreement provides for a period of 30 days thereafter (the “Extended Period”). Throughout the Extended Period of the Agreement, the parties are subject to the standstill provisions of the Agreement. Following the Discussion Period and the Extended Period, nothing in the Agreement shall prohibit any party from taking any of the activities referred to as the Restricted Activities, and specifically nothing shall restrict Mangrove or its representatives from calling a special meeting, nominating one or more candidates to serve as directors of the Company or commencing, or announcing its intention to commence, a “solicitation” of “proxies” (as such terms are used in Regulation 14A of the Securities Exchange Act of 1934, as amended) to vote with respect to any meeting of stockholders of the Company. The effective termination date of this Agreement was January 6, 2017.
On January 6, 2017, the Company entered into a settlement agreement (the “ Settlement Agreement”) with Mangrove and, for limited purposes stated therein, Gary Stern, Ricky Stern, Emily Stern, Arthur Stern, Asta Group, Incorporated and GMS Family Investors LLC (collectively, the “ Stern Family”).
The Settlement Agreement provided that, within ten business days following the date of the Settlement Agreement, the Company will commence a self-tender offer (“Tender Offer”) to repurchase for cash 5,314,009 shares of its common stock at a purchase price of $10.35 per share. The Tender Offer will expire no later than February 28, 2017. Pursuant to the Settlement Agreement, Mangrove will tender its 4,005,701 shares for purchase by the Company. The Stern Family has agreed not to tender any of their shares in the Tender Offer. In addition, pursuant to a securities purchase agreement dated January 6, 2017 between Mangrove and Gary Stern (the “Purchase Agreement”), Gary Stern will purchase any remaining shares owned by Mangrove eleven business days following the closing of the Tender Offer for $10.35 per share.
The Settlement Agreement includes customary standstill and related provisions. Mangrove and the Company also agreed on a mutual release of claims. Additionally, the Company indemnified Mangrove from and against any excise tax imposed as a result of this Settlement Agreement.
The Settlement Agreement was terminable by either the Company or Mangrove by written notice at any time after the close of business on the second anniversary of the Settlement Agreement. The Settlement Agreement will also terminate if the Tender Offer does not close on or before February 28, 2017 or the Company amends the terms of the Tender Offer in a manner adverse to Mangrove.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Restated)
Note 15—Stockholders’ Equity (continued)
In connection with the Settlement Agreement, the Company also entered into a Voting Agreement dated January 6, 2017 (the “Voting Agreement”) with Gary Stern, Ricky Stern, Emily Stern, Asta Group, Incorporated and GMS Family Investors LLC (collectively, the “Stern Stockholders”). The Voting Agreement provides that the Stern Stockholders will not have the right to vote more than 49% of the Company’s total outstanding shares, and any additional shares held by the Stern Stockholders will be voted in a manner proportionate to the votes of the outstanding shares not held by the Stern Stockholders.
On January 19, 2017, the Company commenced a self-tender offer to purchase for cash up to 5,314,009 shares of its common stock at a purchase price of $10.35 per share, less applicable withholding taxes and without interest. The Company made the tender offer pursuant to the Settlement Agreement dated as of January 6, 2017, by and among the Company, Mangrove and certain of their respective affiliates, pursuant to which Mangrove and its affiliates would tender their 4,005,701 shares. The tender offer would reduce the number of shares in the public market.
If more than 5,314,009 shares had been tendered, the Company would have purchased all tendered shares on a pro rata basis, subject to the conditional tender provisions described in the Offer to Purchase. Pursuant to the Settlement Agreement, Gary Stern (or his permitted assignees) had unconditionally agreed to purchase from Mangrove and its affiliates any shares owned by Mangrove and its affiliates that the Company did not purchase in the tender offer. Effective with the repurchase of the Mangrove shares in this tender offer, Mangrove was no longer deemed to be a related party.
The tender offer expired on February 15, 2017, at 11:59 p.m., New York City time. Based on the final count by American Stock Transfer & Trust Company, LLC ("AMSTOCK"), the depositary for the tender offer, a total of approximately 6,022,253 shares of the Company’s common stock were validly tendered and not validly withdrawn. Because the tender offer was oversubscribed by 708,244 shares, the Company purchased only a prorated portion of the shares properly tendered by each tendering stockholder. The depositary had informed the Company that the final proration factor for the tender offer was approximately 88.24% of the shares validly tendered and not validly withdrawn. AMSTOCK promptly issued payment for the 5,314,009 shares accepted pursuant to the tender offer and returned all other shares tendered and not purchased. The shares acquired represented approximately 44.7% of the total number of shares of the Company’s common stock issued and outstanding as of February 6, 2017. As a result of this tender offer, the Company recorded during the second quarter an additional $54.2 million in treasury stock, and $797,000 was charged to general and administrative expenses in the consolidated statements of operations which represents the excess of the current market price of the Company’s common stock on January 18, 2017 of $10.20 per share. Additionally, the Ricky Stern Family 2012 Trust (as Gary Stern's permitted assignee), acquired 471,086 Shares under the Purchase Agreement on March 10, 2017 for $4.9 million.
As of December 31, 2016, and for the three month periods ended December 31, 2015 and 2016, through February 14, 2017, Mangrove due to their ownership in the Company's common stock, which was acquired in a series of OTC transactions, was deemed to be a related party. Effective on February 15, 2017, the date Mangrove tendered its shares, they were no longer deemed to be a related party.
Note 16—Fair Value of Financial Measurements and Disclosures (Restated
Fair Value Hierarchy
The Company recorded its available-for-sale investments at estimated fair value on a recurring basis. The accompanying consolidated financial statements include estimated fair value information regarding its available-for-sale investments as of March 31,2017, as required by FASB ASC 820, Fair Value Measurements and Revised)Disclosures (“ASC 820”). ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s level within the fair value hierarchy is based on the lowest level of input significant to the fair value measurement.
Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to assess at the measurement date.
Level 2 – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities in active markets; quoted prices in markets that are not active for identical or similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.
Level 3 – Unobservable inputs that are supported by little or no market activity and significant to the fair value of the liabilities that are developed using the reporting entities’ estimates and assumptions, which reflect those that market participants would use.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Restated)
Note 16—Fair Value of Financial Measurements and Disclosures (continued)
Disclosures about Fair Value of Financial Instruments
FASB ASC 825, Financial Instruments, (“ASC 825”), requires disclosure of fair value information about financial instruments, whether or not recognized on the balance sheet, for which it is practicable to estimate that value. Because there are a limited number of market participants for certain of the Company’s assets and liabilities, fair value estimates are based upon judgments regarding credit risk, investor expectation of economic conditions, normal cost of administration and other risk characteristics, including interest rate and prepayment risk. These estimates are subjective in nature and involve uncertainties and matters of judgment, which significantly affect the estimates.
The estimated fair value of the Company’s financial instruments is summarized as follows:
March 31, 2017 | September 30, 2016 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Financial assets | ||||||||||||||||
Cash equivalents (Level 1) | $ | 2,936,000 | $ | 2,936,000 | $ | 923,000 | $ | 923,000 | ||||||||
Available-for-sale investments (Level 1) | 5,397,000 | 5,397,000 | 56,763,000 | 56,763,000 | ||||||||||||
Other investments, net (Level 1) | — | — | 3,590,000 | 3,590,000 | ||||||||||||
Consumer receivables acquired for liquidation (Level 3) | 11,590,000 | 44,014,000 | 13,427,000 | 47,233,000 | ||||||||||||
| RESTATED | REVISED | |||||||||||||||
| June 30, 2014 | September 30, 2013 | |||||||||||||||
| Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||
Financial assets | ||||||||||||||||
Available-for-sale investments (Level 1) | $ | 70,205,000 | $ | 70,205,000 | $ | 58,035,000 | $ | 58,035,000 | ||||||||
Consumer receivables acquired for liquidation (Level 3) | 32,414,000 | 60,490,000 | 64,254,000 | 70,875,000 | ||||||||||||
Structured settlements (Level 3) | 35,892,000 | 35,892,000 | — | — | ||||||||||||
Financial liabilities | ||||||||||||||||
Non-recourse debt – BMO (Level 3) | — | — | 35,760,000 | 27,000,000 | ||||||||||||
Other debt – CBC, revolving line of credit (Level 3) | 14,443,000 | 14,443,000 | — | — | ||||||||||||
Other debt – CBC, non-recourse notes payable with varying installments (Level 3) | 12,991,000 | 12,991,000 | — | — | ||||||||||||
The following assets have been reclassified to discontinued operations as of March 31, 2017 and September 30, 2016:
March 31, 2017 | September 30, 2016 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Financial asset | ||||||||||||||||
Structured settlements (Level 3) | 89,641,000 | 89,641,000 | 86,091,000 | 86,091,000 | ||||||||||||
Disclosure of the estimated fair values of financial instruments often requires the use of estimates. The Company uses the following methods and assumptions to estimate the fair value of financial instruments:
Cash equivalents – The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. The carrying amount of cash equivalents approximates fair value.
Available-for-sale investments —– The available-for-sale securities consist of mutual funds that are valued based on quoted prices in active markets.
Other investments – The Company estimated the fair value using the net asset value per share of the investment. There are no unfunded commitments and the investment cannot be redeemed for 5 years from the date of the initial investment ( October 2014).
Consumer receivables acquired for liquidation —– The Company computed the fair value of the consumer receivables acquired for liquidation using its proprietary forecasting model. The Company’s forecasting model utilizes a discounted cash flow analysis. The Company’s cash flows are an estimate of collections for consumer receivables based on variables fully described in Note 4:4 - Consumer Receivables Acquired for Liquidation. These cash flows are discounted to determine the fair value.
Structured settlements —– The Company determined the fair value based on the discounted forecasted future collections of the structured settlements.
Non-recourse Debt — Bank Unrealized gains (losses) on structured settlements is comprised of Montreal — carried a variable rate. Theboth unrealized gains resulting from fair market valuation at the date of acquisition of the structured settlements and the subsequent fair value at September 30, 2013 was basedadjustments resulting from the change in the discount rate. Of the $3.0 million of unrealized losses recognized in the six month period ended March 31, 2017, approximately $4.3 million is due to day one gains on new structured settlements financed during the discounted weighted average forecasted future collectionsperiod, offset by a decrease of $1.0 million in realized gains recognized as realized interest income on structured settlements and a reduction in fair value of $6.3 million during the Portfolio Purchase.period.
Other debt CBC, revolving line of credit — The Company determined
A significant unobservable input used in the fair value based on similar instrumentsmeasurement of structured settlements is the discount rate. Significant increases and decreases in the market.
Other debt CBC, notes payable with varying installments — The fair value at June 30, 2014 was based on the discounted forecasted future collections of the structured settlements.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 20 — Fair Value of Financial Measurements and Disclosures (Restated and Revised) (continued)
Fair Value Hierarchy
The Company recorded its available-for-sale investments at estimated fair value on a recurring basis. The accompanying consolidated financial statements include estimated fair value information regarding its available-for-sale investments as of June 30, 2014, as required by FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value as the price that would be receiveddiscount rate used to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s level within the fair value hierarchy is based on the lowest level of input significant to the fair value measurement.
Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to assess at the measurement date.
Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities in active markets; quoted prices in markets that are not active for identical or similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.
Level 3 — Unobservable inputs that are supported by little or no market activity and significant toestimate the fair value of structured settlements could decrease or increase the liabilities thatfair value measurement of the structured settlements. The discount rate could be affected by factors, which include, but are developed usingnot limited to, creditworthiness of insurance companies, market conditions, specifically competitive factors, credit quality of receivables purchased, the reporting entities’ estimatesdiversity of the payers of the receivables purchased, the weighted average life of receivables, current benchmark rates (i.e. 10 year treasury or swap rate) and assumptions, which reflect those that market participants would use.the historical portfolio performance of the originator and/or servicer.
The Company’s available-for-sale investments are classified as Level 1 financial instruments based on the classifications described above. The Company did not have transfers into or (out of) Level 1 investments during the ninesix month period ended June 30, 2014.March 31,2017. The Company had no Level 2 or Level 3 available-for-sale investments during the first ninesix months of fiscal year 2014.2017.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Restated)
Note 16—Fair Value of Financial Measurements and Disclosures(continued)
The following table sets forth the Company’s quantitative information about its Level 3 fair value measurements as of June 30, 2014:March 31,2017 (which are classified in the consolidated financial statements as assets related to discontinued operations):
| Fair Value | Valuation Technique | Unobservable Input | Rate | |||||||||||||
Structured settlements at fair value | $ | 35,892,000 |
| Discounted cash flow |
|
| Discount rate |
| 5.5 | % | ||||||
Fair Value | Valuation | Significant Unobservable | Weighted Average Rate | ||||||||||
Structured settlements at fair value | $ | 89,641,000 | Discounted cash flow | Discount rate | 4.80% | – | 10.5% |
| |||||
A significant unobservable input used in the fair value measurement of the Company's structured settlements measured at fair value using unobservable inputs (Level 3) is the discount rate. The inputs comprising the discount rate include A-rated U.S. Financial yield curve, plus illiquidity spread, and cash flows of the portfolio are adjusted to take into consideration survival probabilities, if applicable.
The changes in structured settlementsthe financial instruments at fair value using significant unobservable inputs (Level 3)3) during the ninesix months ended June 30, 2014March 31,2017 were as follows:
Balance at September 30, 2013 | $ | 0 | ||
Acquisition of CBC (see Note 6) | 30,436,000 | |||
Total gains included in earnings | 1,440,000 | |||
Purchases | 4,696,000 | |||
Sales | — | |||
Interest accreted | 1,475,000 | |||
Payments received | (2,155,000 | ) | ||
|
| |||
Total | $ | 35,892,000 | ||
|
| |||
The amount of total gains for the nine month period included in earnings attributable to the change in unrealized gains (losses) relating to assets held at June 30, 2014 | $ | 1,440,000 | ||
|
|
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Balance at September 30, 2016 | $ | 86,091,000 | ||
Total gains and losses included in earnings | (3,020,000 | ) | ||
Purchases | 7,926,000 | |||
Interest accreted | 3,165,000 | |||
Payments received | (4,136,000 | ) | ||
Fair Value adjustment | (385,000 | ) | ||
Total | $ | 89,641,000 | ||
The amount of total losses for the three month period included in earnings attributable to the change in unrealized losses relating to structured settlements held at March 31, 2017 | $ | (3,020,000 | ) |
Note 20 — Fair Value of Financial Measurements and Disclosures (Restated and Revised) (continued)
Fair Value Hierarchy
Realized and unrealized gains and losses included in earnings in the accompanying consolidated statements of incomeoperations for the ninesix months ended June 30, 2014March 31,2017 are reported in the following revenue categories:
Total gains (losses) included in earnings in fiscal year 2014 | $ | 1,440,000 | ||
|
| |||
Change in unrealized gains (losses) relating to assets still held at June 30, 2014 | $ | 1,440,000 | ||
|
|
Total losses included in the six months ended March 31, 2017 | $ | (3,020,000 | ) | |
Change in unrealized losses relating to assets still held at March 31, 2017 | $ | (3,020,000 | ) |
Note 17—Segment Reporting
The Company operates through strategic business units that are aggregated into three reportable segments: Consumer receivables, personal injury claims, and GAR. The three reportable segments consist of the following:
• | Consumer receivables - This segment is engaged in the business of purchasing, managing for its own account and servicing distressed consumer receivables, including judgment receivables, charged off receivables and semi-performing receivables. Judgment receivables are accounts where outside attorneys have secured judgments directly against the consumer. Primary charged-off receivables are accounts that have been written-off by the originators and may have been previously serviced by collection agencies. Semi-performing receivables are accounts where the debtor is currently making partial or irregular monthly payments, but the accounts may have been written-off by the originators. Distressed consumer receivables are the unpaid debts of individuals to banks, finance companies and other credit providers. A large portion of our distressed consumer receivables are MasterCard ® , Visa ® and other credit card accounts which were charged-off by the issuers or providers for non-payment. We acquire these and other consumer receivable portfolios at substantial discounts to their face values. The discounts are based on the characteristics (issuer, account size, debtor location and age of debt) of the underlying accounts of each portfolio. The business conducts its activities primarily under the name Palisades Collection, LLC. |
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Restated)
Note 17—Segment Reporting(continued)
• | Personal injury claims(Equity Method Investment) – Pegasus Funding, LLC, purchases interests in personal injury claims from claimants who are a party to personal injury litigation. Pegasus advances to each claimant funds on a non-recourse basis at an agreed upon interest rate, in anticipation of a future settlement. The interest in each claim purchased by Pegasus consists of the right to receive, from such claimant, part of the proceeds or recoveries which such claimant receives by reason of a settlement, judgment or award with respect to such claimant’s claim. Effective January 2017, Simia commenced funding personal injury settlement claims while Pegasus will not fund any new advances, and will remain in operation to liquidate its current portfolio of advances. Simia's activity for the three months ended March 31, 2017 is included in this segment, along with that of the Company's equity investment in Pegasus. |
• | GAR Disability Advocates is an advocacy group which represents individuals nationwide in their claims for social security disability and supplemental security income benefits from the Social Security Administration. |
Certain non-allocated administrative costs, interest income, interest expense and various other non-operating income and expenses are reflected in Corporate. Corporate assets include cash and cash equivalents, restricted cash, available-for-sale securities, property and equipment, goodwill, deferred taxes, other assets, and assets related to discontinued operations.
The changesfollowing table shows results by reporting segment for the three and six month period ended March 31,2017 and 2016.
(Dollars in millions) | Consumer | GAR Disability | Personal Injury Claims including (Equity Method Investment) (2) | Corporate (3) | Total | ||||||||||||||||
Three Months Ended March 31, | |||||||||||||||||||||
2017: | |||||||||||||||||||||
Revenues | $ | 3.9 | $ | 1.5 | $ | — | $ | — | $ | 5.4 | |||||||||||
Other income | — | — | — | (0.6 | ) | (0.6 | ) | ||||||||||||||
Segment profit (loss) | 3.6 | (0.5 | ) | (0.7 | ) | (10.3 | ) | (7.9 | ) | ||||||||||||
2016: | |||||||||||||||||||||
Revenues | 4.9 | 0.9 | — | — | 5.8 | ||||||||||||||||
Other income | — | — | — | 0.6 | 0.6 | ||||||||||||||||
Segment profit (loss) | 1.8 | (2.7 | ) | 0.3 | (3.1 | ) | (3.7 | ) | |||||||||||||
Six Months Ended March 31, | |||||||||||||||||||||
2017: | |||||||||||||||||||||
Revenues | 8.0 | 2.9 | — | — | 10.9 | ||||||||||||||||
Other income | — | — | — | (0.2 | ) | (0.2 | ) | ||||||||||||||
Segment profit (loss) | 6.8 | (1.4 | ) | (0.3 | ) | (14.0 | ) | (8.9 | ) | ||||||||||||
Segment Assets(1) | 18.7 | 2.3 | 49.4 | 138.0 | (4) | 208.4 | |||||||||||||||
2016: | |||||||||||||||||||||
Revenues | 10.0 | 1.5 | — | — | 11.5 | ||||||||||||||||
Other income | — | — | — | 1.0 | 1.0 | ||||||||||||||||
Segment profit (loss) | 6.4 | (4.5 | ) | 1.8 | (5.4 | ) | (1.7 | ) | |||||||||||||
Segment Assets(1) | 21.9 | 3.7 | 37.6 | 177.2 | (4) | 240.4 | |||||||||||||||
The Company does not have any intersegment revenue transactions.
(1) | Includes other amounts in other line items on the consolidated balance sheet. |
(2) | The Company records Pegasus as an equity investment in its consolidated financial statements. For segment reporting the Company has included its pro-rated share of the earnings and losses from its investment under the Personal Injury Claims segment. |
| (3) | Corporate is not part of the three reportable segments, as certain expenses and assets are not earmarked to any specific operating segment. |
(4) | Included in Corporate are approximately $95.2 million and $80.1 million of assets related to discontinued operations as of March 31, 2017 and 2016, respectively. |
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Restated)
Note 18 - Accumulated Other Comprehensive (Loss) Income
Accumulated other comprehensive (loss) income consists of:
Six Months Ended March 31, 2017 | Year Ended September 30, 2016 | |||||||||||||||||||||||
Unrealized gain (loss) on marketable securities |
Foreign currency translation, net | Total | Unrealized gain (loss) on marketable securities | Foreign currency translation, net | Total | |||||||||||||||||||
Beginning Balance | $ | 624,000 | $ | 179,000 | $ | 803,000 | $ | (205,000 | ) | $ | 225,000 | $ | 20,000 | |||||||||||
Change in unrealized (losses) gains on foreign currency translation, net of tax benefit/(expense) of $1,000 and $25,000 at March 31 2017, and September 30, 2016, respectively. | - | (3,000 | ) | (3,000 | ) | - | (46,000 | ) | (46,000 | ) | ||||||||||||||
Change in unrealized (losses) gains on marketable securities, net of tax benefit/ (expense) of $23,000 and ($529,000) at March 31, 2017, and September 30, 2016, respectively. | (35,000 | ) | - | (35,000 | ) | 868,000 | - | 868,000 | ||||||||||||||||
Amount reclassified from accumulated other comprehensive loss, net of tax benefit of $397,000 and $24,000 at March 31, 2017, and September 30, 2016, respectively. | (596,000 | ) | - | (596,000 | ) | (39,000 | ) | - | (39,000 | ) | ||||||||||||||
Net current-period other comprehensive income (loss) | (631,000 | ) | (3,000 | ) | (634,000 | ) | 829,000 | (46,000 | ) | $ | 783,000 | |||||||||||||
Ending balance | $ | (7,000 | ) | $ | 176,000 | $ | 169,000 | $ | 624,000 | $ | 179,000 | $ | 803,000 | |||||||||||
Six Months Ended March 31, 2016 | ||||||||||||
Unrealized Gain (loss) on marketable securities | Foreign currency translation, net | Total | ||||||||||
Beginning Balance | $ | (205,000 | ) | $ | 225,000 | $ | 20,000 | |||||
Change in unrealized (losses) gains on foreign currency translation, net of tax benefit/(expense) of ($17,000) during the six month period ended March 31, 2016. | - | 26,000 | 26,000 | |||||||||
Change in unrealized (losses) gains on marketable securities, net of tax benefit/ (expense) of ($283,000) during the six month period ended March 31, 2016. | 486,000 | - | 486,000 | |||||||||
Amount reclassified from accumulated other comprehensive loss, net of tax benefit of $11,000 during the six month period ended March 31, 2016. | (20,000 | ) | - | (20,000 | ) | |||||||
Net current-period other comprehensive (loss) income | 466,000 | 26,000 | 492,000 | |||||||||
Ending balance | $ | 261,000 | $ | 251,000 | $ | 512,000 | ||||||
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Restated)
Note 19—Related Party Transactions
On September 17,2015, the Company and Piccolo Business Advisory (“Piccolo”), which is owned by Louis Piccolo, a director of the Company, entered into a Consulting Agreement, pursuant to which Piccolo provides consulting services which included, but is not limited to, analysis of proposed debt and equity transactions, due diligence and financial analysis and management consulting services (“services”). The Consulting Agreement is for a period of two years, which ends on September 17, 2017. For the six months ended March 31,2017, the Company paid $40,000 to Piccolo for such services. There were no amounts due to Piccolo at March 31, 2017 and September 30, 2016.
In addition, A. L. Piccolo & Co., Inc. (“ALP”), which is also owned by Louis Piccolo, received a fee from Pegasus which was calculated based on amounts loaned to Pegasus by Fund Pegasus up to maximum of $700,000. The fee is payable over six years including interest at 4% per annum from Pegasus during the term of the Pegasus Operating Agreement that expired on December 28, 2016. Thereafter, it is payable by PLF and its affiliates. Pegasus paid ALP $67,000 for the six months ended March 31, 2017 and 2016.
In June 2015, CBC entered into an asset purchase agreement with Fortress Funding, LLC (“Fortress”) to acquire an interest in certain tangible and intangible assets of Fortress, which included customer lists, equipment and other intellectual property. In consideration for these assets CBC agreed to pay Fortress $0.5 million, as well as up to an additional $1.2 million based on conversion of customers from the acquired lists obtained in the transaction. Fortress is owned by Michelle Silverman, the wife of Ryan Silverman, who in connection with the agreement was offered employment as General Counsel of CBC.
For the three and six months ended March 31, 2017, the Company paid Fortress $54,000 and $154,000, respectively. For the three and six months ended March 31, 2016, the Company paid Fortress $118,000 and $161,000, respectively. As of March 31, 2017 and September 30, 2016, the Company had a liability due to Fortress of $0.6 million and $0.8 million, respectively.
Note 20—Subsequent Events
Discontinued Operations
On April 7, 2017, CBC, through its subsidiary BBRVII, LLC, issued approximately $18,340,000 of fixed rate asset backed notes with a yield of 5.0% and a stated maturity date of January 15, 2069 (see Note 10 – Other Debt – CBC).
On April 28, 2017, CBC entered into an Assignment Agreement (the “Assignment Agreement”) by and among CBC and an unrelated third party (Assignee”). The Assignment Agreement provided for the sale of the Company’s entire life contingent asset portfolio included in the Company’s structured settlements atto the Assignee for a purchase price of $7.7 million. The Company will realize a loss from the sale of approximately $5.4 million. Accordingly, the Company reflected a $5.4 million reduction in the fair market value using significant observable inputs (Level 3) duringof these assets, resulting in a corresponding revenue loss for the three months ended June 30, 2014 were as follows:
Balance at March 31, 2014 | $ | 33,330,000 | ||
Total gains included in earnings | 620,000 | |||
Purchases | 2,337,000 | |||
Sales | — | |||
Interest accreted | 767,000 | |||
Payments received | (1,162,000 | ) | ||
|
| |||
Total | $ | 35,892,000 | ||
|
| |||
The amount of total gains for the three month period included in earnings attributable to the change in unrealized gains (losses) relating to assets held at June 30, 2014 | $ | 620,000 |
Realized and unrealized gains and losses included in earnings March 31, 2017 in the accompanying consolidated statements of incomeoperations (see Note 8 – Discontinued Operations).
On April 28, 2017, CBC entered into the Tenth Amendment, extending the line of credit to June 30, 2017. Other terms and conditions of the Ninth Amendment, in effect as of March 31, 2017, remained unchanged (see Note 8 – Discontinued Operations).
Other Debt
On April 28, 2017, the Company renewed the line of credit facility from Bank Hapoalim with the new maturity date of August 2, 2017(see Note 7 – Non Recourse Debt). Other terms and conditions remained unchanged
Simia
Effective November 11, 2016, the Company entered into a five year employment agreement with Mr. Preece that may be terminated with or without “cause” (as defined in the Employment Agreement) and may resign with or without “good reason” (as defined in the Employment Agreement). If Mr. Preece is terminated without “cause” or resigns for “good reason” he will receive severance equal to two years of his base salary. See Note 5 - Litigation Funding.
As of July 17, 2017, Mr. Preece was no longer employed as Chief Executive Officer of Simia. On an interim basis Gary Stern, Chairman, Chief Executive Officer and President of the Company, will undertake the responsibilities of Simia’s Chief Executive Officer. No amounts were paid to Mr. Preece under the severance or bonus provisions of his contract.
Pegasus
The Company filed for arbitration with the American Arbitration Association ("AAA") against Pegasus in April 2017 for breaches in the Operating and Term Sheet. On April 18, 2017, the Company was granted an Emergent Award restraining the cash in Pegasus, until a formal arbitration panel is confirmed and can review the case. As of June 30, 2017 there was approximately $24.7 million in cash that was restrained under the Emergent Award, and is classified as restricted on the Company's consolidated balance sheet. The Company has as equity method investment in Pegasus. See Note 5 - Litigation Funding.
On July 17, 2017, an arbitration panel was confirmed, and a hearing date has been scheduled for August 25, 2017 on the Company's motion to have PLF removed from managing Pegasus and replacing them with Company designated representatives, and to permit disbursements to the Company in accordance with the Operating and Liquidation Agreements.
On January 12, 2018, the Company, ASFI and Fund Pegasus entered into a Settlement Agreement and Release (the “Settlement Agreement”) by and among the Company, ASFI, Fund Pegasus, Pegasus, the Seller, Max Alperovich, Alexander Khanas, Larry Stoddard, III, Louis Piccolo and A.L. Piccolo & Co., Inc., a New York corporation. The Settlement Agreement releases certain claims in exchange for, among other things, the parties' entry into the Purchase Agreement.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Restated)
Note 20—Subsequent Events (Continued)
Additionally, on January 12, 2018, ASFI Pegasus Holdings, LLC (“ASFI”), a Delaware limited liability company and a subsidiary of Asta Funding, Inc. (the “Company” or “Asta”), a Delaware corporation, entered into a Membership Interest Purchase Agreement (the “Purchase Agreement) with Pegasus Legal Funding, LLC, a Delaware limited liability company (the “Seller”). Under the Purchase Agreement, ASFI bought the Seller’s ownership interests of Pegasus Funding, LLC (“Pegasus”), which was 20% of the issued and outstanding limited liability company interests of Pegasus, for an aggregate purchase price of $1,800,000. As a result of the execution of the Purchase Agreement, ASFI became the owner of 100% of the limited liability company interests of Pegasus.
As a result of the purchase of the Seller’s 20% interest in Pegasus on January 12, 2018 under the Purchase Agreement, beginning with the quarter ended March 31, 2018, the Company will consolidate the financial statements of Pegasus. The Company currently accounts for its investment in Pegasus under the equity method of accounting. See Note 5 - Litigation Funding.
Legal Matters
A competitor of the Company's former subsidiary CBC alleged that CBC had unlawfully purchased certain of the competitor's trade secrets and customer lists from intermediaries who allegedly arranged and/or paid for said materials from the competitor. CBC denied any wrongdoing and disclaimed liability. The parties settled the matter for a payment by the Company of $0.5 million on or about November 22, 2017, in exchange for a complete release.
On November 24, 2017, the Company paid $0.8 million as a settlement in conjunction with the lawsuit filed against the Company in Montana state court alleging, fraud and abuse of process arising from the Company's business relationship with an entity that finances divorce proceedings.
On January 23, 2018, the Company paid $2.3 million as a global settlement in conjunction with the punitive class action complaint filed against the Company, and one of its third-party law firm servicers. This payment represented the Company's portion of the total settlement of $4.6 million, which was split with the third-party law firm. See Note 9 - Commitments and Contingencies.
Special Dividend
On February 5, 2018, the Board of Directors of the Company declared a special cash dividend in the amount of $5.30 per share with respect to its Common Stock, payable on February 28, 2018 to holders of record of the Company’s Common Stock at the close of business on February 16, 2018, with an ex-dividend date of March 1, 2018. The aggregate payment to shareholders was approximately $35 million.
IRS Examination
The Company's amended federal tax return for the three monthsyears ended JuneSeptember 30, 2014 are reported inand 2015 is currently being audited by the following revenue categories:Internal Revenue Service.
Total gains included in earnings in the three months ended June 30, 2014 | $ | 620,000 | ||
Change in unrealized gains (losses) relating to assets still held at June 30, 2014 | $ | 620,000 |
US Tax Reform
On December 22, 2017 the Tax Cuts and Jobs Act (the “Act”) was signed into law. Among other provisions, the Act reduces the Federal statutory corporate income tax rate from 35% to 21%. This rate reduction is expected to have a significant impact on our provisions for income taxes for periods beginning after September 30, 2017, including a one-time impact resulting from the revaluation of our deferred tax assets and liabilities to reflect the new lower rate. While we have not yet determined the net amount of the revaluation, we expect that it will be a significant component of our income tax provision for the first quarter of fiscal 2018.
Stockholder Rights Agreement
On May 5, 2017, the Board of the Company adopted a stockholder rights plan (the “Rights Agreement”), pursuant to which the Company declared a dividend of one right (a “Right”) for each of the Company’s issued and outstanding shares of common stock. The dividend was paid to the stockholders of record at the close of business on May 15, 2017. Each Right entitles the holder, subject to the terms of the Rights Agreement, to purchase from the Company one one-thousandth of a share of the Company’s Series A Junior Participating Preferred Stock (the “Preferred Stock”) at a price of $28.60, subject to certain adjustments.
The Rights generally become exercisable on the earlier of (i) ten business days after any person or group obtains beneficial ownership of 10% or more of the Company’s outstanding common stock (an “Acquiring Person”), or (ii) ten business days after commencement of a tender or exchange offer resulting in any person or group becoming an Acquiring Person.
The exercise price payable, and the number of shares of Preferred Stock or other securities or property issuable, upon exercise of the Rights are subject to adjustment from time to time to prevent dilution. In the event that, after a person or a group has become an Acquiring Person, the Company is acquired in a merger or other business combination transaction (or 50% or more of the Company’s assets or earning power are sold), proper provision will be made so that each holder of a Right will thereafter have the right to receive, upon the exercise thereof at the then-current exercise price of the Right, that number of shares of common stock of the acquiring company having a market value at the time of that transaction equal to two times the exercise price. The Company may redeem the Rights at any time before a person or group becomes an Acquiring Person at a price of $0.01 per Right, subject to adjustment. At any time after any person or group becomes an Acquiring Person, the Company may generally exchange each Right in whole or in part at an exchange ratio of one shares of common stock per outstanding Right, subject to adjustment.
Unless terminated on an earlier date pursuant to the terms of the Rights Agreement, the Rights will expire on June 1, 2018, or such later date as may be established by the Board as long as any such extension is approved by a vote of the stockholders of the Company by June 1, 2018
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Caution Regarding Forward Looking Statements
This Quarterly Report on Form 10-QAmendment contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21 E of the Securities Exchange Act of 1934. All statements other than statements of historical facts included or incorporated by reference in this quarterly report on Form 10-Q,Amendment, including without limitation, statements regarding our future financial position, business strategy, budgets, projected revenues, projected costs and plans and objective of management for future operations, are forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expects,” “intends,” “plans,” “projects,” “estimates,” “anticipates,” or “believes” or the negative thereof or any variation there on or similar terminology or expressions.
We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are not guarantees and are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Important factors which could materially affect our results and our future performance include, without limitation, the restatement of previously issued financial statements, the identified material weaknesses in our internal control over financial reporting and our ability to remediate those material weaknesses, our ability to purchase defaulted consumer receivables at appropriate prices, changes in government regulations that affect our ability to collect sufficient amounts on our defaulted consumer receivables, our ability to employ and retain qualified employees, changes in the credit or capital markets, changes in interest rates, deterioration in economic conditions, negative press regarding the debt collection industry which may have a negative impact on a debtor’s willingness to pay the debt we acquire, and statements of assumption underlying any of the foregoing, as well as other factors set forth under “Item 1A. Risk Factors” in our Annual Report on Form 10-K10-K/A for the fiscal year ended September 30, 2013 and Item 1A of this Quarterly Report on Form 10-Q.2016.
All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the foregoing. Except as required by law, we assume no duty to update or revise any forward-looking statements.
Overview
All management’s discussion and analysis has been revised to reflect the restatements discussed in Note 1 – Restatement of Financial Statements in the Company’s notes to consolidated financial statements.
Asta Funding, Inc., together with its wholly owned significant operating subsidiaries Palisades Collection LLC, Palisades Acquisition XVI, LLC (“Palisades XVI”), VATIV Recovery Solutions LLC (“VATIV”), ASFI Pegasus Holdings, LLC (“APH”), EMIRIC, LLC (“EMIRIC”), Fund Pegasus, LLC (“Fund Pegasus”), Pegasus Funding,GAR Disability Advocates, LLC (“Pegasus”GAR Disability Advocates”), CBC Settlement Funding,Simia Capital, LLC (“CBC”Simia”) and other subsidiaries, not all wholly owned (the “Company,”“Company”, “we” or “us”), is engaged in several business segments in the financial services industry including structured funding of personal injury claims, through our 50% controlled, 80% owned, equity investment in Pegasus Funding, LLC (“Pegasus”), social security and disability advocates through our wholly owned subsidiary GAR Disability Advocates and the business of acquiring,purchasing, managing for its own account and servicing distressed consumer receivables, including charged off receivables, and recovering on portfoliossemi-performing receivables. The Company started out in the consumer receivable business in 1995 as a subprime auto lender. The primary charged-off receivables are accounts that have been written-off by the originators and may have been previously serviced by collection agencies. Semi-performing receivables are accounts where the debtor is currently making partial or irregular monthly payments, but the accounts may have been written-off by the originators. Our efforts in this area have been in the international arena as we have discontinued our active purchasing of consumer receivables. Thesereceivables in the United States since 2010. We acquire these and other consumer receivable portfolios generally consistat substantial discounts to their face values. The discounts are based on the characteristics (issuer, account size, debtor location and age of one or moredebt) of the following typesunderlying accounts of each portfolio.
GAR Disability Advocates is a social security disability advocacy firm. GAR Disability Advocates assists claimants in obtaining long term disability and supplemental security benefits from the Social Security Administration.
Pegasus provides funding for individuals in need of short term funds pending insurance settlements of their personal injury claims. The funds are recouped when the underlying insurance settlements are paid. The long periods of time taken by insurance companies to settle and pay such claims resulting from lengthy litigation and the court process is fueling the demand for such funding.
In November 2016, the Company formed Simia, a 100% owned subsidiary. Simia commenced funding personal injury settlement claims in January 2017. Simia was formed in response to the Company’s decision not to renew its joint venture with Pegasus Legal Funding, LLC (“PLF”), which expires at the end of December 2016. Pegasus continues to remain in operation to collect its current portfolio of advances, but will not fund any new advances after December 28, 2016. Simia is operated by a new management team, with significant experience in the personal injury funding business.
On December 13, 2017, we sold all of our issued and outstanding equity capital in CBC, our wholly owned subsidiary engaging in structured settlements. As a result of this sale, all prior periods presented in our consolidated financial statements will account for CBC as a discontinued operation. This determination resulted in the reclassification of the assets and liabilities comprising our structured settlement business to assets and liabilities related to discontinued operations in the consolidated balance sheets, and a corresponding adjustment to our consolidated statements of operations to reflect discontinued operations for all periods presented. See Note 8 - Discontinued Operations in the notes to our consolidated financial statements.
The Company operates principally in the United States in three reportable business segments: consumer receivables:receivables (domestic and foreign), personal injury claims and social security benefit advocacy. The Company previously operated a fourth segment when it engaged in the structured settlements business through CBC prior to its sale on December 13, 2017.
Financial Information About Operating Segments
The Company operates through strategic business units that are aggregated into three reportable segments consisting of the following:
• | Consumer receivables – This segment is engaged in the business of purchasing, managing for its own account and servicing distressed consumer receivables, including charged off and semi-performing receivables, primarily in the international marketplace. The charged-off receivables |
• | Personal injury claims (Equity Method of Accounting) – Pegasus Funding, LLC, purchases interests in personal injury claims from claimants who are a party to personal injury litigation. Pegasus advances to each claimant funds on a non-recourse basis at an agreed upon interest rate, in anticipation of a future settlement. The interest in each claim purchased by Pegasus consists of the right to receive, from such claimant, part of the proceeds or recoveries which such claimant receives by reason of a settlement, judgment or award with respect to such claimant’s claim. Effective January 2017, Simia commenced funding personal injury settlement claims while Pegasus will not fund any new advances, and will remain in operation to liquidate its current portfolio of advances. |
• | Social Security benefit advocacy – GAR Disability Advocates is a social security disability advocacy group, which obtains and represents individuals in their claims for social security disability and supplemental security income benefits from the Social Security Administration. |
The consumer receivables segment and the social security benefit advocacy segment each accounted for 10% or more of consolidated net revenue for the three and six month periods ended March 31, 2017 and 2016. Pegasus is accounted for under the equity method within the personal injury claims segment. The following table summarizes total revenues by percentage from the three lines of business for the three and six month periods ended March 31, 2017 and 2016:
Three Month Ended | Six Month Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Finance income (consumer receivables) | 72.2 | % | 84.8 | % | 73.7 | % | 86.7 | % | ||||||||
Personal injury claims | 0.2 | % | — | % | 0.1 | % | — | % | ||||||||
GAR Disability Advocates | 27.6 | % | 15.2 | % | 26.2 | % | 13.3 | % | ||||||||
Total revenues | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
International operations are included in the consumer receivables segment and are not significant to the overall operations of that segment.
Information about the results of each of the Company’s reportable segments for the three and six month periods ended March 31, 2017 and 2016, reconciled to the Company’s consolidated results, are set forth below. Separate segment MD&A is not provided, as segment revenue corresponds to the revenue presented in the Company's consolidated statement of operations, and material expense items are not allocable to any specific segment. Certain non-allocated administrative costs, interest income, interest expense and various other non-operating income and expenses are reflected in Corporate. Corporate assets include cash and cash equivalents, available-for-sale securities, property and equipment, goodwill, deferred taxes, other assets and assets related to discontinued operations.
(Dollars in millions) | Consumer | GAR Disability | Personal Injury Claims and (Equity Investment) (2) | Corporate (3) | Total | ||||||||||||||||
Three Months Ended March 31, | |||||||||||||||||||||
2017: | |||||||||||||||||||||
Revenues | $ | 3.9 | $ | 1.5 | $ | — | $ | 5.4 | |||||||||||||
Other income | — | — | — | (0.6 | ) | (0.6 | ) | ||||||||||||||
Segment profit (loss) | 3.6 | (0.5 | ) | (0.73 | ) | (10.3 | ) | (7.9 | ) | ||||||||||||
2016: | |||||||||||||||||||||
Revenues | 4.9 | 0.9 | — | — | 5.8 | ||||||||||||||||
Other income | — | — | — | 0.6 | 0.6 | ||||||||||||||||
Segment profit (loss) | 1.8 | (2.7 | ) | 0.3 | (3.1 | ) | (3.7 | ) | |||||||||||||
Six Months Ended March 31, | |||||||||||||||||||||
2017: | |||||||||||||||||||||
Revenues | 8.0 | 2.9 | — | — | 10.9 | ||||||||||||||||
Other income | — | — | — | (0.2 | ) | (0.2 | ) | ||||||||||||||
Segment profit (loss) | 6.8 | (1.4 | ) | (0.3 | ) | (14.0 | ) | (8.9 | ) | ||||||||||||
Segment Assets(1) | 18.7 | 2.3 | 49.4 | 138.0 | (4) | 208.4 | |||||||||||||||
2016: | |||||||||||||||||||||
Revenues | 10.0 | 1.5 | — | — | 11.5 | ||||||||||||||||
Other income | — | — | — | 1.0 | 1.0 | ||||||||||||||||
Segment profit (loss) | 6.4 | (4.5 | ) | 1.8 | (5.4 | ) | (1.7 | ) | |||||||||||||
Segment Assets(1) | 21.9 | 3.7 | 37.6 | 177.2 | (4) | 240.4 | |||||||||||||||
The Company does not have any intersegment revenue transactions.
(1) | Includes other amounts in other line items on the consolidated balance sheet. |
(2) | The Company records Pegasus as an equity investment in its consolidated financial statements. For segment reporting the Company has included its pro-rated share of the earnings and losses from its investment under the Personal Injury Claims segment. |
| (3) | Corporate is not part of the three reportable segments, as certain expenses and assets are not earmarked to any specific operating segment. |
(4) | Included in Corporate are approximately $95.2 million and $80.1 million of assets related to discontinued operations as of March 31, 2017 and 2016, respectively. |
Consumer Receivables
The consumer receivable portfolios generally consist of one or more of the following types of consumer receivables (domestic and foreign):
• | charged-off receivables — accounts that have been written-off by the originators and may have been previously serviced by collection agencies; and |
• |
|
We acquire these consumer receivable portfolios at a significant discount to the amount actually owed by the borrowers. We acquire these portfolios after a qualitative and quantitative analysis of the underlying receivables and calculate the purchase price so that our estimated cash flow offers us an adequate return on our acquisition costs andinvestment after servicing expenses. After purchasing a portfolio, we actively monitor its performance and review and adjust our collection and servicing strategies accordingly.
We purchase
Currently, we have been purchasing receivables in the international market from credit grantors and others through (i) privately negotiated direct sales, brokered transactions and (ii) auctions in which sellers of receivables seek bids from several pre-qualified debt purchasers. We pursue new acquisitions of consumer receivable portfolios on an ongoing basis through:
our relationships with industry participants, financial institutions, collection agencies, investors and our financing sources;
brokers who specialize in the sale of consumer receivable portfolios; and
other sources.
Substantially all of the consumer receivables included in the accounts acquired for liquidation are charged-off receivables.
Litigation Funding Business
On December 28,
In 2011, the Company purchased an 80% interest, 50% controlled in Pegasus. Pegasus Legal Funding (“PLF”)“PLF”, an unrelated third party, holds the other 20% interest. The Company accounts for this investment under the equity method of accounting. See Note 5 - Equity Method Investment. The Company is committed to loan up to $21.8$22.4 million per year to Pegasus for a term of five (5) years, all of which is secured by the assets of Pegasus. These loans will provide financing for the personal injury litigation claims and operating expenses of Pegasus.
Pegasus is actively managed by personal injury litigation funders, Max Alperovich and Alexander Khanas, who rely upon strict underwriting criteria to provide legal funding to personal injury plaintiffs prior to the settlement of their claims or their resolution in court.
The Pegasus business model entails the outlay of non-recourse advances to a plaintiff with an agreed-upon fee structure to be repaid from the plaintiff’s recovery. Typically, such advances to a plaintiff approximate 10-20% of the anticipated recovery. These funds are generally used by the plaintiff for a variety of urgent necessities, ranging from surgical procedures to everyday living expenses.
Pegasus’s profits and losses will beare distributed at 80% to the Company and 20% to PLF. These distributions will beare made only after the repayment of Fund Pegasus’ principal amount loaned, plus an amount equal to advances for overhead expenses. While the overall returns to Pegasus are currently estimated to be in excess of 20% per annum,
On November 8, 2016, the Company reserves the right to terminateentered into a binding Term Sheet (the “Term Sheet”) with ASFI Pegasus if returns to the Company for any rolling twelve (12) month period, after the first year of operations, do not exceed 15%. As of June 30, 2014, the Company had a net invested balance of approximately $31.7 million in personal injury cases. During the nine months ended June 30, 2014 distributions of $4.5 million and $0.8 million were made toHoldings, LLC, Fund Pegasus, LLC, Pegasus Funding, LLC, Pegasus Legal Funding, LLC, Max Alperovich and Alexander Khanas. The Company and PLF respectively.have decided not to renew the Pegasus joint venture that, by its terms, terminates on December 28, 2016. The Term Sheet amends certain provisions to Pegasus’ Operating Agreement dated as of December 28, 2011 and governs the terms relating to the liquidation of the existing Pegasus portfolio.
Pursuant to the Term Sheet, the parties agreed that Pegasus will continue in existence to collect advances on its Portfolio. The Company will fund overhead expenses relating to its Portfolio based on a budget agreed upon by the Company and PLF. Any cash received by Pegasus will be distributed to its members in the order provided for in the Operating Agreement. The Company will be allocated an amount equal to 20% of all principal collected on each investment paid back beginning October 1, 2016 and continuing through the collection of the Portfolio, which will be applied against the outstanding balance of overhead expenses previously advanced by the Company to Pegasus. After January 2, 2017, additional overhead expenses advanced will be paid back monthly as incurred by the Company prior to the calculation and distribution of any profits.
In connection with the Term Sheet, the parties also entered into a customary mutual release and non-disparagement agreement as well as a release from the non-competition obligations under the Operating Agreement.
On November 11, 2016, the Company formed Simia, a wholly owned subsidiary. Simia will commence funding personal injury settlement claims in January 2017. Simia was formed in response to the Company’s decision not to renew its joint venture with PLF. As of March 31, 2017, the carrying value of its equity investment in Pegasus was approximately $45.9 million.
On May 18,8, 2012, wethe Company announced the formation of BP Case Management,EMIRIC, LLC (“Balance Point”), a wholly owned subsidiary of the Company. EMIRIC, LLC entered into a joint venture (the “Venture”) with California-based Balance Point Divorce Funding, LLC (“Balance Point Management”BP Divorce Funding”) to create the operating subsidiary BP Case Management, LLC (“BPCM”). BPCM is 60% owned by the Company and 40% owned by BP Divorce Funding. The Venture provides non-recourse funding to a spouse in a matrimonial action where the marital assets exceed $2,000,000. Such funds can be used for legal fees, expert costs and necessary living expenses. The Venture receives an agreed percentage of the proceeds received by such spouse upon final resolution of the case. Balance Point’sBP Divorce Funding's profits and losses will be distributed 60% to usBPCM and 40% to Balance Point Management,BP Divorce Funding, after the return of ourthe Company’s investment on a case by case basis and after a 15% preferred return to us. Ourthe Company. BPCM’s initial investment in the Venture consistsconsisted of up to $15 million to fund divorce claims to be fulfilled in three tranches of $5 million each. Each investment tranche is contingent upon a minimum 15% cash-on-cash return to us. At ourthe Company’s option, there could be an additional $35 million investment in divorce claims in tranches of $10 million, $10 million, and $15 million, also with a 15% preferred return and such investments may even exceed a total of $50 million, at ourBPCM’s sole option. Should the preferred return be less than 15% on any $5 million tranche, the 60%/40% profit and loss split would be adjusted to reflect ourBPCM’s priority to a 15% preferred return. As of June 30, 2014, we haveMarch 31, 2017, BPCM has invested $1.8$2.5 million, net of reserve charges, in cases managed by this Venture.
We
In 2012, the Company provided a $1.0 million revolving line of credit to partially fund Balance Point Management’sBP Divorce Funding’s operations with such loan bearing interest at the prevailing prime rate with an initial term of twenty-four months, which may be extended under certain circumstances for an additional 24 month period.twenty four months. In September 2014, the agreement was revised to extend the term of the loan to August 2016, increase the credit line to $1.5 million and include a personal guarantee of the principal of BP Divorce Funding. The revolving line of credit is collateralized by Balance Point Management’sBP Divorce Funding’s profits share in the Ventureventure and other assets. At June 30, 2014,December 31, 2016, the balance onin the revolving line of credit was approximately $1.0$1.5 million. The termEffective August 14, 2016, BPCM extended its revolving line of credit with BP Divorce Funding until March 31, 2017, at substantially the loan was to end in Maysame terms as the September 2014 but was extended an additional six months.amendment.
Structured SettlementSocial Security Benefit Advocacy Business
On December 31, 2013, the Company acquired 80% ownership of CBC and its affiliate, CBC Management Services, LLC for approximately $5.9 million. In addition, the Company will provide financing to CBC of up to $5 million.
CBC purchases periodic payments under structured settlements and annuity policies fromGAR Disability Advocates is a social security disability advocacy group, which represents individuals in exchangetheir claims for a lump sum payment. The operating principals of CBC, William J. Skyrm, Esq.social security disability and James Goodman, have over 30 years combined experience insupplemental security income benefits from the structured settlement industry.Social Security Administration.
CBC has a portfolio of structured settlements which is financed by approximately $27.4 million of debt, including a $15.0 million line of credit from an institutional source (approximately $0.6 million of the line was unused as of June 30, 2014) and notes issued by CBC to third party investors. At June 30, 2014 the Company has an invested value of $35.9 million in structured settlements.
Critical Accounting Policies
We may account for our investments in consumer receivable portfolios, using either:
The interest method; or
The cost recovery method.
As we believe our
Our extensive liquidating experience in certain asset classes such as distressed credit card receivables, telecommunication receivables, consumer loan receivables and mixed consumer receivables has matured, we have useduse the interest method when we believe we can reasonably estimate the timing of the cash flows. In those situations where we diversify our acquisitions into other asset classes andin which we do not possess the same expertise or history, or we cannot reasonably estimate the timing of the cash flows, we have utilizedutilize the cost recovery method of accounting for those portfolios of receivables.
The Company accounts for certain of its investments in finance receivables using the interest method under the guidance of FASB Accounting Standards Codification (“ASC”), Topic 310, Receivables — Loans and Debt Securities Acquired with Deteriorated Credit Quality, (“ASC 310-30”310”). Under the guidance of ASC 310-30,310, static pools of accounts are established. These pools are aggregated based on certain common risk criteria. Each static pool is recorded at cost and is accounted for as a single unit for the recognition of income, principal payments and loss provision. Effective October 1, 2013, dueDue to the substantial reduction of portfolios reported under the interest method, and the abilityinability to reasonably estimate cash collections required to account for those portfolios under the interest method, the Company concluded the cost recovery method is the appropriate accounting method under the circumstances.
As further discussed under “Item 4—Controls and Procedures” in this Form 10-Q/A for
Under the quarterly period ended December 31, 2013, management identified a material weakness in our internal control over financial reporting related to the revenue recognition process in our consumer receivables portfolios, specifically related to the applicationguidance of the interest method of accounting as promulgated by ASC 310-30. This material weakness resulted in revenue and impairment misstatements that have been revised and restated in this report.
Although310, the Company has switched to the cost recovery method on its current inventory of portfolios, the Company must still analyze a portfolio upon acquisition to ensure which method is appropriate, and once a static pool is established for a quarter, individual receivable accounts are not added to the pool (unless replaced by the seller) or removed from the pool (unless sold or returned to the seller).
Under the interest method , ASC 310-30 requires that the excess of the contractual cash flows over expected cash flows not be recognized as an adjustment of revenue or expense or on the balance sheet. ASC 310-30 initially freezes the internal rate of return, referred to as IRR, estimated when the accounts receivable are purchased, as the basis for subsequent impairment testing. Significant increases in actual or expected future cash flows may be recognized prospectively through an upward adjustment of the IRR over a portfolio’s remaining life. Any increase to the IRR then becomes the new benchmark for impairment testing. Rather than lowering the estimated IRR if the collection estimates are not received or projected to be received, the carrying value of a pool would be impaired, or written down to maintain the then current IRR. Under the interest method, income is recognized on the effective yield method based on the actual cash collected during a period and future estimated cash flows and timing of such collections and the portfolio’s cost. Material variations of cash flow estimates are recorded in the quarter such variations are determined. The estimated future cash flows are reevaluated quarterly.
The Company uses the cost recovery method when collections on a particular pool of accounts cannot be reasonably predicted. Under the cost recovery method, no income is recognized until the cost of the portfolio has been fully recovered. A pool can become fully amortized (zero carrying balance on the balance sheet) while still generating cash collections. In this case, all cash collections are recognized as revenue when received.
The Company’s extensive liquidating experience is in the field of distressed credit card receivables, telecommunication receivables, consumer loan receivables, retail installment contracts, consumer receivables, and auto deficiency receivables. The Company will analyze a portfolio to determine if the interest method is appropriateaccounts for accounting for asset acquisitions within these classes of receivables when it believes it can reasonably estimate the timing of the cash flows. In those situations where the Company diversifies its acquisitions into other asset classes and the Company does not possess the same expertise, or the Company cannot reasonably estimate the timing of the cash flows with an appropriate degree of precision, the Company utilizes the cost recovery method of accounting for those portfolios of receivables. At June 30, 2014, all of the portfolios are accounted for on the cost recovery method, of which $21.6 million is concentrated in one portfolio, the remaining value of a $300 million portfolio purchase in March 2007 (the “Portfolio Purchase”)
We currently consider for aggregation portfolios of accounts, purchased within the same fiscal quarter, that generally have the following characteristics:
After determining that an investment will yield an adequate return on our acquisition cost after servicing fees, including court costs which are expensed as incurred, we use a variety of qualitative and quantitative factors to determine the estimated cash flows. As previously mentioned, included in our analysis for purchasing a portfolio of receivables and determining a reasonable estimate of collections and the timing thereof, the following variables are analyzed and factored into our original estimates:
We will obtain and utilize as appropriate input including, but not limited to, monthly collection projections and liquidation rates, from our third party collection agencies and attorneys, as further evidentiary matter, to assist us in developing collection strategies and in modeling the expected cash flows for a given portfolio.
We acquire accounts that have experienced deterioration of credit quality between origination and the date of our acquisition of the accounts. The amount paid for a portfolio of accounts reflects our determination that it is probable we will be unable to collect all amounts due according to the portfolio of accounts’ contractual terms. We consider the expected payments and estimate the amount and timing of undiscounted expected principal, interest and other cash flows for each acquired portfolio coupled with expected cash flows from accounts available for sales. The excess of this amount over the cost of the portfolio, representing the excess of the accounts’ cash flows expected to be collected over the amount paid, is accreted into income recognized on finance receivables over the expected remaining life of the portfolio.
We believe we have significant experience in acquiring certain distressed consumer receivable portfolios at a significant discount to the amount actually owed by underlying debtors. We acquire these portfolios only after both qualitative and quantitative analyses of the underlying receivables are performed and a calculated purchase price is paid so that we believe our estimated cash flow offers us an adequate return on our costs, including servicing expenses. Additionally, when considering portfolio purchases of accounts, or portfolios from issuers from whom we have little or limited experience, we have the added benefit of soliciting our third party collection agencies and attorneys for their input on liquidation rates and, at times, incorporate such input into the price we offer for a given portfolio and the estimates we use for our expected cash flows.
We account for our investmentinvestments in personal injury claims at an agreed upon interest rate, in anticipation of a future settlement. The interest purchased by Pegasus in each claim consists of the right to receive from such claimant part of the proceeds or recoveries which such claimant receives by reason of a settlement, judgment or award with respect to such claimant’s claim. OpenManagement assesses the quality of the personal injury claims portfolio through an analysis of the underlying personal injury fundings on a case revenueby case basis. Cases are reviewed through periodic updates with attorneys handling the cases, as well as with third party research tools which monitor public filings, such as motions or judgments rendered on specific cases. The Company specifically reserves for those fundings where the underlying cases are identified as uncollectible, due to anticipated non-favorable verdicts and/or settlements at levels where recovery of the advance outstanding is estimated, recognized and accrued at a rateunlikely. For cases that have not exhibited any specific negative collection indicators, the Company establishes reserves based on the expected realizationhistorical collection rates of the Company’s fundings. Fee income on advances is reserved for on all cases where a specific reserve is established on the initially funded amount. In addition, management also monitors its historical collection rates on fee income and underwriting guidelinesestablishes reserves on fee income consistent with the historically experienced collection rates. Management regularly analyzes and facts and circumstances for each individual case. These personal injury claims are non-recourse. The reserve for bad debts is recorded based uponupdates the historical trend for write off in the personal injury financing industry, the agingcollection rates of the claims and other factors that could impact recoverability.its initially funded cases as well as its fee income.
When a case is closed and cash is received for the advance provided
Prior to a claimant, revenue is recognized based upon the contractually agreed upon interest rate, and, if applicable, adjusted for any changes due to a settled amount and fees charged to a claimant.
The fundingour sale of BPCM matrimonial actions is on a non recourse basis. BPCM revenues are recognized under the cost recovery method.
CBC, purchasesCBC purchased periodic payments under structured settlements and annuity policies from individuals in exchange for a lump sum payment. The Company elected to carry the structured settlements at fair value. Unearned income on structured settlements is recognized as interest income using the effective interest method over the life of the related structured settlement. Changes in fair value are recorded in unrealized gain (loss) in structured settlements in our statements of income.
The Company recognizes revenue for GAR Disability Advocates when disability claimants cases close with the social security administration and the applicable fees are collected.
In the following discussions, most percentages and dollar amounts have been rounded to aid in the presentation. As a result, all figures are approximations.
Results of Operations
The nine-month period ended June 30, 2014, comparedSixMonths Ended March 31, 2017, Compared to the nine-month period ended June 30, 2013SixMonths Ended March 31, 2016
Finance income (Restatedand revised). For the nine month periodsix months ended June 30, 2014,March 31, 2017, finance income decreased $10.2$2.0 million or 40.9%,19.6% to $14.8$8.0 million from $25.0$10 million for the nine month periodsix months ended June 30, 2013. Finance income decreased primarily due toMarch 31, 2016. During the lower levelsix months ended March 31, 2017, the Company purchased $35.0 million of portfolio purchases and, a significant decrease in zero basis income. Zero basis income decreased from $20.4 million in the fiscal year 2013 period to $14.8 million in the comparable fiscal year 2014 period. We purchased $53.0 million in face value of new portfolios at a cost of $3.7 million in$2.2 million. During the first ninesix months of fiscal year 2014. The portfolios2016, the Company purchased are accounted for on the cost recovery method. We purchased $53.5$121.0 million inof face value of new portfolios at a cost of $3.3$6.2 million. Net collections for the six months ended March 31, 2017 decreased 16.9% to $12.3 million infrom $14.8 million for the nine month period ended June 30, 2013.
same prior year period. During the first ninesix months of fiscal year 2014,2017, gross collections decreased 21.8%10.9% or $2.7 million to $51.9$21.9 million from $66.4$24.6 million for the ninesix months ended June 30, 2013, reflecting the lower level of purchases, and the age of our portfolios.March 31, 2016. Commissions and fees associated with gross collections from our third party collection agencies and attorneys decreased $3.2$0.2 million, or 13.1%1.9%, to $9.6 million for the ninecurrent fiscal six month period from $9.8 million for the six months ended June 30, 2014March 31, 2016. Commissions and fees amounted to 44.0% of gross collections for the six month period ended March 31, 2017, compared to 39.9% in the same period of the prior year, resulting from higher percentage of commissionable collections in the current year period.
Social security benefit advocacy fee income. For the six months ended March 31, 2017, disability fee income increased $1.4 million, or 86.5%, to $2.9 million as compared to $1.5 million for the same periodsix months ended March 31, 2016, due to the increase in the prior year, and averaged 40.7 %number of collectionsdisability claimant cases closed with the Social Security Administration during the current period.
Earnings (loss) from equity method investee. Earnings from equity method investee decreased $1.8 million, or 97.3%, to earnings of $49,000 for the ninesix months ended June 30, 2014March 31, 2017 from earnings of $1.8 million for the six months ended March 31, 2016, due to reduced interest income and bad debt write downs on personal injury claimant advances.
Other income (loss). The following table summarizes other income (loss) for the six months ended March 31, 2017 and 2016:
March 31, | ||||||||
2017 | 2016 | |||||||
Interest and dividend income | $ | 595,000 | $ | 622,000 | ||||
Realized (loss)/gain | (815,000 | ) | 16,000 | |||||
Other | 4,000 | 362,000 | ||||||
| $ | (216,000 | ) | $ | 1,000,000 | ||||
General and administrative expenses. For the six months ended March 31, 2017, general and administrative expense increased $3.5 million, or 22.5%, to $19.5 million from $16.0 million for the six months ended March 31, 2016, primarily due to an increase in professional fees of $2.3million, primarily related to the Mangrove matter, and a loss on investment of $3.4 million, partially offset by the reduction in litigation settlement costs of $2.0 million.
Interest expense. For the six months ended March 31, 2017, interest expense increased $33,000 to $33,000 as compared to 36.7% for the same prior year period. Net collections decreased 26.9% to $30.7$0 million for the nine month periodsix months ended June 30, 2014March 31, 2016. The increased interest expense is a result of the Company's current advance on its line of credit.
Segment profit – Consumer Receivables. For the six months ended March 31, 2017, segment profit increased $0.4 million to $6.8 million from $42.0$6.4 million for the ninesix months ended June 30, 2013. Income recognized from zero basedMarch 31, 2016, primarily due the reduction in litigation settlement costs of $2.0 million, and other overhead expenses of $0.4 million, partially offset by decreased revenue portfoliosof $2.0 million.
Segment loss– Personal Injury Claims. For the six months ended March 31, 2017, segment loss was $14$0.3 million as compared to segment profit of $1.8 million for the nine month periodsix months ended June 30, 2014 compared to $20.4 million for the nine month period ended June 30, 2013.
Finance income.(As Reported)For the nine month period ended June 30, 2014, finance income decreased $6.2 million, or 23.2%, to $20.6 million from $26.8 million for the nine month period ended June 30, 2013. Finance income decreased primarily dueMarch 31, 2016. The decrease is attributable to the lower level of portfolio purchases and, as a result, an increased percentage of our portfolio balances areCompany's loss from its equity investment in the later stages of their yield curves. We purchased $53.0 million in face value of new portfolios at a cost of $3.7 million in the first nine months of fiscal year 2014. The portfolios purchased are accounted for on the cost recovery method. We purchased $53.5 million in face value of new portfolios at a cost of $3.3 million in the nine month period ended June 30, 2013.current period.
During the first nine months of fiscal year 2014, gross collections decreased 21.8% to $51.9 million from $66.4 million for the nine months ended June 30, 2013, reflecting the lower level of purchases, and the age of our portfolios. Commissions and fees associated with gross collections from our third party collection agencies and attorneys decreased $3.2 million, or 13.1%, for the nine months ended June 30, 2014 as compared to the same period in the prior year, and averaged 40.7 % of collections for the nine months ended June 30, 2014 as compared to 36.7% for the same prior year period. Net collections decreased 26.9% to $30.7 million for the nine month period ended June 30, 2014 from $42.0 million for the nine months ended June 30, 201. Income recognized from fully amortized portfolios (zero based revenue) was $20.2 million for the nine month period ended June 30, 2014 compared to $25.8 million for the nine month period ended June 30, 2013.
Personal injury claims incomeDiscontinued Operations.. For the nine month period ended June 30, 2014, personal injury claims income increased 16.3% to $5.7 million, from $4.9 million for the nine month period ended June 30, 2013.
Forgiveness of non-recourse debt. On June 3, 2014 the Company made the final payment of the remaining amount due on the non-recourse debt due to the Bank of Montreal in accordance with the Settlement Agreement signed in August 2013. The Company has recorded as other income, forgiveness of non-recourse debt, in the amount of approximately $26.1 million in the third quarter of fiscal year 2014.
Structured settlement income. Structured settlement income was $2.9of $0.8 million includes $3.0 million of unrealized losses and $3.8 million of interest income for the six months ended March 31, 2017. Structured settlement income of $5.9 million included $3.2 million of unrealized gains and $2.7 million of interest income for the six months ended March 31, 2016. This decrease in income is primarily the result of a reduction in fair value of $5.6 million in CBC’s life contingent annuities portfolio during the current year. Unrealized losses on structured settlements is comprised of both unrealized losses resulting from fair market valuation at the date of acquisition of the structured settlements and the subsequent fair value adjustments resulting from the change in the discount rate. Of the $3.0 million of unrealized losses recognized for the six months ended March 31, 2017, approximately $4.3 million is due to day one gains on new structured settlements financed during the period, ended June 30, 2014, which consistsoffset by a decrease of $1.5$1.0 million ofin realized gains recognized as interest income on structured settlements and $1.5a reduction in fair value of $6.3 million during the period. There were no other changes in assumptions during the period. All of unrealized gains on structured settlements. Thethe revenue associated with CBC is recorded in income is for(loss) from discontinued operations in the period January 1, 2014 through June 30, 2014, the period CBC was included in our resultsCompany's consolidated statements of operations. There is no prior year comparative data.
Other income.Segment loss Other income consists of interest and dividend income, realized gains and losses on available for sale transactions, service fee income and fee income from– GAR Disability Advocates. For the new disability advocacy group, GAR National Disability Advocates.
General and administrative expenses. During the ninesix months ended June 30, 2014, general and administrative expenses increased $2.6 million, or 14.5%, to $20.5 million from $17.9 million for the nine months ended June 30, 2013. The increase primarily reflects the inclusion of CBC and GAR National Disability Help Advocates, LLC (“GAR National Disability”), as there is no comparative data included in the nine month prior year period.
Interest expense. During the nine month period ended June 30, 2014, interest expense decreased $0.8 million, or 49.4%, to $0.8 million, from $1.6 million in the same prior year period. The decrease in interest expense is primarily the result of the Settlement Agreement with the Bank of Montreal, signed in August of 2013, whereby the interest rate and balance on which the interest is applied were significantly reduced. Offsetting the total interest savings is the inclusion of approximately $0.8 million in CBC interest expense for the period in which CBCMarch 31, 2017, segment loss was part of the Company, the six month period January 1, 2014 through June 30, 2014.
Impairments. (Restated and Revised) There were $19.6 million in impairments recorded during the nine month period ended June 30, 2014 compared to impairments of $10.7 million recorded during the nine month period ended June 30, 2013. Impairment of the Great Seneca Portfolio totaled $14.1 million in the nine month period ended June 30, 2014 compared to $10.1 million in the same prior year period. Additionally, an impairment of $4.7 million was recorded on all the medical receivable asset class.
Impairments. (as reported) There were $19.6 million in impairments recorded during the nine month period ended June 30, 2014 compared to impairments of $17.9 million recorded during the nine month period ended June 30, 2013. Impairment of the Great Seneca Portfolio totaled $14.1 million in the nine month period ended June 30, 2014 compared to $10.1 million in the same prior year period. Additionally, an impairment of $4.7 million was recorded on all the medical receivable asset class.
Income tax expense. (Restated and Revised) Income tax expense, consisting of federal and state income taxes, was a $3.8 million for the nine months ended June 30, 2014, as compared to income tax expense of $0.4 million for the comparable 2013 period.
Income tax expense. (as reported)Income tax expense, consisting of federal and state income taxes, was a $5.1 million benefit for the nine months ended June 30, 2014, as compared to income tax expense of $0.5 million for the comparable 2013 period.
Income attributable to non-controlling interest. The income attributable to non-controlling 20% interests in Pegasus and CBC of $483,000 was recorded in fiscal year 2014. The non-controlling interest in Pegasus for the nine month period ended June 30, 2013 was $176,000. There was no comparative data for CBC in the prior year.
Net income attributable to Asta Funding, Inc. (Restated and Revised) Net income was $5.7 million for the nine month period ended June 30, 2014 as compared to $718,000 for the nine month period ended June 30, 2013.
Net income attributable to Asta Funding, Inc. (as reported)Net income was $9.3 million for the nine month period ended June 30, 2014 as compared to $733,000 for the nine month period ended June 30, 2013.
The three-month period ended June 30, 2014, compared to the three-month period ended June 30, 2013
Finance income. (Restated and Revised) For the three month period ended June 30, 2014, finance income was $5.1$1.4 million as compared to $9.0a $4.5 million loss for the three month period ended June 30, 2013, a decrease of $3.9 million, or 43.5%. We purchased $35.9 million in face value of new portfolios at a cost of $2.7 million in the third quarter of fiscal year 2014. We purchased $53.5 million in face value of a consumer portfolio at a cost of $3.3 million during the three month period ended June 30, 2013.
During the third quarter of fiscal year 2014, gross collections decreased 22.4% to $18.2 million from $23.4 million for the three months ended June 30, 2013. Commissions and fees associated with gross collections from our third party collection agencies and attorneys were flat during the third quarter of fiscal year 2014 as compared the same period of the prior year. Net collections decreased by 34.9% to $10.0 million in the current quarter from $15.4 million for the three months ended June 30, 2013. Income recognized from fully amortized portfolios (zero based revenue was) $5.1 million and $7.3 million for the three months ended June 30, 2014 and 2013, respectively.
Finance income. (as reported) For the three month period ended June 30, 2014, finance income was $6.7 million as compared to $10.0 million for the three month period ended June 30, 2013, a decrease of $3.3 million, or 33.5%. We purchased $35.9 million in face value of new portfolios at a cost of $2.7 million in the third quarter of fiscal year 2014. We purchased $53.5 million in face value of a consumer portfolio at a cost of $3.3 million during the three month period ended June 30, 2013.
During the third quarter of fiscal year 2014, gross collections decreased 22.4% to $18.2 million from $23.4 million for the three months ended June 30, 2013. Commissions and fees associated with gross collections from our third party collection agencies and attorneys were flat during the third quarter of fiscal year 2014 as compared the same period of the prior year. Net collections decreased by 34.9% to $10.0 million in the current quarter from $15.4 million for the three months ended June 30, 2013. Income recognized from fully amortized portfolios (zero based revenue) was $6.5 million and $9.7 million for the three months ended June 30, 2014 and 2013, respectively.
Personal injury claims income. For the three month period ended June 30, 2014 personal injury claims income of $1.8 million decreased $0.5 million from $2.3 million for the three month period ended June 30, 2013.
Structured settlement income. Structured settlement income was $1.4 million in the three month period ended June 30, 2014. There is no prior year comparative data.
Forgiveness of non-recourse debt. On June 3, 2014 the Company made the final payment of the remaining amount due on the non-recourse debt due to the Bank of Montreal in accordance with the Settlement Agreement signed in August 2013. The Company has recorded as other income, forgiveness of non-recourse debt, in the amount of approximately $26.1 million in the third quarter of fiscal year 2014.
Other income. Other income consists of interest and dividend income, realized gains and losses on available for sale transactions and service fee income and fee income from the new disability advocacy group, GAR National Disability Advocates.
General and administrative expenses . During the three-month period ended June 30, 2014, general and administrative expenses increased $0.5 million, or 7.1%, to $7.0 million from $6.5 million for the three months ended June 30, 2013. The increase primarily reflects the inclusion of CBC and GAR National Disability, as there is no comparative data included in the three month prior year period.
Interest expense. During the three-month period ended June 30, 2014, interest expense was $413,000 compared to $518,000 in the same period in the prior year. The decrease in interest expense is the result of the Settlement Agreement with the Bank of Montreal, signed in August of 2013, whereby the interest rate and balance on which the interest is applied were significantly reduced. Offsetting the total interest savings is the inclusion of approximately $0.4 million of CBC interest expense for the 2014 period.
Impairments. (Restated and Revised)Impairments of $19.6 million were recorded in the three month period ended June 30, 2014 as compared to impairments of $10.2 million recorded during the three month period ended June 30, 2013. Approximately $14.4 million of the current period impairment charge was attributable to the Great Seneca Portfolio. Additionally, $4.7 million of the current quarter impairment charge was recorded on all the medical receivable asset class.
Impairments. (as reported)Impairments of $19.9 million were recorded in the three month period ended June 30, 2014 as compared to impairments of $10.2 million recorded during the three month period ended June 30, 2013. Approximately $14.4 million of the current period impairment charge was attributable to the Great Seneca Portfolio. Additionally, $4.7 million of the current quarter impairment charge was recorded on all the medical receivable asset class.
Income tax. (Restated and Revised) Income tax expense was $3.0 million for the three month period ended June 30, 2014 as compared to a benefit of $2.3 million for the three month period ended June 30, 2013.
Income tax benefit. (as reported)Income tax benefit was $7.2 million for the three month period ended June 30, 2014 as compared to a benefit of $1.9 million for the three month period ended June 30, 2013. The higher tax benefitThis reduced loss in the current period is primarily the result of increased revenues of $1.4 million and the reduction in overhead expenses.
Income tax(benefit) expense. For the six months ended March 31, 2017, income tax benefit for continuing and discontinued operations, consisting of federal and state income taxes, was $0.3 million, as compared to an income tax benefit for continuing and discontinued operations, consisting of federal and state income taxes, of $0.6 million for the six months ended March 31, 2016, resulting from a decrease in the taxable loss in the current period.
Loss from continuing operations. As a result of the above, the Company had a net loss from continuing operations for the six months ended March 31, 2017 of $8.6 million compared to a $1.1 million net loss from continuing operations for the six months ended March 31, 2016.
Loss from discontinued operations. As a result of the above, the Company had a net loss from discontinued operations for the six months ended March 31, 2017 of $2.3 million compared to $0.8 million of net income from discontinued operations for the six months ended March 31, 2016.
Net loss. As a result of the above, the Company had a net loss for the six months ended March 31, 2017 of $10.9 million compared to $0.3 million net loss for the six months ended March 31, 2016.
ThreeMonths Ended March 31, 2017, Compared to the ThreeMonths Ended March 31, 2016
Finance income. For the three months ended March 31, 2017, finance income decreased $1.0 million or 19.5% to $3.9 million from $4.9 million for the three months ended March 31, 2016. During the three months ended March 31, 2017, the Company did not purchase any portfolios. During the three months ended March 31, 2016, the Company purchased $24.8 million in face value of new foreign portfolios purchased in Peru and Colombia at a cost of $1.7 million. Net collections for the three months ended March 31, 2017, decreased 17.9% to $6.1 million from $7.4 million for the three months ended March 31, 2016. During the second quarter of fiscal year 2017, gross collections decreased 3.8% or $1.7 million to $10.7 million from $12.4 million for the three months ended March 31, 2016. Commissions and fees associated with gross collections from third party collection agencies and attorneys decreased to $4.6 million for the three months ended March 31, 2017 from $5.0 million for the three months ended March 31, 2016. Commissions and fees amounted to 43.0% of gross collections for the three months ended March 31, 2017, compared to 40.1% for the three months ended March 31, 2016, resulting from higher pre-tax loss, reflectingpercentage of commissionable collections in the prior period.
Social security benefit advocacy fee income. For the three months ended March 31, 2017, disability fee income increased $0.6 million to $1.5 million as compared to $0.9 million for the three months ended March 31, 2016, due to an increase in impairments recordeddisability claimant cases closed with the Social Security Administration during the current period.
Earnings (loss) from equity method investee. Earnings from equity method investee decreased $0.7 million, or 206.6%, to a loss of $355,000 for the three months ended March 31, 2017 from earnings of $0.3 million for the three months ended March 31, 2016, due to reduced interest income and bad debt write downs on personal injury claimant advances.
Other income (loss). The following table summarizes other income (loss) for the three months ended March 31, 2017 and 2016:
March 31, | ||||||||
2017 | 2016 | |||||||
Interest and dividend income | $ | 299,000 | $ | 313,000 | ||||
Realized loss | (948,000 | ) | — | |||||
Other | (18,000 | ) | 295,000 | |||||
| $ | (667,000 | ) | $ | 608,000 | ||||
General and administrative expenses.For the three months ended March 31, 2017, general and administrative expense increased $2.1 million, or 19.8 %, to $12.3 million from $10.2 million for the three months ended March 31, 2016, primarily attributable to loss on investments of $3.4 million, increase in professional fees of $1.7 million related to the Mangrove matter, increased bad debt expense of $0.5 million, partially offset by the reduction in litigation settlement costs of $2.0 million, and $1.5 million reduction in GAR Disability overhead costs .
Interest expense. For the three months ended March 31, 2017, interest expense increased $33,000 to $33,000 as compared to $0 million for the three months ended March 31, 2016. The increased interest expense in the current period compared tois the prior year period.result of the Company's current advance on its line of credit.
Income attributable to non-controlling interest. (as reported)Segment profitThe income attributable to non-controlling interest was $20,000 and $53,000 in fiscal years 2014 and 2013, respectively. The non-controlling interests are related to Pegasus and CBC in – Consumer Receivables. For the three month periodmonths ended June 30, 2014March 31, 2017, segment profit increased $1.8 million to $3.6 million as compared to only Pegasus in the same comparative period of fiscal year 2013.
Net income attributable to Asta Funding, Inc. (Restated and Revised)Net income was $4.7$1.8 million for the three month periodmonths ended June 30, 2014March 31, 2016, primarily due to the reduction in litigation settlement costs of $2.0 million.
Segment loss – Personal Injury Claims. For the three months ended March 31, 2017, segment loss was $0.7 million as compared to segment profit of $0.3 million for the three months ended March 31, 2016. The decrease is attributable to the Company's loss from its equity investment in the current period.
Segment loss – GAR Disability Advocates. For the three months ended March 31, 2017, segment loss was $0.5 million as compared to a net$2.7 million loss for the same period in the prior year. This reduced loss in the current fiscal year is primarily the result of $3.4increased revenues of $0.6 million and the reduction in overhead costs.
Discontinued Operations. Structured settlement income of $0.6 million includes $1.3 million of unrealized gains and $1.9 million of interest income offset by a reduction in fair value of $3.0 million on CBC’s life contingent annuities portfolio for the three months ended March 31, 2017. Structured settlement income of $3.1 million included $1.6 million of unrealized gains and $1.5 million of interest income for the three months ended March 31, 2016. This decrease in income is the result of a reduction in fair value of $3.0 million during this period. Unrealized losses on structured settlements is comprised of both unrealized losses resulting from fair market valuation at the date of acquisition of the structured settlements and the subsequent fair value adjustments resulting from the change in the discount rate. Of the $1.3 million of unrealized losses recognized for the three months ended March 31, 2017, approximately $2.2 million is due to day one gains on new structured settlements financed during the period, offset by a decrease of $0.5 million in realized gains recognized as interest income on structured settlements and a reduction in fair value of $3.0 million during the period. There were no other changes in assumptions during the period. All of the revenue associated with CBC is recorded in income (loss) from discontinued operations in the Company's consolidated statements of operations.
Income tax (benefit) expense. For the three months ended March 31, 2017, income tax benefit for continuing and discontinued operations, consisting of federal and state income taxes, was $1.7 million, as compared to an income tax expense for continuing and discontinued operations, consisting of federal and state income taxes, of $1.2 million for the three month periodmonths ended June 30, 2013.March 31, 2016, resulting from a decrease in the taxable loss in the current period.
Net income attributable to Asta Funding, Inc. (as reported)LossNet income was $5.5 million from continuing operations. As a result of the above, the Company had a net loss from continuing operations for the three month periodmonths ended June 30, 2014 asMarch 31, 2017 of $6.9 million compared to a $2.4 million net loss of $2.7 millionfrom continuing operations for the three month periodmonths ended June 30, 2013.March 31, 2016.
Loss from discontinued operations. As a result of the above, the Company had a net loss from discontinued operations for the three months ended March 31, 2017 of $1.1 million compared to $0.6 million of net income from discontinued operations for the three months ended March 31, 2016.
LiquidityNet loss. As a result of the above, the Company had a net loss for the three months ended March 31, 2017 of $8.0 million compared to $1.8 million net loss for the three months ended March 31, 2016.
Liquidity and Capital Resources
Our primary sourcessource of cash from operations includeis collections on the receivable portfolios that we have acquired and the funds generated from the personal injury claims settled, and collections on structured settlementsbusiness segments. Our primary uses of cash include our acquisitionrepayments of receivable portfolios, investments indebt and associated interest payment, and advances of personal injury claims, investments in structured settlement, interest payments, costs involved in the collectionscollection of consumer receivables, personal injury claims, structured settlement taxes and dividends, if approved, and repayment of debt. We currently rely on cash provided by operations to providesupport the funds necessary for the acquisition of receivables, investments in personal injury claims and generalday-to-day operations of the business.Company.
Receivables Financing Agreement (“RFA”)
In March 2007, Palisades XVI borrowed approximately $227 million under the Receivables Financing Agreement,RFA, as amended in July 2007, December 2007, May 2008, February 2009, October 2010 and August 2013 from BMO, in order to finance the Portfolio Purchase which had a purchase price of $300 million. The original term of the agreement was three years. This term was extended by each of the Second, Third, Fourth, and Fifth Amendments and the most recent agreement signed in August 2013, discussed below.
Since the inception of the Receivables Financing Agreement amendments have been signed to revise various terms of the Receivables
Financing Agreement. The Settlement Agreement and Omnibus Amendment (“Settlement Agreement”) was in effect on August 7, 2013, Palisades XVI, a 100% owned bankruptcy remote subsidiary, entered into a Settlement Agreement with BMO as an amendment to the Receivables Financing Agreement.RFA. In consideration for a $15 million prepayment funded by the Company, BMO has agreed to significantly reduce minimum monthly collection requirements and the interest rate. If and when BMO were to receive the next $15 million of collections from the Portfolio Purchase, or from voluntary prepayments by Asta Funding, Inc., (the “Remaining Amount”) less certain credits for payments made prior to the consummation of the Settlement Agreement, the Company would be entitled to recover from future net collections the $15 million prepayment that it funded. Thereafter, BMO would have the right to receive 30% of future net collections. Upon repayment of the Remaining Amount to BMO, the Company would be released from the remaining contractual obligation of the Receivables Financing AgreementRFA and the Settlement Agreement.
On June 3, 2014, Palisades XVI finished paying the Remaining Amount. The final principal payment of $2.9 million included a voluntary prepayment of $1.9 million provided from funds of the Company. Accordingly, Palisades XVI will bewas entitled to receive $16.9 million of future collections from the Portfolio Purchase before BMO is entitled to receive any payments with respect to its Income Interest. During the month of June 2016, the Company received the balance of the $16.9 million, and, as of March 31, 2017, the Company recorded a liability to BMO of approximately $0.2 million. The liability to BMO is recorded when actual collections are received.
Bank Hapoalim B.M. (“Bank Hapoalim”) Line of Credit
On May 2, 2014, the Company obtained a $20 million line of credit facility from Bank Hapoalim, pursuant to a Loan Agreement (the “Loan Agreement”) among the Company and its subsidiary, Palisades Collection, LLC, as borrowers, and Bank Hapoalim, as agent and lender. The Loan Agreement provides for a $20.0 million committed line of credit and an accordion feature providing an increase in the line of credit of up to $30 million, at the discretion of the lenders. The facility is for a term of three years at an interest rate of either LIBOR plus 275 basis points or prime, at the Company’s option. The Loan Agreement includes covenants that require the Company to maintain a minimum net worth of $150 million and pay an unused line fee. The facility is secured pursuant to a Security Agreement among the parties to the Loan Agreement. On March 30, 2016, the Company signed the First Amendment to the Loan Agreement (the “First Amendment”) with Bank Hapoalim which amended certain terms of their banking arrangement. The First Amendment includes (a) the reduction of the interest rate to LIBOR plus 225 basis points; (b) a decrease in the minimum net worth requirement by $50 million, to $100 million and (c) modifies the No Net Loss requirement from a quarterly to an annual basis. All other terms of the original agreement remain in effect. The Company estimatedhas $9.6 million as outstanding balance against the Income Interestfacility as of March 31, 2017. There is a $10.1 million aggregate balance on deposit at Bank Hapoalim which has been reclassified to be between $0 and $1.4 million. However,restricted cash in the consolidated balance sheet since these assets serve as collateral for the line of credit. On April 28, 2017, the Company believes that no amount would be incurred becauserenewed the line of credit facility with the new maturity date of August 2, 2017, under the existing terms and conditions as of March 31, 2017
Tender Offer of Company Common Shares
On March 22, 2016, MPF InvestCo 4, LLC, a wholly owned subsidiary of The Mangrove Partners Master Fund, Ltd. ("Mangrove"), filed a Tender Offer Statement with the SEC, announcing the commencement of an unsolicited tender offer to acquire up to 3,000,000 shares of Asta common stock at price of $9.00 per share (“the Mangrove Offer”). The Mangrove Offer was sent to the holders of common stock of the continued deteriorationIssuer. If the Offer is fully subscribed, the Mangrove Offer would represent approximately 25.0% of the collections fromissued and outstanding Shares and would result in Mangrove owning an aggregate of approximately 5,102,427 Shares, which would represent approximately 42.5% of issued and outstanding Shares, based on the portfolio purchase.12,011,476 Shares, issued and outstanding as of March 31, 2016.
With
On March 31, 2016, the paymentCompany announced that its Board of Directors, after careful consideration and in consultation with a special committee of the Remaining AmountBoard and upon completionits financial and legal advisors, has unanimously determined to recommend that shareholders reject the Mangrove Offer. Furthermore, the Company has announced its intention to commence an issuer tender offer for 3,000,000 shares of Asta common stock pursuant to a "Dutch Auction" format at a price range of $9.50 to $10.25 per share.
On April 15, 2016, Mangrove amended its previously announced unsolicited tender offer to acquire up to 3,000,000 shares of Asta’s common stock, increasing the price per share from $9.00 to $9.50, and extending the expiration date to May 9, 2016. In addition, the amendment added certain additional conditions to Mangrove’s obligation to consummate its offer. On April 21, 2016, The Company’s Board of Directors unanimously reaffirmed its recommendation to shareholders that they reject the unsolicited offer, citing the fact that the increased offer is still at the bottom of the documents grantingrange in the Palisades XVI Income Interest, including a written confirmationCompany’s self-tender, as described above.
On April15, 2016, MPF InvestCo 4, LLC and Mangrove Master Fund (“Mangrove”) amended its previously announced unsolicited tender offer to acquire up to 3,000,000 shares of Asta’s common stock, increasing the price per share from BMO$9.00 to $9.50, and extending the expiration date to May 9, 2016. In addition, the amendment added certain additional conditions to Mangrove’s obligation to consummate its offer. On April 21, 2016, The Company’s Board of Directors unanimously reaffirmed its recommendation to shareholders that they reject the unsolicited offer, citing the fact that the obligation has been paid in full, Palisades XVI has been released from further debt obligations fromincreased offer is still at the RFA. We have recorded as other income, forgivenessbottom of non-recourse debt,the range in the amountCompany’s self-tender, as described above. On April 26, 2016, Mangrove announced the termination of its Tender Offer, previously due to expire on May 9, 2016. Mangrove terminated its offer because it determined that a condition of the offer would not be satisfied. None of the shares of the Company’s common stock were purchased under the Mangrove offer.
The Company’s Tender offer expired on May 12, 2016.
On January 19, 2017, the Company commenced a self-tender offer to purchase for cash up to 5,314,009 shares of its common stock at a purchase price of $10.35 per share, less applicable withholding taxes and without interest. The Company made the tender offer pursuant to the Settlement Agreement dated as of January 6, 2017, by and among the Company, Mangrove and certain of their respective affiliates, pursuant to which Mangrove and its affiliates will tender their 4,005,701 shares. The tender offer will reduce the number of shares in the public market.
If more than 5,314,009 shares had been tendered, the Company would have purchased all tendered shares on a pro rata basis, subject to the conditional tender provisions described in the Offer to Purchase. Pursuant to the Settlement Agreement, Gary Stern (or his permitted assignees) had unconditionally agreed to purchase from Mangrove and its affiliates any shares owned by Mangrove and its affiliates that the Company did not purchase in the tender offer.
The tender offer expired on February 15, 2017, at 11:59 p.m., New York City time. Based on the final count by American Stock Transfer & Trust Company, LLC ("AMSTOCK"), the depositary for the tender offer, a total of approximately $26.16,022,253 shares of the Company’s common stock were validly tendered and not validly withdrawn. Because the tender offer was oversubscribed by 708,244 shares, the Company purchased only a prorated portion of the shares properly tendered by each tendering stockholder. The depositary had informed the Company that the final proration factor for the tender offer is approximately 88.24% of the shares validly tendered and not validly withdrawn. AMSTOCK promptly issued payment for the 5,314,009 shares accepted pursuant to the tender offer and returned all other shares tendered and not purchased. The shares acquired represented approximately 44.7% of the total number of shares of the Company’s common stock issued and outstanding as of February 6, 2017. As a result of this tender offer the Company recorded an additional $54.2 million in treasury stock and an $0.8 million charge to general and administrative expense for the third quarterthree months ended March 31, 2017. Additionally, the Ricky Stern Family 2012 Trust (Gary Stern's permitted assignee) acquired 471,086 Shares under the Purchase Agreement with Mangrove and its affiliates on March 10, 2017 for $4.9 million.
Other Investments — Personal Injury Claims
On December 28, 2011, we formed a joint venture Pegasus Funding, LLC (“Pegasus”) with Pegasus Legal Funding, LLC (“PLF”). Pegasus purchases interests in personal injury claims from claimants who are a party to a personal injury litigation with the expectation of a settlement in the future. Pegasus advances to each claimant funds on a non-recourse basis at an agreed upon interest rate in anticipation of a future settlement. The interest purchased by Pegasus in each claim will consist of the right to receive from such claimant part of the proceeds or recoveries which such claimant receives by reason of a settlement, judgment or award with respect to such claimant’s claim. The profits from the joint venture are distributed based on the ownership percentage of the parties — Asta Funding, Inc. 80% and PLF, 20%.
Other Investments — Divorce Funding
On November 8, 2016, the Company entered into a binding Term Sheet (the “Term Sheet”) with Pegasus and PLF. The Company and PLF have decided not to renew the Pegasus joint venture that by its terms terminates on December 28, 2016. The Term Sheet amends certain provisions to Pegasus’ operating agreement dated as of December 28, 2011 (as amended, the “Operating Agreement”) and governs the terms relating to the collection of its existing Pegasus portfolio (the “Portfolio”).
Pursuant to the Term Sheet, the parties thereto have agreed that Pegasus will continue in existence in order to collect advances on its existing Portfolio. The Company will fund overhead expenses relating to the collection of the Portfolio based on a budget agreed upon by the Company and PLF. Any cash received by Pegasus will be distributed to its members in the order provided for in the Operating Agreement. The Company will be allocated an amount equal to 20% of all principal collected on each investment paid back beginning October 1, 2016 and continuing through the collection of the Portfolio, which will be applied against the outstanding balance of overhead expenses previously advanced by the Company to Pegasus. After January 2, 2017, additional overhead expenses advanced will be paid back monthly as incurred by the Company prior to the calculation and distribution of any profits.
In connection with the Term Sheet, the parties thereto have also entered into a customary mutual release and non-disparagement agreement as well as a release from the non-competition obligations under the Operating Agreement.
On May 18,9, 2017, Pegasus collected approximately $18 million from a group of claimants on a class action lawsuit that recently settled.
On November 11, 2016, the Company announced that it will continue its personal injury claims funding business through the formation of a wholly owned subsidiary, Simia. In connection with its formation, Simia entered into an employment agreement with Patrick F. Preece to serve as its Chief Executive Officer.
On March 24, 2017, Simia purchases a portfolio of personal injury claims from a third party for approximately $3.0 million, The Company plans to grow the business organically, but may from time to time purchase portfolios of personal injury claims from third parties if the opportunity presented aligns with the Company's strategic growth plans.
Divorce Funding
On May 8, 2012, wethe Company formed BP Case Management, LLC (“BPCM”),EMIRIC, a wholly owned subsidiary of the Company. EMIRIC entered into a joint venture with California-based Balance Point Divorce Funding, LLC (“BP Divorce Funding”) to create BP Case Management, LLC (“BPCM”). BPCM is 60% owned by the Company and 40% owned by BP Divorce Funding. BPCM provides non-recourse funding to a spouse in a matrimonial action. The Company provides a $1.0$1.5 million revolving line of credit to partially fund BP Divorce Funding’s operations, with such loan bearing interest at the prevailing prime rate, with an initial term of twenty-four months. The term of the loan was to end in May 2014, but had been extended to August 2016. Effective August 14, 2016, the Company extended its revolving line of credit with Balance Point until March 31, 2017, at substantially the same terms as the September 14, 2014 amendment. The revolving line of credit is collateralized by BP Divorce Funding’s profit share in BPCM and other assets. The term ofOn April 1, 2017, this loan was in default as BPCM failed to make the required payments due under the loan agreement. Accordingly, the loan balance of $1.5 million was deemed uncollectible and written off during the second quarter with a charge to end in May 2014, but was extended an additional six months.
Other Investments — Structured Settlements
On December 31, 2013, the Company acquired 80% ownership of CBC and its affiliate, CBC Management Services, LLC for approximately $5.9 million. At the closing, the operating principals of CBC, namely William J. Skyrm, Esq. and James Goodman, were each issued a 10% interest in CBC. In addition, the Company has agreed to provide financing to CBC of up to $5 million.million, amended to $7.5 million in March 2015. Through the transaction we acquired structured settlements valued at $30.4 million and debt that totaled $23$23.4 million, consisting of $9.6 million of a revolving line of credit with a financial institution and $13.8 million of non-recourse notes issued by CBC’s subsidiaries. On December 31, 2015, the Company acquired the remaining 20% ownership of CBC for $1,800,000, through the issuance of restricted stock valued at approximately $1,000,000 and $800,000 in cash. Each of the two original principals received 61,652 shares of restricted stock at fair market value of $7.95 per share and $400,000 in cash. An aggregate of 123,304 shares of restricted stock was issued. As of June 30, 2014, theMarch 31, 2017, CBC had structured settlements valued at $90.1 million and debt approximated $27.4 million. On July 15, 2014, CBC entered intoof $74.2 million, consisting of an amendment whereby it increased its revolving$18.7 million line of credit from $15.0and an aggregate of $55.5 million of non-recourse notes.
In April 2017, CBC sold off substantially all of its life contingent assets to $20.0a third party for $5.0 million, andresulting in a realized loss of approximately $5.6 million. The life contingent assets sold in April 2017 have been adjusted in the maturity date was changedCompany's consolidated balance sheet to Decembertheir net realized value of this transaction as of March 31, 2014.2017.
Cash Flow (Restated and Revised)
As of June 30, 2014,March 31, 2017, our cash decreased $9.2and cash equivalents, including restricted cash increased $1.8 million to $26.0$18.1 million from $35.2$16.3 million at September 30, 2013.2016.
Net cash used in operating activities was $7.2 million during the six months ended March 31, 2017 compared to $2.8 million used in operating activities during the six months ended March 31, 2016. Net cash provided by operatinginvesting activities was $1.8$47.1 million during the nine months ended June 30, 2014 compared to $11.1 million during the nine months ended June 30, 2013 primarily due to lower income taxes paid in the period. Net cash used in investing activities was $3.0 million during the ninesix month period ended June 30, 2014March 31, 2017 compared to $32.2$1.1 million provided by investing activityactivities during the ninesix months ended June 30, 2013, reflectingMarch 31, 2016, primarily from the proceeds from maturitiesthe sale of certificates of deposit in the prior fiscal year, an increase in net purchases of available-for-saleavailable for sale securities, $44.7 million, and the CBC acquisition in the current period, partially offset by a decrease in the personal injury claim investment.purchase of assets acquired for liquidation, $4.0 million, in the current year. Net cash used in financing activities decreased from $10.0was $37.9 million in the ninesix month period ended June 30, 2013March 31, 2017, as compared to $7.9cash used in financing activities of $0.5 million in the nine month periodsix months ended June 30, 2014. This decrease is attributable to the discontinuationMarch 31, 2016. The increase of dividend payments and treasury stock purchasesfinancing activities in the current nine month period.period is primarily the result of the purchase of treasury stock in conjunction with the Company’s self-tender, $45.8 million, offset by the $9.6 million borrowed from a financial institution, and a decrease of $1.8 million from financing activities of the discontinued Operations.
Our cash requirements have been and will continue to be significant and have, in the past, depended oninclude external financing to acquire consumer receivables and operate thevarious lines of business. Significant requirements include repayments under our debt facilities, purchase of consumer receivable portfolios, interest payments,investment in personal injury claims, investment in structured settlements, costs involved in the collections of consumer receivables, repayment of CBC debt and taxes. In addition, dividends are paid if approved by the Board of Directors. Acquisitions have been financed primarily through cash flows from operating activities and a credit facility.investment in consumer receivable portfolios. We believe we will be less dependentmay secure credit facilities with financial institutions as we look to grow the Company, support current operations, and execute on a credit facility inour short and long term business initiatives. In the short-term, as our cash flowbalances will be sufficient to invest in personal injury claims, purchase portfolios and finance the disability advocacy business. Structured settlements are financed through the use of a credit line, warehouse facility, and private placement financing.
We believe our available cash resources and expected cash flows from operations will be sufficient to fund operations for the next twelve months. We do not expect to incur any material capital expenditures during the next twelve months. The Company used a portion of its cash and cash equivalents on hand to fund the purchase portfolios and operateof shares in the business. However, astender offer. Further, the collection environment remains challenging, we may seek additional financing.Company has an available line of credit from Bank of Hapoalim of up to $30 million that can be used for working capital purposes, if needed. Currently, the Company has $9.6 million outstanding on this line of credit.
We are cognizant of the current market fundamentals in the debt purchase and company acquisition markets which, because of significant supply and tight capital availability, could result in increased buying opportunities. We willThe outcome of any future transaction(s) is subject to market conditions. In addition, due to these opportunities, we continue to consider otherseek opportunities with banking organizations and others on a possible financing options.
Our business model affords us the ability to sell accounts on an opportunistic basis; however, account sales have been immaterial in recent quarters.
The following tables summarize the changes in the balance sheet of the investment in consumer receivables acquired for liquidation during the following periods:loan facility.
| RESTATED | ||||||||||||
| For the Nine Months Ended June 30, 2014 | ||||||||||||
| Interest Method | Cost Recovery Method | Total | ||||||||||
Balance, beginning of period | $ | 8,071,000 | $ | 49,829,000 | $ | 57,900,000 | ||||||
Balance transferred to cost recovery – prior period adjustment | (1,304,000 | ) | 1,304,000 | — | ||||||||
Adjustment for misapplication of the interest method to prior periods | 6,354,000 | — | 6,354,000 | |||||||||
|
|
|
|
|
| |||||||
Balance beginning of period, as restated | 13,121,000 | 51,133,000 | 64,254,000 | |||||||||
Reclassification of interest method portfolios to cost recovery method | (13,121,000 | ) | — | — | ||||||||
Acquisition of receivable portfolios | — | 3,702,000 | 3,702,000 | |||||||||
Net cash collections from collection of consumer receivables acquired for liquidation | — | (30,739,000 | ) | (30,739,000 | ) | |||||||
Net cash collections represented by account sales of consumer receivables acquired for liquidation | — | (4,000 | ) | (4,000 | ) | |||||||
Impairment | — | (19,591,000 | ) | (19,591,000 | ) | |||||||
Finance income recognized (1) | — | 14,792,000 | 14,792,000 | |||||||||
|
|
|
|
|
| |||||||
Balance, end of period | $ | 0 | $ | 32,414,000 | $ | 32,414,000 | ||||||
|
|
|
|
|
| |||||||
Finance income as a percentage of collections | 0 | % | 48.1 | % | 48.1 | % | ||||||
(1) Includes $14.8 million derived from zero basis pools. | ||||||||||||
| REVISED | ||||||||||||
| For the Nine Months Ended June 30, 2013 | ||||||||||||
| Interest Method | Cost Recovery Method | Total | ||||||||||
Balance, beginning of period | $ | 12,326,000 | $ | 74,561,000 | $ | 86,887,000 | ||||||
Balance transferred to cost recovery – prior period adjustment | (2,692,000 | ) | 2,692,000 | — | ||||||||
Adjustment for misapplication of the interest method to prior periods | 5,852,000 | 1,500,000 | 7,352,000 | |||||||||
|
|
|
|
|
| |||||||
Balance beginning of period, as revised | 15,486,000 | 78,753,000 | 94,239,000 | |||||||||
Acquisition of receivable portfolios | — | 3,340,000 | 3,340,000 | |||||||||
Net cash collections from collection of consumer receivables acquired for liquidation | (24,832,000 | ) | (15,182,000 | ) | (40,014,000 | ) | ||||||
Net cash collections represented by account sales of consumer receivables acquired for liquidation | (977,000 | ) | (1,047,000 | ) | (2,024,000 | ) | ||||||
Impairment | (556,000 | ) | (10,149,000 | ) | (10,705,000 | ) | ||||||
Finance income recognized (1) | 21,765,000 | 3,275,000 | 25,040,000 | |||||||||
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|
|
|
|
| |||||||
Balance, end of period | $ | 10,886,000 | $ | 58,990,000 | $ | 69,876,000 | ||||||
|
|
|
|
|
| |||||||
Finance income as a percentage of collections | 84.3 | % | 20.2 | % | 59.6 | % | ||||||
(1) Includes $20.4 million derived from zero basis pools. | ||||||||||||
Balance, beginning of period Balance transferred to cost recovery - prior period adjustment Adjustment for misapplication of the interest method to prior periods Balance beginning of period, as restated Acquisition of receivable portfolio Net cash collections from collection of consumer receivables acquired for liquidation Net cash collections represented by account sales of consumer receivables acquired for liquidation Impairment Finance income recognized (1) Balance, end of period Finance income as a percentage of collections (1) Includes $5.1 million derived from fully amortized pools. Balance, beginning of period Balance transferred to cost recovery – prior period adjustment Adjustment for misapplication of the interest method to prior periods Balance beginning of period, as revised Acquisition of receivable portfolio Net cash collections from collection of consumer receivables acquired for liquidation Net cash collections represented by account sales of consumer receivables acquired for liquidation Impairment Finance income recognized (1) Balance, end of period Finance income as a percentage of collections RESTATED For the Three Months Ended June 30, 2014 Interest
Method Cost
Recovery
Method Total $ 6,970,000 $ 45,101,000 $ 52,071,000 (989,000 ) 989,000 — (5,981,000 ) 8,149,000 2,168,000 — 54,239,000 54,239,000 — 2,733,000 2,733,000 — (10,039,000 ) (10,039,000 ) — (2,000 ) (2,000 ) — (19,591,000 ) (19,591,000 ) — 5,074,000 5,074,000 $ 0 $ 32,414,000 $ 32,414,000 0 % 50.5 % 50.5 % REVISED For the Three Months Ended June 30, 2013 Interest
Method Cost
Recovery
Method Total $ 6,813,000 $ 68,011,000 $ 74,824,000 (2,025,000 ) 2,025,000 — 7,539,000 812,000 8,351,000 12,327,000 70,848,000 83,175,000 — 3,340,000 3,340,000 (7,937,000 ) (5,481,000 ) (13,418,000 ) (970,000 ) (1,037,000 ) (2,007,000 ) (37,000 ) (10,149,000 ) (10,148,000 ) 7,503,000 1,469,000 8,972,000 $ 10,886,000 $ 58,990,000 $ 69,876,000 84.2 % 22.5 % 58.2 %
Off Balance Sheet Arrangements
As of June 30, 2014,March 31, 2017, we did not have any relationships with unconsolidated entities or financial partners, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
Additional Supplementary Information:
We do not anticipate collecting the majority of the purchased principal amounts.amounts of our various portfolios. Accordingly, the difference between the carrying value of the portfolios and the gross receivables is not indicative of future revenues from these accounts acquired for liquidation. Since we purchased these accounts at significant discounts, we anticipate collecting only a portion of the face amounts.
For additional information regarding our methods of accounting for our investment in finance receivables, the qualitative and quantitative factors we use to determine estimated cash flows, and our performance expectations of our portfolios, see “ “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies”Policies ” above.
Collections Represented by Account Sales
Recent Accounting Pronouncements
Period | Collections Represented By Account Sales | Finance Income Earned | ||||||
Nine months ended June 30, 2014 | $ | 4,000 | $ | 1,000 | ||||
Three months ended June 30, 2014 | $ | 2,000 | $ | — | ||||
Nine months ended June 30, 2013 | $ | 2,024,000 | $ | 1,401,000 | ||||
Three months ended June 30, 2013 | $ | 2,007,000 | $ | 1,396,000 | ||||
Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board (the “FASB”)FASB issued an update to ASC 606, “RevenueRevenue from Contracts with Customers,” that will supersede virtually all existing revenue guidance. Under this update, an entity is required to recognize revenue upon transfer of promised goods or services to customers, in an amount that reflects the entitled consideration received in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from the customer contracts. This update is effective for annual reporting periods beginning after December 15, 2016,2017 including interim periods within that reporting period. Early application is permitted for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Based on the Company’s evaluation, the Company does not permitted. We arebelieve this new standard will impact the accounting for its revenues. Given the changes in the Company's business management is continuing to assess this new standard and the impact it will have on accounting for its revenues.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities. The main objective in developing this update is enhancing the reporting model for financial instruments to provide users of financial statements with more decision-useful information. The amendments in this update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The effective date for this update is for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company is currently evaluating the impact this update will have on ourits consolidated financial statements as well as the expected adoption method.statements.
In June 2014,February 2016, the FASB issued ASU 2014-11, “TransfersNo. 2016-02, Leases (Topic 842) to amend lease accounting requirements and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings,requires entities to generally recognize on the balance sheet operating and Disclosures.”financing lease liabilities and corresponding right-of-use assets. The amendments in this ASUnew standard will require two accounting changes. First,significant additional disclosures about the amendments in this ASU change the accounting for repurchase-to maturity transactions to secured borrowing accounting. Second, for repurchase financing arrangements, the amendments require separate accounting for a transferamount, timing and uncertainty of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. This ASU also includes new disclosure requirements.cash flows from leases. The accounting changes in this Update arestandard update is effective for public business entities for the first interim or annual periodfiscal years beginning after December 15, 2014. An entity2018 and interim periods within those years and early adoption is requiredpermitted. The standard is to present changes in accounting for transactions outstanding on the effective date asbe applied using a cumulative-effect adjustmentmodified retrospective approach and includes a number of optional practical expedients that entities may elect to retained earnings as of the beginning of the period of adoption. Earlier application for a public business entity is prohibited.apply. The Company reviewedis currently evaluating the impact of adopting this ASU and determined that it did not have a material impactupdate on its consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718) Improvements to Employee Share Based Payment Accounting, to simplify and improve areas of generally accepted accounting principles for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The effective date for this update is for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is currently evaluating the impact this update will have on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For the Company, this update will be effective for interim periods and annual periods beginning after December 15, 2019. Upon adoption, the Company will accelerate the recording of its credit losses in its financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The new standard is effective for fiscal years beginning after December 15, 2017. Early adoption is permitted. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case the Company would be required to apply the amendments prospectively as of the earliest date practicable. The Company is in the process of evaluating the provisions of the ASU, but does not expect it to have a material effect on the Company’s consolidated statements of cash flows.
In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash ("ASU 2016-18"), to require that restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total cash amounts shown on the statement of cash flows. Consequently, transfers between cash and restricted cash will not be presented as a separate line item in the operating, investing or financing sections of the cash flow statement. ASU 2016-18 does not provide a definition of restricted cash or restricted cash equivalents. The new guidance will only be applicable to amounts described by the Company as restricted cash. We adopted ASU 2016-18 on October 1, 2016, the effect of which was a change in presentation on our consolidated statement of cash flows, but not on our consolidated financial results.
Quantitative and Qualitative Disclosures about Market Risk (restated) |
We are exposed to various types of market risk in the normal course of business, including the impact of interest rate changes and foreign exchange rates and changes in corporate tax rates. At June 30, 2014, our Receivable Financing Agreement, which had been variable debt, had an outstanding balance of $0. TheMarch 31, 2017, the debt associated with our acquisition of CBC, had a balance of approximately $27.4$74.2 million, consisting of $14.4$18.7 million through a line of credit, at a rate of 4.75%LIBOR plus 3%, with a floor of 4.1%, from a financial institution, and $13.0$55.5 million of notes at varying rates, from 7.125%4.85% to 8.75%, issued by CBC’s subsidiaries. At March 31, 2017, the LIBOR rate was 0.98278%. A 25 basis point change in the LIBOR rate would have had an immaterial impact on the CBC line of credit interest expense, while above the floor rate (4.23278 %) would have an effect less than a month. The same 25 basis point change in the LIBOR rate would have had approximately $2,000 impact on the Bank Hapoalim line of credit interest expense. The Company sold CBC on December 13, 2017, and presents the entity as a discontinued operation in its consolidated financial statements. We do not currently invest in derivative financial or commodity instruments.
Controls and Procedures |
a. Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Under the supervision and with the participation of our management, including its principal executive officer and principal financial officer, we conducted an assessment of the effectiveness of its internal control over financial reporting. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO 2013”) in Internal Control — Integrated Framework, issued in 2013. Based on management’s assessment, and based on the criteria in COSO 2013, we concluded that our disclosure controls and procedures were not effective on March 31, 2017 due to the material weaknesses described below:
1. The Company lacked a process to review key inputs into the period end valuation using underlying benchmark interest rates in determining fair value of the Company’s structured settlements. The material weakness was first reported by the Company in its Quarterly Report on Form 10-Q/A (Amendment No. 1) for the quarter ended December 31, 2016, which was filed with the SEC on May 26, 2017, and was also identified as a material weakness in connection with the preparation of this Amendment.
Planned Remedial Actions:
● | Since the original determination regarding this material weakness, the Company retained and intends to continue to retain third-party specialists to perform independent valuations of its assets and liabilities, when warranted, particularly with respect to, those assets and liabilities which involve specific complex or intricate valuation techniques, and/or are outside the Company's traditional business model. |
● | The Company plans on hiring additional personnel with financial reporting experience to supplement its existing accounting/finance department. Additionally, management will develop and train accounting/finance personnel in the use of formalized checklists, to identify key inputs associated with period end valuations. |
2. The Company did not maintain effective internal controls over financial reporting disclosures specifically associated with concentrations, foreign transactions, significant entities and related party transactions. The material weaknesses related to financial reporting disclosures associated with significant and related party transactions at the subsidiary level, were first reported by the Company in its Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 20142017, which was filed with the SEC on August 18, 2014 disclosed that, in accordance with Rules 13a-15(b)May 26, 2017, and 15d-15(b) of the Securities Exchange Act of 1934,was also identified as amended (the “Exchange Act”), the Chief Executive Officer and Chief Financial Officer, had carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) and, based on that evaluation, had concluded that the Company’s disclosure controls and procedures were effective at June 30, 2014. In light of the SEC Comment Letter process and a review made by the Companymaterial weakness in connection with the preparation of this Amendment.
Planned Remedial Actions:
● | The Company has retained and intends to continue to retain the services of outside consultants, with relevant accounting experience, skills and knowledge, working under the supervision and direction of the Company’s management, to supplement the Company’s existing accounting personnel. |
● | The Company plans to develop policies, procedures, and controls for the specific areas identified in this material weakness. The Company will also hire additional accounting and finance personnel with significant accounting and SEC reporting experience to join its finance team to ensure consistent application of these accounting principles and adherence to the Company’s newly adopted policies, procedures, and controls. The Company plans to review the current financial controls to assess if additional management review controls are necessary and work with all finance personnel to establish the appropriate documentation criteria for the existing controls including evidence of review, timeliness and variance thresholds. |
● | The Company plans to have the Disclosure Committee, which now meets on a quarterly basis, meet more frequently throughout the year to assure that our SEC filings and other public disclosures are complete, accurate, and otherwise comply with applicable accounting principles and regulations. The Company’s Disclosure Committee reports to our Chief Executive Officer with oversight provided by our Audit Committee, and includes individuals knowledgeable about, among other things, SEC rules and regulations, financial reporting, and internal control matters. The Company will also document a formal disclosure policy and procedures to govern the work of the Disclosure Committee. |
● | Since the original determination regarding the material weakness associated with significant and related party transactions at the subsidiary level, the Company has installed contract management software to manage all of its contracts and associated obligations under those contracts. Management from each department has been trained on the software, and all contracts require approvals of designated managers and the accounting department prior to execution. All contracts are reviewed by accounting personnel with requisite experience in identifying complex accounting transactional and disclosure issues, |
3. The Company did not maintain effective internal controls over regulatory compliance; specifically the restatement presented in this Form 10-Q/ACompany did not have an effective whistleblower hotline or a formalized Foreign Corrupt Practices Act Policy.
Planned Remedial Actions:
● | While the Company has implemented a whistleblower hotline it believes will be effective, management will develop a formalized plan to test the independent system on a regular basis to ensure regulatory compliance. |
● | The Company will formalize its Foreign Corrupt Practices Act Policy, and will ensure all employees are trained on, and adhere to the policy. |
4. The Company lacks a formal policy to assess the Chief Executive Officeradequacy of the design and our Chief Financial Officer, re-evaluatedoperating effectiveness of controls related to certain of the Company’s disclosuresubsidiaries, third party service providers and third party advocates.
Planned Remedial Actions:
● | The Company will increase the frequency of onsite inspections of third party servicers and advocates throughout the year, utilizing existing accounting/finance personnel familiar with the specific accounting processes involved at each location. |
● | The Company will provide training to accounting personnel at subsidiary locations, and will develop detailed checklist and processes that can be used, and reviewed by management during period ends. Additionally, management will routinely visit subsidiary locations to ensure that the processes and guidelines developed are being strictly adhered to. |
5. The Company did not maintain effective internal controls over accounting for complex transactions specifically associated with equity method investments.
Planned Remedial Actions:
● | The Company plans to develop policies, procedures, and controls to ensure the proper accounting for complex technical issues are identified, researched and brought to management's attention. The Company will also ensure that the appropriate personnel are appropriately trained on new and existing accounting pronouncements, Company policies, procedures, and controls. |
6. The Company did not maintain effective internal controls over accounting for foreign transactions specifically associated with accounting for transaction and procedurestranslation adjustments, unallocated payments and based on that evaluation,cutoff.
Planned Remedial Actions:
● | The Company plans to develop and implement improved policies, procedures, processes and controls, as well as, conduct trainings to ensure the proper accounting for foreign currency matters in accordance with ASC 830, Foreign Currency Matters |
● | The Company plans to utilize an accounting system to ensure that all transactions are systematically re-measured and translated at the applicable foreign currency exchange rate and the associated gain or loss is appropriately recognized in earnings. |
● | The Company plans to appropriately reconcile the AOCI account, in a timely manner. To ensure that the proper amounts are being recorded in the Company's financial statements. |
As a result of these misstatements and omitted disclosures, the Company concluded thatthere were material weaknesses in the Company’s disclosure controls and procedures were not effective at June 30, 2014.
The Company’s management based its conclusion on the identification of a material weakness in internal control over financial reporting at June 30, 2014. The material weaknessreporting. Management, under the supervision of the Audit Committee, will develop a comprehensive remediation plan, including a detailed plan and remedial steps being taken bytimetable for implementation, and will report regularly to the Company are discussed below.Audit Committee regarding the status of the implementation activities.
b. Changes in Internal Controls over Financial Reporting. Our management, under the supervision and with the participation of |
Based on the aforementioned evaluation, Management identified a material weakness in our internal control over financial reporting related to the revenue recognition process in our consumer receivables portfolios, specifically related to the application of the interest method of accounting as promulgated byAccounting Standards Codification (“ASC”) 310-30, Receivables – Loans and Debt Securities Acquired with Deteriorated Quality. During our review of portfolio cash flows, our controls did not include an analysis and review of the current cash flow variations within a quarter to determine whether there is an impairment or accretion. This resulted in misstatements of our previously filed quarterly financial statements and annual financial statements – see Note 2, Restatement of Quarterly Financial Statements and Revision of Prior Period Financial Statements. As a result of this material weakness, our Chief Executive Officer and Chief Financial Officer, concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were not effective.
As part of our commitment to strengtheningre-evaluated our internal control over financial reporting we have implemented various actions and will initiate other remedial actions under the oversight of the Audit Committee, including:
Following the guidance set forth in byAccounting Standards Codification (“ASC”) 310-30, Receivables – Loans and Debt Securities Acquired with Deteriorated Quality.
We believe we have implemented the necessary internal controls to remediate the material weakness relating to our revenue recognition process. We have implemented procedures to prepare and review an analysis of the variations between actual and estimated cash flowsdetermine whether any changes occurring during the current period. We will continuesecond quarter of fiscal year 2017 that have materially affected, or are reasonably likely to maintainaffect, our internal control over financial reporting, and verify the effective operationhave concluded that there have been no changes that occurred during such quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We can give no assurance that the measures we take will remediate the material weakness that we identified or that any additional material weaknesses will not arise in the future. We will continue to monitor the effectiveness of these and other processes, procedures and controls and will make any further changes management determines appropriate.
Legal Proceedings |
In the ordinary course of our business, we are involved in numerous legal proceedings. We regularly initiate collection lawsuits, using our network of third party law firms, against consumers. Also, consumers occasionally initiate litigation against us, in which they allege that we have violated a federal or state law in the process of collecting on their account. We do not believe that these ordinary course matters are material to our business and financial condition. As of the date of this Form 10-Q,report, we arewere not involved in any material litigation in which we arewere a defendant.
We have identified a material weakness in our internal control over financial reporting, specifically related to our revenue recognition process,Originators, debt purchasers and our businessthird-party collection agencies and stock price could be adversely affected if we do not adequately address this weakness, or if we have other material weaknesses in our internal control over financial reporting.
Management identified a material weakness in our internal control over financial reporting related to the revenue recognition process in our consumer receivables portfolios, specifically related to the application of the interest method of accounting as promulgated by ASC 310-30. As a result of this material weakness, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were not effective. The existence of this material weakness could result in errors in our financial statements, and substantial costs and resources may be required to rectify any internal control deficiencies. If we cannot produce reliable financial reports, investors could lose confidence in our reported financial information, the market price of our stock could decline significantly, we may be unable to obtain additional financing to operate and expand our business, and our business and financial condition could be harmed.
As a result of the acquisition of CBC Settlement Funding, LLC on December 31, 2013, the following risk factor was disclosedattorneys in the first quarter of fiscal year 2014:
Weconsumer credit industry are frequently subject to various risksputative class action lawsuits and other litigation. Claims include failure to comply with applicable laws and regulations and improper or deceptive origination and servicing practices. Being a defendant in connection with our structured settlement funding business.
Risks of the structured settlement funding business include the potential regulation that could stem from the Dodd Frank Act, state regulation and/such class action lawsuits or any other change in statutory or case law which may limit or restrict the ability of our structured settlement business to: make investments; the effectiveness of our marketing programs; and our ability to continue to grow the volume of structured settlements. Our failure or inability to execute any element of our business strategylitigation could materially adversely affect our business, financial position and results of operations.operations and financial condition. Currently, the Company has set up a reserve for settlement costs of $2.3 million to cover a class action lawsuit.
Legal proceedings are subject to substantial uncertainties concerning the outcome of material factual and legal issues relating to the litigation. Accordingly, we cannot currently predict the manner and timing of the resolution of some of these matters and may be unable to estimate a range of possible losses or any minimum loss from such matters.
Risk factors (restated) |
For a discussion of our potential risks and uncertainties, see the information previously disclosed in Part I, Item 1A. “Risk Factors” in our Form 10-K/A. There have been no material changes to the risk factors disclosed in our Form 10-K/A.
Unregistered Sales of Equity Securities and Use of Proceeds |
None
Default Upon Senior Securities |
None
Mine Safety Disclosures |
None
Other Information |
Unresolved Staff Comments.
The Company received several comment letters beginning on March 7, 2014 from the Securities and Exchange Commission (“SEC”), the last dated October 6, 2014, concerning its Annual Report on Form 10-K for the fiscal year ended September 30, 2013. Additionally, verbal communication with the SEC Staff addressed further comments with regard to the Company’s Form 10-Q’s for the fiscal year ended September 30, 2014. The SEC requested, among other things, information concerning the Company’s revenue recognition policy on consumer receivables acquired for liquidation and the Company’s applicationNone
Exhibits |
(a) Exhibits.
| 2.1 |
| Term Sheet, dated November 8, 2016, by and among Asta Funding, Inc., ASFI Pegasus Holdings, LLC, Fund Pegasus, LLC, Pegasus Funding, LLC, Pegasus Legal Funding, LLC, Max Alperovich and Alexander Khanas (incorporated by reference to Exhibit 10.1 to Asta Funding, Inc.’s Current Report on Form 8-K filed November 15, 2016). | ||
| | ||
3.1 | ||
3.2 | ||
3.3 | ||
3.4 | ||
3.5 | ||
3.6 | ||
3.7 | ||
4.1 | ||
10.1 | ||
10.2 | ||
| 10.3 | Settlement Agreement, dated January 6, 2017, by and among Asta Funding, Inc., The Mangrove Partners Master Fund, Ltd. and, for limited purposes therein, Gary Stern, Emily Stern, Arthur Stern, Asta Group, Incorporated and GMS Family Investors LLC (incorporated by reference to Exhibit 10.1 to Asta Funding, Inc.’s Current Report on Form 8-K filed January 9, 2017). | |
31.1* | ||
| | ||
31.2* | ||
32.1** | ||
| | ||
32.2** | ||
101.INS | XBRL Instance. | |
101.SCH | XBRL Taxonomy Extension Schema. | |
101.CAL | XBRL Taxonomy Extension Calculation. | |
101.DEF | XBRL Taxonomy Extension Definition. | |
101.LAB | XBRL Taxonomy Extension Labels. | |
101.PRE | XBRL Taxonomy Extension Presentation. | |
* | Filed herewith. |
** | This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (“Exchange Act”), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended or the Exchange Act. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ASTA FUNDING, INC. (Registrant) | ||||||
Date: September 17, 2018 | By: | /s/ Gary Stern | ||||
Gary Stern, President, Chief Executive Officer | ||||||
(Principal Executive Officer) | ||||||
| �� | ||||||
Date: September 17, 2018 | By: | /s/ | ||||
Bruce R. Foster , Chief Financial Officer | ||||||
(Principal Financial Officer and Principal Accounting Officer) | ||||||
EXHIBIT INDEX
Exhibit Number | Description |
| 2.1 | Term Sheet, dated November 8, 2016, by and among Asta Funding, Inc., ASFI Pegasus Holdings, LLC, Fund Pegasus, LLC, Pegasus Funding, LLC, Pegasus Legal Funding, LLC, Max Alperovich and Alexander Khanas (incorporated by reference to Exhibit 10.1 to Asta Funding, Inc.’s Current Report on Form 8-K filed November 15, 2016). | |
| Certificate of Incorporation of Asta Funding, Inc. (incorporated by reference to Exhibit 3.1 to Asta Funding, Inc.’s Quarterly Report on Form 10-Q filed on August 9, 2016). | |
| ||
3.2 | Certificate of Amendment to Certificate of Incorporation of Asta Funding, Inc. (incorporated by reference to Exhibit 3.1(a) to Asta Funding, Inc.’s Quarterly Report on Form 10-QSB filed on May 15, 2002). | |
3.3 | Certificate of Designation of Series A Junior Preferred Stock of Asta Funding, Inc. (incorporated by reference to Exhibit 3.1 to Asta Funding, Inc.’s Current Report on Form 8-K filed on August 24, 2012). | |
| | ||
3.4 | Certificate of Elimination of the Series A Junior Preferred Stock of Asta Funding, Inc. (incorporated by reference to Exhibit 3.1 to Asta Funding, Inc.’s Current Report on Form 8-K filed on May 5, 2017). | |
3.5 | Certificate of Designation of Series A Junior Participating Preferred Stock of Asta Funding, Inc. (incorporated by reference to Exhibit 3.2 to Asta Funding, Inc.’s Current Report on Form 8-K filed on May 5, 2017). | |
3.6 | Amended and Restated By-laws of Asta Funding, Inc. (incorporated by reference to Exhibit 3.3 to Asta Funding, Inc.’s Quarterly Report on Form 10-Q filed on August 9, 2016). | |
3.7 | Amendment to Amended and Restated By-laws of Asta Funding, Inc. (incorporated by reference to Exhibit 3.1 to Asta Funding’s Current Report on Form 8-K filed on January 9, 2017). | |
4.1 | Rights Agreement, dated May 5, 2017, by and between Asta Funding, Inc. and American Stock Transfer & Trust Company, LLC. (incorporated by reference to Exhibit 4.1 to Asta Funding Inc.’s Current Report on Form 8-K filed on May 5, 2017). | |
10.1 | Settlement Agreement, dated January 6, 2017, by and among Asta Funding. Inc., The Mangrove Partners Master Fund Ltd., The Mangrove Partners Fund, L.P., Mangrove Partners Fund (Cayman), Ltd., Mangrove Partners, Mangrove Capital and Nathaniel August and, solely for purposes of Section 1(c), 1(d), 2 and 8 thereof, Gary Stern, Ricky Stern, Emily Stern, Arthur Stern, Asta Group, incorporated and GMS Family Investors LLC (incorporated by reference to Exhibit 10.1 to Asta Funding, Inc.’s Current Report on Form 8-K filed on January 9, 2017). | |
10.2 | Voting Agreement, dated January 6, 2017, by and among Asta Funding, Inc., Gary Stern, Ricky Stern, Emily Stern, Asta Group, incorporated and GMS Family Investors LLC (incorporated by reference to Exhibit 10.2 to Asta Funding, Inc.’s Current Report on Form 8-K filed on January 9, 2017). | |
| 10.3 | Settlement Agreement, dated January 6, 2017, by and among Asta Funding, Inc., The Mangrove Partners Master Fund, Ltd. and, for limited purposes therein, Gary Stern, Emily Stern, Arthur Stern, Asta Group, Incorporated and GMS Family Investors LLC (incorporated by reference to Exhibit 10.1 to Asta Funding, Inc.’s Current Report on Form 8-K filed January 9, 2017). | |
31.1* | Certification of | |
| | ||
31.2* | Certification of | |
| | ||
32.1** | Certification of the | |
| | ||
32.2** | Certification of | |
101.INS | XBRL Instance. | |
101.SCH | XBRL Taxonomy Extension Schema. | |
101.CAL | XBRL Taxonomy Extension Calculation. | |
101.DEF | XBRL Taxonomy Extension Definition. | |
101.LAB | XBRL Taxonomy Extension Labels. | |
101.PRE | XBRL Taxonomy Extension Presentation. | |
* | Filed herewith. |
** | This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (“Exchange Act”), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended or the Exchange Act. |
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