Asta Funding (ASFI) 10-Q/A 2014 Q3 Quarterly report (amended)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q/A

Amendment #1

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                    

Commission file number: 001-35637

ASTA FUNDING, INC.

(Exact name of registrant as specified in its charter)

Delaware	22-3388607
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
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 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. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	¨

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, the registrant had 13,060,839 common shares outstanding.

EXPLANATORY NOTE

We are filing this Amendment No. 1 on Form 10-Q/A to revise and restate the following items of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 as originally filed with the Securities and Exchange Commission on August 18, 2014 (the “Original Form 10-Q”): (i) Item 1 of Part I “Financial Information,” (ii) Item 2 of Part I, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” (iii) Item 4 of Part I, “Controls and Procedures,” and (iv) Item 6 of Part II, “Exhibits”, and we have also updated the signature page, the certifications of our Chief Executive Officer and Chief Financial Officer in Exhibits 31.1, 31.2, 32.1 and 32.2, and our financial statements formatted in Extensible Business Reporting Language (XBRL) in Exhibit 101. No other sections were affected, but for the convenience of the reader, this report on Form 10-Q/A restates in its entirety, as amended, our Original Form 10-Q. This report on Form 10-Q/A is presented as of the filing date of the Original Form 10-Q and, except where otherwise noted, does not reflect events occurring after that 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 misstatement as an adjustment to the beginning balance of retained earnings of approximately $3.7 million as of September 30, 2013, in this quarterly report for the period ended June 30, 2014. See Note 2 to notes to condensed consolidated financial statements for more information.

ASTA FUNDING, INC.

INDEX TO FORM 10-Q

Part I. Financial Information	3
Item 1. Condensed Consolidated Financial Statements (As Restated and Revised)	3
Condensed Consolidated Balance Sheets as of June 30, 2014 and September 30, 2013 (unaudited)	3
Condensed Consolidated Statements of Operations for the three and nine month periods ended June  30, 2014 and 2013 (unaudited)	4
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine month periods ended June 30, 2014 and 2013 (unaudited)	5
Condensed Consolidated Statements of Stockholders’ Equity for the nine month periods ending June  30, 2014 and 2013 (unaudited)	6
Condensed Consolidated Statements of Cash Flows for the nine month periods ended June  30, 2014 and 2013 (unaudited)	7
Notes to Condensed Consolidated Financial Statements (unaudited)	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	42
Item 3. Quantitative and Qualitative Disclosures about Market Risk	57
Item 4. Controls and Procedures	57
Part II. Other Information	58
Item 1. Legal Proceedings	58
Item 1A. Risk Factors	58
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds	58
Item 3. Defaults Upon Senior Securities	58
Item 4. Mine Safety Disclosures	58
Item 5. Other Information	58
Item 6. Exhibits	59
Signatures	60
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ASTA FUNDING, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)

	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
Total assets	$	213,906,000		$	211,530,000
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			—
Total liabilities		33,241,000			38,246,000
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 – 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	)
Total stockholders’ equity		180,665,000			173,284,000
Total liabilities and stockholders’ equity	$	213,906,000		$	211,530,000

(1) For discussion on the adjustments, see Note 2 – Restatement of Quarterly Financial Statements and Revision of Prior Period Financial Statements.

See Notes to Condensed Consolidated Financial Statements

3

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		—
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
		34,696,000		11,637,000			50,928,000		31,589,000
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
		27,016,000		17,249,000			40,928,000		30,252,000
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
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
Net income (loss) attributable to Asta Funding, Inc.	$	4,687,000	$	(3,369,000	)	$	5,709,000	$	718,000
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

(1) For discussion on the adjustments, see Note 2 – Restatement of Quarterly Financial Statements and Revision of Prior Period Financial Statements.

See Notes to Condensed Consolidated Financial Statements

4

ASTA FUNDING, INC.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(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)
Comprehensive income (loss) is as follows:
Net income (loss)	$	4,707,000		$	(3,316,000	)	$	6,192,000		$	894,000
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	)
Other comprehensive income (loss)		325,000			(643,000	)		696,000			(938,000	)
Total comprehensive income (loss)	$	5,032,000		$	(3,959,000	)	$	6,888,000		$	(44,000	)

(1) For discussion on the adjustments, see Note 2 – Restatement of Quarterly Financial Statements and Revision of Prior Period Financial Statements.

See Notes to Condensed Consolidated Financial Statements

5

ASTA FUNDING, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

	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
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	)
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
(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.

See Notes to Condensed Consolidated Financial Statements

6

ASTA FUNDING, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	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	)
Net cash provided by operating activities		1,771,000			11,095,000
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	)
Net cash (used in) provided by investing activities		(3,016,000	)		32,162,000
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	)
Net cash used in financing activities		(7,917,000	)		(9,958,000	)
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
Cash and cash equivalents at end of period	$	26,017,000		$	38,252,000
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			—

(1) For discussion on the adjustments, see Note 2 – Restatement of Quarterly Financial Statements and Revision of Prior Period Financial Statements.

See Notes to Condensed Consolidated Financial Statements

7

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 — 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”), VATIV Recovery Solutions LLC (“VATIV”), ASFI Pegasus Holdings, LLC (“APH”), Fund Pegasus, LLC (“Fund Pegasus”), GAR National Disability Advocates, LLC (“GAR National Disability”) (formerly known as AGR Disability Help Center, LLC) and other subsidiaries, not all wholly owned (collectively, the “Company”), is engaged in the business of purchasing, managing for its own account and servicing distressed consumer receivables, including charged-off receivables, semi-performing receivables and performing receivables. 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. Performing receivables are accounts where the debtor is making regular monthly payments that may or may not have been delinquent in the past. Distressed 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 from their face values. The discounts are 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 the Company is assigned the revenue stream from the proceeds received.

The Company owns 80% of Pegasus Funding, LLC (“Pegasus”), which invests in funding personal injury claims and 80% of CBC Settlement Funding, LLC (“CBC”), which invests in structured settlements (see Note 6: Acquisition of CBC).

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, the condensed consolidated statements of operations for the nine and three month periods ended June 30, 2014 and 2013, the condensed consolidated statements of comprehensive income (loss) for the nine and three month periods ended June 30, 2014 and 2013, the condensed consolidated statement of stockholders’ equity as of and for the nine months ended June 30, 2014 and 2013 and the condensed consolidated statements of cash flows for the nine month periods ended June 30, 2014 and 2013, are unaudited. The September 30, 2013 financial information included in this report has been extracted from our audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2013. 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, the results of operations for the nine and three month periods ended June 30, 2014 and 2013 and cash flows for the nine month periods ended June 30, 2014 and 2013 have been made. The results of operations for the nine and three month periods ended June 30, 2014 and 2013 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 of the VIE via its ownership and service contract. Palisades XVI holds the Great Seneca portfolio valued at $21.6 million as of June 30, 2014. See Note 11-Debt,Non-Recourse Debt-Bank of Montreal 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 10-01 of Regulation S-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, filed with the Securities and Exchange Commission.

8

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 America 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 Standards

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued an update to ASC 606, “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, including interim periods within that reporting period. Early application is not permitted. We are currently evaluating the impact this update will have on our consolidated financial statements as well as the expected adoption method.

In June 2014, the FASB issued ASU 2014-11, “Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.” 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 Update are effective for public business entities for the first interim or annual period 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. The Company reviewed this ASU and determined that it did not have a material impact on its consolidated financial statements.

Concentration of Credit Risk — Cash

Cash balances are maintained at various high credit quality depository institutions and are insured by the Federal Deposit Insurance Corporation (“FDIC”). The Company believes it is not exposed to any significant credit risk for cash.

Reclassifications

Certain items in the three months and nine months ended June 30, 2013 condensed consolidated financial statements have been reclassified to conform to the current period’s presentation, primarily related to certain balance sheet and statement of operations items.

9

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 2—Restatement of Quarterly Financial Statements and Revision of Prior Period Financial Statements

Restatement of Quarterly Financial Statements for the Period Ended June 30, 2014

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.

10

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

11

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

12

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

13

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

14

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

15

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

16

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

17

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, there were seven investments, five of which were in a net unrealized loss position. 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.

18

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 5 — 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.

The Company may account for its investments in consumer receivable portfolios, using either:

• the interest method; or

• the cost recovery method.

The Company accounts for certain of its investments in finance receivables using the interest method under the guidance of ASC 310-30. Under the guidance of ASC 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 under 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 and once a static pool is established for a quarter, individual accounts receivable were 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 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 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”).

19

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 within the same fiscal quarter, that generally meet the following characteristics:

• same issuer/originator;

• same underlying credit quality;

• similar geographic distribution of the accounts;

• similar age of the receivable; and

• same type of asset class (credit cards, telecommunication, etc.)

The Company uses a variety of qualitative and quantitative factors to estimate collections and the timing thereof. This analysis includes the following variables:

• the number of collection agencies previously attempting to collect the receivables in the portfolio;

• the average balance of the receivables, as higher balances might be more difficult to collect while low balances might not be cost effective to collect;

• the age of the receivables, as older receivables might be more difficult to collect or might be less cost effective. On the other hand, the passage of time, in certain circumstances, might result in higher collections due to changing life events of some individual debtors;

• past history of performance of similar assets;

• time since charge-off;

• payments made since charge-off;

• the credit originator and its credit guidelines;

• our ability to analyze accounts and resell accounts that meet our criteria for resale;

• the locations of the debtors, as there are better states to attempt to collect in and ultimately the Company has better predictability of the liquidations and the expected cash flows. Conversely, there are also states where the liquidation rates are not as favorable and that is factored into our cash flow analysis;

• financial condition of the seller;

• jobs or property of the debtors found within portfolios. In the Company’s business model, this is of particular importance as debtors with jobs or property are more likely to repay their obligation and conversely, debtors without jobs or property are less likely to repay their obligation; and

• the ability to obtain timely customer statements from the original issuer.

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.

20

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:

				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	%

(1) Includes $14.8 million derived from fully amortized 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
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 fully amortized pools.

21

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 5 — Consumer Receivables Acquired for Liquidation (Restated 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	%

(1) Includes $5.1 million derived from fully amortized pools.

	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	%

(1) Includes $7.3 million derived from fully amortized pools.

22

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 three 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

(1) Includes portfolios that became zero basis during the period, removal of zero basis portfolios from the accretable yield calculation and other immaterial impairments and accretions based on the extension of certain collection curves.

During the nine and three month periods ended June 30, 2014, the Company purchased $53.0 million and $35.9 million, respectively, of face value portfolios, at a cost of $3.7 million and $2.7 million, respectively. During both the nine and three month periods ended June 30, 2013, the Company purchased $53.5 million of face value receivables at a cost of $3.3 million.

23

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 table summarizes collections on a gross basis as received by the Company’s third-party collection agencies and attorneys, less commissions and direct costs for the nine and three month periods ended June 30, 2014 and 2013, respectively.

	For the Nine Months Ended June 30,
	2014		2013
Gross collections (1)	$	51,884,000	$	66,371,000
Commissions and fees (2)		21,141,000		24,333,000
Net collections	$	30,743,000	$	42,038,000
	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 third-party collection agencies and attorneys, collections from in-house efforts, and collections represented by account sales.

(2) Commissions and fees are the contractual commission earned by third party collection agencies and attorneys, and direct costs associated with the collection effort, generally court costs. Includes a 3% fee charged by a servicer on gross collections received by the Company in connection with one portfolio. Such arrangement was consummated in December 2007. The fee is charged for asset location, skip tracing and ultimately suing debtors in connection with this portfolio purchase.

24

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.

25

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 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.

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

(1) See Note 12 — Other Debt — CBC

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

26

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 8 — Other Investments

Personal Injury Claims

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, through Pegasus, earned $1.7 million and $5.7 million, in interest and fees during the three and nine month periods ending June 30, 2014, respectively, compared to $2.3 million and $4.9 million, respectively, during the three and nine month periods ending June 30, 2013. The Company had a net invested balance of $31.7 million and $35.8 million on June 30, 2014 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 million 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

Matrimonial Claims (included in Other Assets)

On May 18, 2012, the Company formed BP Case Management, LLC (“BPCM”), a joint venture with California-based Balance Point Divorce Funding, LLC (“BP Divorce Funding”). BPCM provides non-recourse funding to a spouse in a matrimonial action. The Company provided a $1.0 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 contract term has been extended an additional six months to October 2014. The revolving line of credit is collateralized by BP Divorce Funding’s profit share in BPCM and other assets. As of June 30, 2014, 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. There was no income recognized in the first nine months of fiscal years 2014 and 2013.

Note 9 — Furniture & Equipment

Furniture and equipment consist of the following as of the dates indicated:

	June 30, 2014		September 30, 2013
Furniture	$	310,000	$	310,000
Equipment		3,622,000		3,622,000
Software		1,211,000		1,211,000
Leasehold improvements		99,000		99,000
		5,242,000		5,242,000
Less accumulated depreciation		4,586,000		4,136,000
Balance, end of period	$	656,000	$	1,106,000

27

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 of Montreal (“BMO”)

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 a $300 million portfolio purchase in March 2007 (the “Portfolio Purchase”). 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 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 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 Palisade 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 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 included a voluntary prepayment of $1,866,036 provided from funds of the Company. Accordingly, Palisades XVI will be 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.

With the payment of the Remaining Amount and upon completion of the documents granting the Palisades XVI Income Interest, including a written confirmation from BMO that the obligation has been paid 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, in the amount of approximately $26.1 million in the third quarter of fiscal year 2014.

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 (“Security Agreement”) among the parties to the Loan Agreement. As of June 30, 2014, the Company has not used this facility.

28

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 12 — Other Debt — CBC

The Company assumed $25.9 million of debt related to the CBC acquisition (see Note 6 — Acquisition of CBC) on December 31, 2013. On the same date, the Company paid down $2.5 million of the debt. On March 27, 2014, CBC entered into an amendment whereby it increased its revolving line of credit from $12.5 million to $15.0 million, the interest rate floor was reduced from 5.5% to 4.75% and the commitment was extended to February 28, 2015. The amendment also included changes in carrier concentration ratios and removal of the personal guarantees of the general managers and non-controlling interest partners. As of June 30, 2014, the debt amounted to $27.4 million, which consists of a $14.4 million drawdown from a line of credit ($0.6 million available) from an institutional source and $13.0 million notes 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 other debt at June 30, 2014:

	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 of credit from $15.0 million to $20.0 million and the maturity date was changed to December 31, 2014.

Note 13 — Commitments and Contingencies

Employment Agreements

In January 2007, the Company entered into an employment agreement (the “Employment Agreement”) with Gary Stern, its Chairman, President and Chief Executive, which expired on December 31, 2009. This Employment Agreement was not renewed and Mr. Stern is continuing in his current roles at the discretion of the Board of Directors until a new agreement is signed. The two CBC operating principals entered into renewable two-year employment contracts at the time of acquisition (see Note 6, Acquisition of CBC).

Leases

The Company leases its facilities in Englewood Cliffs, New Jersey, Houston, Texas, New York, New York and Conshohocken, Pennsylvania. Please refer to the Company’s consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the fiscal year ended September 30, 2013, as filed with the Securities and Exchange Commission, for additional information. CBC is a party to a lease agreement for a facility located in Conshohocken, Pennsylvania. The lease expires in August 2014. CBC is not renewing the lease. Rather it is planning on relocating to a different (leased) facility within the same town.

Litigation

In the ordinary course of its business, the Company is involved in numerous legal proceedings. The Company regularly initiates collection lawsuits, using its network of third party law firms, against consumers. Also, consumers occasionally initiate litigation against the Company, in which they allege that the Company has violated a federal or state law in the process of collecting their account. The Company does not believe that these matters are material to its business or financial condition. The Company is not involved in any material litigation in which it is a defendant.

29

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 14 — 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 ASC 310-30. Under the guidance of ASC 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 under 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 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 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.

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 reward with respect to such claimant’s claim. Open case revenue is estimated, recognized and accrued at a rate based on the expected realization and underwriting guidelines and facts and circumstances for each individual case. These personal injury claims are non-recourse. When a case is closed and 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.

The funding of BPCM matrimonial actions is on a non-recourse basis. BPCM income is recognized under the cost recovery method.

Impairments

As previously discussed, the Company has switched from the interest method to the cost recovery method as of October 1, 2013 on its current inventory of portfolios. In accordance with ASC 310-30, 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 adjustment of the internal rate of return while decreases in expected cash flows are recognized as impairments. 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 it is determined a portfolio accounted for on the cost recovery method will not recover the current book value 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.

30

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 of the timing and amount of cash flows to be generated by our portfolio purchases are based on the following attributes:

• the type of receivable, the location of the debtor and the number of collection agencies previously attempting to collect the receivables in the portfolio. The Company has found that there are better states to try to collect receivables and it factors in both better and worse states when establishing its initial cash flow expectations.

• the average balance of the receivables influences our analysis in that lower average balance portfolios tend to be more collectible in the short-term and higher average balance portfolios are more appropriate for our law suit strategy and thus yield better results over the longer term. As the Company has significant experience with both types of balances, it is able to factor these variables into our initial expected cash flows;

• the age of the receivables, the number of days since charge-off, any payments since charge-off, and the credit guidelines of the credit originator also represent factors taken into consideration in our estimation process. For example, older receivables might be more difficult and/or require more time and effort to collect;

• past history and performance of similar assets acquired. As the Company purchase portfolios of like assets, it accumulates a significant historical data base on the tendencies of debtor repayments and factor this into our initial expected cash flows;

• the Company’s ability to analyze accounts and resell accounts that meet its criteria;

• jobs or property of the debtors found within portfolios. With our business model, this is of particular importance. Debtors with jobs or property are more likely to repay their obligation through the lawsuit strategy and, conversely, debtors without jobs or property are less likely to repay their obligation. The Company believes that debtors with jobs or property are more likely to repay because courts have mandated the debtor must pay the debt. Ultimately, the debtor with property will pay to clear title or release a lien. The Company also believes that these debtors generally might take longer to repay and that is factored into our initial expected cash flows; and

• credit standards of the issuer.

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 over the amount paid, was accreted into income recognized on finance receivables accounted for on the interest method over the expected remaining life of the portfolio.

31

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)

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 third party collection agencies and attorney networks.

Note 15 — Income Taxes

Deferred federal and state taxes principally arise from (i) recognition of finance income collected for tax purposes, but not yet recognized for financial reporting; (ii) provision for impairments/credit losses; and (iii) stock based compensation expense for stock option grants and restricted stock awards recorded in the statement 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 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% and (40.9)%, respectively. The provision for income tax expense for the nine month periods ended June 30, 2014 and 2013 reflects income tax expense at an effective rate of 36.7% and 35.4%, respectively.

The corporate federal income tax returns of the Company for the years 2009 through 2013 are subject to examination by the IRS, generally for three years after they are filed. The state income 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.

32

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 16 — Net Income (Loss) per Share - (Restated and Revised)

Basic per share data is calculated by dividing net income 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
Effect of Dilutive Stock				228,543		(0.01	)				271,135		(0.01	)
Diluted	$	5,709,000		13,208,015	$	0.43		$	718,000		13,217,656	$	0.05

(1) Net income and per share data have been restated as explained in Note 2 – Restatement of Quarterly Financial Statements and Revision of Prior Period Financial Statements.

(2) Net income and per share data have been revised as explained in Note 2 – Restatement of Quarterly Financial Statements and Revision of Prior Period Financial Statements.

(3) At June 30, 2014, 1,088,304 options at a weighted average exercise price of $11.88 were not included in the diluted earnings per share calculation as they were antidilutive.

(4) At June 30, 2013, 575,669 options at a weighted average exercise price of $8.07 were not included in the diluted earnings per share calculation as they were antidilutive.

The following table presents the computation of basic and diluted per share data for the three months ended June 30, 2014 and 2013:

		RESTATED(1)									REVISED(2)
		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	)
Effect of Dilutive Stock					229,821			(0.01	)						—			0.00
Diluted		$	4,687,000		13,214,703		$	0.35			$	(3,369,000	)		12,954,455		$	(0.26	)

(1) Net income and per share data have been restated as explained in Note 2 – Restatement of Quarterly Financial Statements and Revision of Prior Period Financial Statements.

(2) Net income and per share data have been revised as explained in Note 2 – Restatement of Quarterly Financial Statements and Revision of Prior Period Financial Statements.

33

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 17 — 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 statement of operations, rather than a disclosure in the notes to the Company’s consolidated financial statements.

In February 2014, the Compensation Committee of the Board of Directors of the Company (“Compensation Committee”) granted 5,000 options to a former employee for past services. 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	0.06	%
Expected term (years)	5.9
Expected volatility	35.3	%
Dividend yield	0.00	%

In December 2013, the Compensation Committee granted 156,700 stock options, of which 70,000 options were awarded to the Officers of the Company and the remaining 86,700 stock options were awarded to 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:

Risk-free interest rate	0.08	%
Expected term (years)	6.5
Expected volatility	98.3	%
Dividend yield	0.00	%

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 75,000 shares were issued to six non-employee directors of the Company. The exercise price of these options, issued on December 18, 2012, 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:

Risk-free interest rate	0.16	%
Expected term (years)	6.0
Expected volatility	101.0	%
Dividend yield	1.67	%

In addition, the Company granted 102,321 restricted shares to the Chief Executive Officer of the Company. The shares vest in three equal annual installments.

34

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 Plan”), which was approved by the stockholders of the Company on March 21, 2012. The 2012 Plan replaces 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 371,700 shares and an award of 102,321 shares of restricted stock, leaving 1,525,979 shares available as of June 30, 2014. As of June 30, 2014, approximately 49 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 allows 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 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 authorizes 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.

35

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 18 — Stock Option Plans (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,
	2014					2013
	Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price
Outstanding options at the beginning of period		1,622,771		$	11.31		1,499,471		$	11.27
Options granted		161,700			8.48		210,000			9.36
Options exercised		(11,500	)		3.46		(29,500	)		3.51
Options forfeited/canceled		(210,767	)		14.87		(50,000	)		7.77
Outstanding options at the end of period		1,562,204		$	10.66		1,629,971		$	11.27
Exercisable options at the end of period		987,198		$	11.97		1,112,037		$	12.57
	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
Outstanding options at the end of period		1,562,204		$	10.66		1,629,971		$	11.27
Exercisable options at the end of period		987,198		$	11.97		1,112,037		$	12.57

The following table summarizes information about the 2012 Plan, 2002 Plan, and the Equity Compensation Plan outstanding options as of June 30, 2014:

	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
		1,562,204		5.8	$	10.66		987,198	$	11.97

36

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 18 — Stock Option Plans (continued)

The Company recognized $1,046,000 and $367,000 of compensation expense related to stock option during the nine and three month periods ended June 30, 2014, respectively. The Company recognized $1,307,000 and $532,000 of compensation expense related to stock options during the nine and three months ended June 31, 2013. As June 30, 2014, there was $1,796,000 of unrecognized compensation cost related to stock option awards. The weighted average period over which such costs are expected to be recognized is 1.45 years.

The intrinsic value of the outstanding and exercisable options as of June 30, 2014 was approximately $391,000 and $281,000, respectively. The weighted average remaining contractual life of exercisable options is 4.3 years. The intrinsic and the fair value of the options exercised during the nine month period ended June 30, 2014 was approximately $57,000 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. The fair value of the stock options that vested during the nine and three month periods ended June 30, 2014 was approximately $743,000 and $137,000, respectively. The fair value of the options that vested during the nine and three month periods ended June 30, 2013 was approximately $1,259,000 and $144,000, respectively. The fair value of the awards granted during the nine 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, 2013 was approximately $1,702,000 and $341,000, 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		—			—		—			—
Unvested at the end of period		68,214		$	9.57		102,321		$	9.57
	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		—			—		—			—
Unvested at the end of period		68,214		$	9.57		102,321		$	9.57

37

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 18 — Stock Option Plans (continued)

The Company recognized $244,000 and $82,000 of compensation expense related to the restricted stock awards during the nine and three month periods ended June 30, 2014, 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, there was $479,000 of 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 no restricted stock awards granted during the first nine months of fiscal year 2014. The fair value of the restricted stock awards granted during the first quarter of fiscal year 2013 was approximately $979,000. The fair value of the awards vested during the nine month periods ended June 30, 2014 and 2013 was $326,000 and $83,000, 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 and $449,000, respectively, in compensation expense for the nine and three month periods ended June 30, 2014, for the stock options and restricted stock grants. The Company recognized an aggregate of $1,498,000 and $613,000, respectively, for the nine and three month periods ended June 30, 2013, for the stock options and restricted stock grants. As of June 30, 2014, there was a total of $2,275,000 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 — Stockholders’ Equity and Prior Period Adjustments

As more fully disclosed in Note 2, the Company 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. 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, 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, consistent with the guidance in ASC Topic 250, we have accounted for these errors as a restatement of prior period financial statements.

There were no dividends declared or paid during the nine months 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.

On March 9, 2012, 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 million of the Company’s common stock, which was effective through March 11, 2013. During the nine and three month period ended June 31, 2013 the Company purchased approximately 172,000 and 0 shares, respectively, at an aggregate cost of approximately $1,574,000 and $0, respectively, under the plan. The Plan expired in March 2013.

38

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 20 — Fair Value of Financial Measurements and Disclosures (Restated and Revised)

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:

	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		—		—

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:

Available-for-sale investments — The available-for-sale securities consist of mutual funds that are valued based on quoted prices in active markets.

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: 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 of Montreal — carried a variable rate. The fair value at September 30, 2013 was based on the discounted weighted average forecasted future collections of the Portfolio Purchase.

Other debt CBC, revolving line of credit — The Company determined the fair value based on similar instruments 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.

39

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 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.

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 nine month period ended June 30, 2014. The Company had no Level 2 or Level 3 available-for-sale investments during the first nine months of fiscal year 2014.

The following table sets forth the Company’s quantitative information about its Level 3 fair value measurements as of June 30, 2014:

	Fair Value		Valuation Technique		Unobservable Input		Rate
Structured settlements at fair value	$	35,892,000		Discounted cash flow		Discount rate		5.5	%

The changes in structured settlements at fair value using significant unobservable inputs (Level 3) during the nine months ended June 30, 2014 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

40

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

Realized and unrealized gains and losses included in earnings in the accompanying consolidated statements of income for the nine months ended June 30, 2014 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

The changes in structured settlements at fair value using significant observable inputs (Level 3) during 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 in the accompanying consolidated statements of income for the three months ended June 30, 2014 are reported in the following revenue categories:

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

41

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Caution Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q 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, 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, 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-K for the fiscal year ended September 30, 2013 and Item 1A of this Quarterly Report on Form 10-Q.

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

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”), Fund Pegasus, LLC (“Fund Pegasus”), Pegasus Funding, LLC (“Pegasus”), CBC Settlement Funding, LLC (“CBC”) and other subsidiaries, not all wholly owned (the “Company,” “we” or “us”), is engaged in the business of acquiring, managing, servicing and recovering on portfolios of consumer receivables. These portfolios generally consist of one or more of the following types of consumer receivables:

• charged-off receivables — accounts that have been written-off by the originators and may have been previously serviced by collection agencies;

• semi-performing receivables — accounts where the debtor is currently making partial or irregular monthly payments, but the accounts may have been written-off by the originators; and

• performing receivables — accounts where the debtor is making regular monthly payments that may or may not have been delinquent in the past.

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 and servicing expenses. After purchasing a portfolio, we actively monitor its performance and review and adjust our collection and servicing strategies accordingly.

We purchase receivables from credit grantors and others through (i) privately negotiated direct sales 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, collection agencies, investors and our financing sources;

• brokers who specialize in the sale of consumer receivable portfolios; and

• other sources.

42

Substantially all of the consumer receivables included in the accounts acquired for liquidation are charged-off receivables.

Litigation Funding Business

On December 28, 2011, the Company purchased an 80% interest in Pegasus. Pegasus Legal Funding (“PLF”) holds the other 20% interest. The Company is committed to loan up to $21.8 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 be distributed at 80% to the Company and 20% to PLF. These distributions will be 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, the Company reserves the right to terminate 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 to Fund Pegasus, LLC and PLF, respectively.

On May 18, 2012, we announced the formation of BP Case Management, LLC (“Balance Point”), a joint venture (the “Venture”) with California-based Balance Point Divorce Funding, LLC (“Balance Point Management”). 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’s profits and losses will be distributed 60% to us and 40% to Balance Point Management, after the return of our investment on a case by case basis and after a 15% preferred return to us. Our initial investment in the Venture consists 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 our 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 our 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 our priority to a 15% preferred return. As of June 30, 2014, we have invested $1.8 million, net of reserve charges, in cases managed by this Venture.

We provided a $1.0 million revolving line of credit to partially fund Balance Point Management’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. The revolving line of credit is collateralized by Balance Point Management’s profits share in the Venture and other assets. At June 30, 2014, the balance on the revolving line of credit was approximately $1.0 million. The term of the loan was to end in May 2014 but was extended an additional six months.

Structured Settlement 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 from individuals in exchange for a lump sum payment. The operating principals of CBC, William J. Skyrm, Esq. and James Goodman, have over 30 years combined experience in the structured settlement industry.

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.

43

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 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 used 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 and we do not possess the same expertise, or we cannot reasonably estimate the timing of the cash flows, we have utilized 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”), Receivables — Loans and Debt Securities Acquired with Deteriorated Credit Quality, (“ASC 310-30”). Under the guidance of ASC 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 under the circumstances.

As further discussed under “Item 4—Controls and Procedures” in this Form 10-Q/A for 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 application 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.

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 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 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”)

44

We currently consider for aggregation portfolios of accounts, purchased within the same fiscal quarter, that generally have the following characteristics:

• same issuer/originator

• same underlying credit quality

• similar geographic distribution of the accounts

• similar age of the receivable and

• same type of asset class (credit cards, telecommunications, etc.)

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:

• the number of collection agencies previously attempting to collect the receivables in the portfolio;

• the average balance of the receivables;

• the age of the receivables (as older receivables might be more difficult to collect or might be less cost effective);

• past history of performance of similar assets — as we purchase portfolios of similar assets, we believe we have built significant history on how these receivables will liquidate and cash flow;

• number of months since charge-off;

• payments made since charge-off;

• the credit originator and their credit guidelines;

• the locations of the debtors as there are better states to attempt to collect in and ultimately we have better predictability of the liquidations and the expected cash flows. Conversely, there are also states where the liquidation rates are not as good and that is factored into our cash flow analysis;

• financial wherewithal of the seller;

• jobs or property of the debtors found within portfolios-with our business model, this is of particular importance as debtors with jobs or property are more likely to repay their obligation and conversely, debtors without jobs or property are less likely to repay their obligation ; and

• the ability to obtain customer statements from the original issuer.

45

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 investment 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. Open case revenue is estimated, recognized and accrued at a rate based on the expected realization and underwriting guidelines and facts and circumstances for each individual case. These personal injury claims are non-recourse. 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.

When a case is closed and cash is received for the advance provided 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 funding of BPCM matrimonial actions is on a non recourse basis. BPCM revenues are recognized under the cost recovery method.

CBC purchases 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.

46

In the following discussions, most percentages and dollar amounts have been rounded to aid presentation. As a result, all figures are approximations.

Results of Operations

The nine-month period ended June 30, 2014, compared to the nine-month period ended June 30, 2013

Finance income (Restatedand revised). For the nine month period ended June 30, 2014, finance income decreased $10.2 million, or 40.9%, to $14.8 million from $25.0 million for the nine month period ended June 30, 2013. Finance income decreased primarily due to the lower level 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 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.

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, 2013. Income recognized from zero based revenue portfolios was $14 million for the nine month period 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 due to the lower level of portfolio purchases and, as a result, an increased percentage of our portfolio balances are 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.

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 income. 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 $2.9 million in the period ended June 30, 2014, which consists of $1.5 million of interest income on structured settlements and $1.5 million of unrealized gains on structured settlements. The income is for the period January 1, 2014 through June 30, 2014, the period CBC was included in our results of operations. There is no prior year comparative data.

Other income. Other income consists of interest and dividend income, realized gains and losses on available for sale transactions, service fee income and fee income from the new disability advocacy group, GAR National Disability Advocates.

General and administrative expenses. During the nine 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.

47

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 CBC 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.

48

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 million as compared to $9.0 million 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.

49

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 benefit in the current period is primarily the result of a higher pre-tax loss, reflecting the increase in impairments recorded in the current period compared to the prior year period.

Income attributable to non-controlling interest. (as reported)The 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 the three month period ended June 30, 2014 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 million for the three month period ended June 30, 2014 as compared to a net loss of $3.4 million for the three month period ended June 30, 2013.

Net income attributable to Asta Funding, Inc. (as reported)Net income was $5.5 million for the three month period ended June 30, 2014 as compared to a net loss of $2.7 million for the three month period ended June 30, 2013.

50

Liquidity and Capital Resources

Our primary sources of cash from operations include collections on the receivable portfolios that we have acquired, personal injury claims settled, and collections on structured settlements Our primary uses of cash include our acquisition of receivable portfolios, investments in personal injury claims, investments in structured settlement, interest payments, costs involved in the collections 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 provide the funds necessary for the acquisition of receivables, investments in personal injury claims and general operations of the business.

Receivables Financing Agreement

In March 2007, Palisades XVI borrowed approximately $227 million under the Receivables Financing Agreement, 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, 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. 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 Agreement 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 be 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. 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 the collections from the portfolio purchase.

With the payment of the Remaining Amount and upon completion of the documents granting the Palisades XVI Income Interest, including a written confirmation from BMO that the obligation has been paid in full, Palisades XVI has been released from further debt obligations from the RFA. We have 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 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 May 18, 2012, we formed BP Case Management, LLC (“BPCM”), a joint venture with California-based Balance Point Divorce Funding, LLC (“BP Divorce Funding”). BPCM provides non-recourse funding to a spouse in a matrimonial action. The Company provides a $1.0 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 revolving line of credit is collateralized by BP Divorce Funding’s profit share in BPCM and other assets. The term of the loan was to end in May 2014, but was extended an additional six months.

51

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, 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. Through the transaction we acquired debt that totaled $23 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. As of June 30, 2014, the debt approximated $27.4 million. On July 15, 2014, CBC entered into an amendment whereby it increased its revolving line of credit from $15.0 million to $20.0 million and the maturity date was changed to December 31, 2014.

Cash Flow (Restated and Revised)

As of June 30, 2014, our cash decreased $9.2 million to $26.0 million from $35.2 million at September 30, 2013.

Net cash provided by operating activities was $1.8 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 nine month period ended June 30, 2014 compared to $32.2 million provided by investing activity during the nine months ended June 30, 2013, reflecting proceeds from maturities of certificates of deposit in the prior fiscal year, an increase in net purchases of available-for-sale securities and the CBC acquisition in the current period, partially offset by a decrease in the personal injury claim investment. Net cash used in financing activities decreased from $10.0 million in the nine month period ended June 30, 2013 to $7.9 million in the nine month period ended June 30, 2014. This decrease is attributable to the discontinuation of dividend payments and treasury stock purchases in the current nine month period.

Our cash requirements have been and will continue to be significant and have, in the past, depended on external financing to acquire consumer receivables and operate the business. Significant requirements include repayments under our debt facilities, purchase of consumer receivable portfolios, interest payments, costs involved in the collections of consumer receivables, 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. We believe we will be less dependent on a credit facility in the short-term as our cash flow from operations will be sufficient to purchase portfolios and operate the business. However, as the collection environment remains challenging, we may seek additional financing.

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 will continue to consider other 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.

52

The following tables summarize the changes in the balance sheet of the investment in 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	)		—			—
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
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.

53

	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	%
(1)    Includes $5.1 million derived from fully amortized pools.
	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	)		(10,148,000	)
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	%

(1) Includes $7.3 million derived from fully amortized pools.

54

Off Balance Sheet Arrangements

As of June 30, 2014, 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. 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” above.

Collections Represented by Account Sales

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

55

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued an update to ASC 606, “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, including interim periods within that reporting period. Early application is not permitted. We are currently evaluating the impact this update will have on our consolidated financial statements as well as the expected adoption method.

In June 2014, the FASB issued ASU 2014-11, “Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.” 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 Update are effective for public business entities for the first interim or annual period 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. The Company reviewed this ASU and determined that it did not have a material impact on its consolidated financial statements.

56

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to various types of market risk in the normal course of business, including the impact of interest rate changes 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. The debt associated with our acquisition of CBC, had a balance of approximately $27.4 million, consisting of $14.4 million through a line of credit, at a rate of 4.75%, from a financial institution, and $13.0 million of notes at varying rates, from 7.125% to 8.75%, issued by CBC’s subsidiaries. We do not currently invest in derivative financial or commodity instruments.

Item 4. Controls and Procedures (As Restated)

The Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2014 filed with the SEC on August 18, 2014 disclosed that, in accordance with Rules 13a-15(b) and 15d-15(b) of the Securities Exchange Act of 1934, 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 Company in connection with the preparation of the restatement presented in this Form 10-Q/A the Chief Executive Officer and our Chief Financial Officer, re-evaluated the Company’s disclosure controls and procedures and, based on that evaluation, concluded that 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 weakness and remedial steps being taken by the Company are discussed below.

(a) Evaluation of Disclosure Controls and Procedures

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.

d) Remediation Plan

As part of our commitment to strengthening 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 flows during the current period. We will continue to maintain and verify the effective operation of these controls, before concluding that we have remediated this material weakness in revenue recognition controls.

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.

57

PART II. OTHER INFORMATION

Item 1. 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 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, we are not involved in any material litigation in which we are a defendant.

Item 1A. Risk factors

We have identified a material weakness in our internal control over financial reporting, specifically related to our revenue recognition process, and our business 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 disclosed in the first quarter of fiscal year 2014:

We are subject to various risks 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/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 strategy could materially adversely affect our business, financial position and results of operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Default Upon Senior Securities

None

Item 4. Mine Safety Disclosures

None

Item 5. 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 application of Generally Accepted Accounting Principles in the United States (“GAAP”) thereon. We have restated the financial statements contained in this Report on Form 10-Q/A for the third quarter of Fiscal Year 2014. The Company is in the process of finalizing its discussions with the SEC in order to resolve the Staff Comments. Please see Note 2 of the Condensed Consolidated financial statements for the period ended June 30, 2014 (the third quarter of fiscal year 2014) for more information.

58

Item 6. Exhibits

(a) Exhibits.

31.1	Certification of the Registrant’s Chief Executive Officer, Gary Stern, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the Registrant’s Chief Financial Officer, Robert J. Michel, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of the Registrant’s Chief Executive Officer, Gary Stern, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of the Registrant’s Chief Financial Officer, Robert J. Michel, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

59

SIGNATURES

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)
Dated: June 25, 2015	By:	/s/ Gary Stern
		Gary Stern, President, Chief Executive Officer
		(Principal Executive Officer)
Dated: June 25, 2015	By:	/s/ Robert J. Michel
		Robert J. Michel, Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

60

EXHIBIT INDEX

Exhibit Number	Description
31.1	Certification of the Registrant’s Chief Executive Officer, Gary Stern, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the Registrant’s Chief Financial Officer, Robert J. Michel, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of the Registrant’s Chief Executive Officer, Gary Stern, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of the Registrant’s Chief Financial Officer, Robert J. Michel, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

61