UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2017March 31, 2019
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 |
| (IRS Employer |
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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 ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |
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| Accelerated filer |
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Non-accelerated filer |
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| Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act: | ||||
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common stock, par value $0.01 per share | ASFI | Nasdaq Global Select Market | ||
As of August 8, 2017,May 13, 2019, the registrant had 6,623,8156,685,415 common shares outstanding.
ASTA FUNDING, INC. AND SUBSIDIARIES
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Notes to Condensed Consolidated Financial Statements (unaudited) | 8 |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
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| 46 |
PARTI. FI NAN CIALFINANCIAL INFORMATION
ASTA FUNDING, INC. AND SUBSIDIARIES
Condensed ConsolidatedBalance Sheets
(Unaudited) | ||||||||
June 30, | September 30, | |||||||
ASSETS | ||||||||
Cash and cash equivalents | $ | 16,570,000 | $ | 18,526,000 | ||||
Restricted cash | 35,248,000 | — | ||||||
Available for sale investments (at fair value) | 5,500,000 | 56,764,000 | ||||||
Consumer receivables acquired for liquidation (at net realizable value) | 9,118,000 | 13,671,000 | ||||||
Structured settlements (at fair value) | 89,045,000 | 85,708,000 | ||||||
Investment in personal injury claims | 27,538,000 | 48,289,000 | ||||||
Other investments, net | — | 3,590,000 | ||||||
Due from third party collection agencies and attorneys | 1,367,000 | 1,005,000 | ||||||
Prepaid and income taxes receivable | 4,836,000 | 880,000 | ||||||
Furniture and equipment, net | 178,000 | 243,000 | ||||||
Deferred income taxes | 18,940,000 | 15,530,000 | ||||||
Goodwill | 2,770,000 | 2,770,000 | ||||||
Other assets | 5,102,000 | 8,423,000 | ||||||
Total assets | $ | 216,212,000 | $ | 255,399,000 | ||||
LIABILITIES | ||||||||
Line of credit | $ | 9,600,000 | $ | — | ||||
Other debt – CBC (including non-recourse notes payable of $72.1 million at June 30, 2017 and $57.3 million at September 30, 2016) | 76,435,000 | 67,435,000 | ||||||
Other liabilities | 8,272,000 | 5,974,000 | ||||||
Income taxes payable | — | 252,000 | ||||||
Total liabilities | 94,307,000 | 73,661,000 | ||||||
Commitments and contingencies | ||||||||
STOCKHOLDERS’ EQUITY | ||||||||
Preferred stock, $.01 par value; authorized 5,000,000 shares; issued and outstanding — none | — | — | ||||||
Preferred stock, Series A Junior Participating, $.01 par value; authorized 30,000 shares; issued and outstanding — none | — | — | ||||||
Common stock, $.01 par value, authorized 30,000,000 shares; issued 13,398,108 at June 30, 2017 and 13,336,508 at September 30, 2016; and outstanding 6,623,815 at June 30, 2017 and 11,876,224 at September 30, 2016 | 134,000 | 133,000 | ||||||
Additional paid-in capital | 67,467,000 | 67,026,000 | ||||||
Retained earnings | 122,669,000 | 128,063,000 | ||||||
Accumulated other comprehensive income (loss) | (968,000 | ) | 86,000 | |||||
Treasury stock (at cost) 6,774,293 shares at June 30, 2017 and 1,460,284 shares at September 30, 2016 | (67,128,000 | ) | (12,925,000 | ) | ||||
Non-controlling interest | (269,000 | ) | (645,000 | ) | ||||
Total stockholders’ equity | 121,905,000 | 181,738,000 | ||||||
Total liabilities and stockholders’ equity | $ | 216,212,000 | $ | 255,399,000 | ||||
March 31, (Unaudited) | September 30, | |||||||
ASSETS | ||||||||
Cash and cash equivalents | $ | 3,694,000 | $ | 6,284,000 | ||||
Available for sale debt securities (at fair value) | 38,390,000 | 38,054,000 | ||||||
Investments in equity securities (at fair value) | 7,989,000 | — | ||||||
Consumer receivables acquired for liquidation (at cost) | 2,626,000 | 3,749,000 | ||||||
Investment in personal injury claims, net | 6,630,000 | 10,745,000 | ||||||
Due from third party collection agencies and attorneys | 654,000 | 755,000 | ||||||
Accounts receivable, net | 382,000 | — | ||||||
Prepaid and income taxes receivable, net | 8,496,000 | 5,387,000 | ||||||
Furniture and equipment, net of accumulated depreciation of $1.9 million at March 31, 2019 and $1.8 million at September 30, 2018 | 168,000 | 100,000 | ||||||
Equity method investment | 211,000 | 236,000 | ||||||
Note receivable | 3,831,000 | 4,313,000 | ||||||
Settlement receivable | 2,637,000 | 3,339,000 | ||||||
Deferred income taxes | 10,548,000 | 10,940,000 | ||||||
Goodwill | 1,410,000 | 1,410,000 | ||||||
Other assets | 1,452,000 | 1,003,000 | ||||||
Total assets | $ | 89,118,000 | $ | 86,315,000 | ||||
LIABILITIES | ||||||||
Accounts payable and accrued expenses | $ | 1,597,000 | $ | 2,281,000 | ||||
Commitments and contingencies | ||||||||
STOCKHOLDERS’ EQUITY | ||||||||
Preferred stock, $.01 par value; authorized 5,000,000 shares; issued and outstanding — none | — | — | ||||||
Preferred stock, Series A Junior Participating, $.01 par value; authorized 30,000 shares; issued and outstanding — none | — | — | ||||||
Common stock, $.01 par value, authorized 30,000,000 shares; issued 13,459,708 at March 31, 2019 and September 30, 2018; and outstanding 6,685,415 at March 31, 2019 and September 30, 2018 | 135,000 | 135,000 | ||||||
Additional paid-in capital | 68,558,000 | 68,551,000 | ||||||
Retained earnings | 85,652,000 | 82,441,000 | ||||||
Accumulated other comprehensive income, net of taxes | 304,000 | 35,000 | ||||||
Treasury stock (at cost) 6,774,293 shares at March 31, 2019 and September 30, 2018 | (67,128,000 | ) | (67,128,000 | ) | ||||
Total stockholders’ equity | 87,521,000 | 84,034,000 | ||||||
Total liabilities and stockholders’ equity | $ | 89,118,000 | $ | 86,315,000 | ||||
See Notesaccompanying notes to Consolidated Financial Statementscondensed consolidated financial statements
ASTA FUNDING, INC. AND SUBSIDIARIES
Condensed ConsolidatedStatements of Operations
(Unaudited)
(rounded to the nearest thousands, except share data)
Three Months | Three Months | Nine Months | Nine Months | Three Months | Three Months | Six Months | Six Months | |||||||||||||||||||||||||
Ended | Ended | Ended | Ended | Ended | Ended | Ended | Ended | |||||||||||||||||||||||||
June 30, 2017 | June 30, 2016 | June 30, 2017 | June 30, 2016 | March 31, 2019 | March 31, 2018 | March 31, 2019 | March 31, 2018 | |||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||
Finance income, net | $ | 3,980,000 | $ | 4,612,000 | $ | 11,999,000 | $ | 14,668,000 | $ | 3,481,000 | $ | 4,101,000 | $ | 6,975,000 | $ | 8,286,000 | ||||||||||||||||
Personal injury claims income | 5,569,000 | 9,838,000 | 10,017,000 | 14,769,000 | 456,000 | 469,000 | 1,169,000 | 610,000 | ||||||||||||||||||||||||
Unrealized gain on structured settlements | 7,531,000 | 1,422,000 | 5,238,000 | 4,586,000 | ||||||||||||||||||||||||||||
Interest income on structured settlements | 1,923,000 | 1,765,000 | 5,765,000 | 4,473,000 | ||||||||||||||||||||||||||||
Loss on sale of structured settlements | (5,353,000 | ) | — | (5,353,000 | ) | — | ||||||||||||||||||||||||||
Disability fee income | 1,134,000 | 1,169,000 | 3,990,000 | 2,700,000 | 1,296,000 | 1,149,000 | 2,557,000 | 2,060,000 | ||||||||||||||||||||||||
Total revenues | 14,784,000 | 18,806,000 | 31,656,000 | 41,196,000 | 5,233,000 | 5,719,000 | 10,701,000 | 10,956,000 | ||||||||||||||||||||||||
Other income (loss) - includes ($18,000) and ($32,000) during the three month periods ended June 30, 2017 and 2016, and ($1,011,000) and ($63,000) during the nine month periods ended June 30, 2017 and 2016, respectively, of accumulated other comprehensive loss reclassification for securities sold | 98,000 | 215,000 | (31,000 | ) | 1,108,000 | |||||||||||||||||||||||||||
Gain on settlement | 323,000 | — | 323,000 | — | ||||||||||||||||||||||||||||
Other income, net | 306,000 | 69,000 | 540,000 | 103,000 | ||||||||||||||||||||||||||||
| 5,862,000 | 5,788,000 | 11,564,000 | 11,059,000 | |||||||||||||||||||||||||||||
| 14,882,000 | 19,021,000 | 31,625,000 | 42,304,000 | |||||||||||||||||||||||||||||
Expenses: | ||||||||||||||||||||||||||||||||
General and administrative | 9,349,000 | 10,591,000 | 36,327,000 | 32,039,000 | 3,395,000 | 3,301,000 | 7,321,000 | 7,513,000 | ||||||||||||||||||||||||
Interest | 1,123,000 | 832,000 | 3,039,000 | 2,348,000 | ||||||||||||||||||||||||||||
Impairment of consumer receivables | 148,000 | — | 148,000 | 124,000 | ||||||||||||||||||||||||||||
Loss on acquisition of minority interest | — | 1,420,000 | — | 1,420,000 | ||||||||||||||||||||||||||||
Loss (earnings) from equity method investment | 56,000 | (493,000 | ) | 86,000 | (845,000 | ) | ||||||||||||||||||||||||||
| 10,620,000 | 11,423,000 | 39,514,000 | 34,511,000 | |||||||||||||||||||||||||||||
Income (loss) before income tax | 4,262,000 | 7,598,000 | (7,889,000 | ) | 7,793,000 | |||||||||||||||||||||||||||
Income tax (benefit)/expense - includes tax expense/(benefit) of $7,000 and ($13,000) during the three month periods ended June 30, 2017 and 2016 and $404,000 and ($24,000) during the nine month periods ended June 30, 2017 and 2016, respectively, of accumulated other comprehensive income reclassifications for unrealized net gains / (losses) on available for sale securities | 1,700,000 | 2,853,000 | (3,237,000 | ) | 2,461,000 | |||||||||||||||||||||||||||
| 3,451,000 | 4,228,000 | 7,407,000 | 8,088,000 | |||||||||||||||||||||||||||||
Income from continuing operations before income tax | 2,411,000 | 1,560,000 | 4,157,000 | 2,971,000 | ||||||||||||||||||||||||||||
Income tax expense | 638,000 | 540,000 | 1,109,000 | 4,540,000 | ||||||||||||||||||||||||||||
Net income (loss) from continuing operations | 1,773,000 | 1,020,000 | 3,048,000 | (1,569,000 | ) | |||||||||||||||||||||||||||
Net loss from discontinued operations, net of income tax | — | — | — | (80,000 | ) | |||||||||||||||||||||||||||
Net income (loss) | 2,562,000 | 4,745,000 | (4,652,000 | ) | 5,332,000 | $ | 1,773,000 | $ | 1,020,000 | $ | 3,048,000 | $ | (1,649,000 | ) | ||||||||||||||||||
Less: net income attributable to non-controlling interests | 730,000 | 1,549,000 | 742,000 | 2,161,000 | ||||||||||||||||||||||||||||
Net income (loss) attributable to Asta Funding, Inc. | $ | 1,832,000 | $ | 3,196,000 | $ | (5,394,000 | ) | $ | 3,171,000 | |||||||||||||||||||||||
Net income (loss) per share attributable to Asta Funding, Inc.: | ||||||||||||||||||||||||||||||||
Basic | $ | 0.28 | $ | 0.27 | $ | (0.57 | ) | $ | 0.26 | |||||||||||||||||||||||
Diluted | $ | 0.27 | $ | 0.26 | $ | (0.57 | ) | $ | 0.26 | |||||||||||||||||||||||
Net income (loss) per basic shares: | ||||||||||||||||||||||||||||||||
Continuing operations | $ | 0.27 | $ | 0.15 | $ | 0.46 | $ | (0.24 | ) | |||||||||||||||||||||||
Discontinued operations | — | — | — | (0.01 | ) | |||||||||||||||||||||||||||
| $ | 0.27 | $ | 0.15 | $ | 0.46 | $ | (0.25 | ) | ||||||||||||||||||||||||
Net income (loss) per diluted shares: | ||||||||||||||||||||||||||||||||
Continuing operations | $ | 0.27 | $ | 0.15 | $ | 0.46 | $ | (0.24 | ) | |||||||||||||||||||||||
Discontinued operations | — | — | — | (0.01 | ) | |||||||||||||||||||||||||||
| $ | 0.27 | $ | 0.15 | $ | 0.46 | $ | (0.25 | ) | ||||||||||||||||||||||||
Weighted average number of common shares outstanding: | ||||||||||||||||||||||||||||||||
Basic | 6,577,784 | 11,897,139 | 9,389,864 | 12,023,156 | 6,685,415 | 6,655,855 | 6,685,415 | 6,639,659 | ||||||||||||||||||||||||
Diluted | 6,879,082 | 12,433,424 | 9,389,864 | 12,294,073 | 6,685,827 | 6,659,354 | 6,685,775 | 6,639,659 | ||||||||||||||||||||||||
See Notesaccompanying notes to Consolidated Financial Statementscondensed consolidated financial statements
ASTA FUNDING, INC. AND SUBSIDIARIES
Condensed ConsolidatedStatementsof Comprehensive Income (Loss)
June 30, 2017March 31, 2019 and 20162018
(Unaudited)
Three Months | Three Months | Nine Months | Nine Months | Three Months | Three Months | Six Months | Six Months | |||||||||||||||||||||||||
Comprehensive income (loss) is as follows: | ||||||||||||||||||||||||||||||||
Net income (loss) | $ | 2,562,000 | $ | 4,745,000 | $ | (4,652,000 | ) | $ | 5,332,000 | $ | 1,773,000 | $ | 1,020,000 | $ | 3,048,000 | $ | (1,649,000 | ) | ||||||||||||||
Net unrealized securities gain (loss), net of tax (expense)/benefit of $(12,000) and ($364,000) during the three month periods ended June 30, 2017 and 2016, respectively, and $11,000 and ($647,000) during the nine month periods ended June 30, 2017 and 2016, respectively. | 18,000 | 543,000 | (17,000 | ) | 1,046,000 | |||||||||||||||||||||||||||
Reclassification adjustments for securities sold, net of tax benefit of $7,000 and $13,000 during the three month periods ended June 30, 2017 and 2016, and $404,000 and $24,000 during the nine month periods ended June 30, 2017 and 2016, respectively. | (11,000 | ) | (19,000 | ) | (607,000 | ) | (39,000 | ) | ||||||||||||||||||||||||
Foreign currency translation, net of tax (expense)/benefit of $166,000 and $93,000 during the three month periods ended June 30, 2017 and 2016, respectively, and $287,000 and $650,000 during the nine month periods ended June 30, 2017 and 2016, respectively. | (249,000 | ) | 9,000 | (430,000 | ) | 505,000 | ||||||||||||||||||||||||||
Net unrealized debt securities gain (loss), net of tax (expense)/benefit of ($35,000) and $2,000 during the three months ended March 31, 2019 and 2018, respectively, and ($87,000) and $6,000 during the six months ended March 31, 2019 and 2018, respectively. | 88,000 | (4,000 | ) | 223,000 | (11,000 | ) | ||||||||||||||||||||||||||
Foreign currency translation, net of tax (expense) / benefit of $17,000 and $28,000 during the three months ended March 31, 2019 and 2018, respectively, and ($7,000) and $14,000 during the six months ended March 31, 2019 and 2018, respectively. | (44,000 | ) | (52,000 | ) | 36,000 | (23,000 | ) | |||||||||||||||||||||||||
Other comprehensive income (loss) | (242,000 | ) | 533,000 | (1,054,000 | ) | 1,512,000 | 44,000 | (56,000 | ) | 259,000 | (34,000 | ) | ||||||||||||||||||||
Total comprehensive income (loss) | $ | 2,320,000 | $ | 5,278,000 | $ | (5,706,000 | ) | $ | 6,844,000 | $ | 1,817,000 | $ | 964,000 | $ | 3,307,000 | $ | (1,683,000 | ) | ||||||||||||||
See Notesaccompanying notes to Consolidated Financial Statementscondensed consolidated financial statements
ASTA FUNDING, INC. AND SUBSIDIARIES
Condensed ConsolidatedStatementsof Stockholders’ Equity
(Unaudited)
Common Stock | Additional | Accumulated | Non- | Total | ||||||||||||||||||||||||||||
Issued | Amount | Paid-in | Retained | Comprehensive Income (Loss) | Treasury | Controlling | Stockholders’ | |||||||||||||||||||||||||
Balance,September 30, 2016 | 13,336,508 | 133,000 | 67,026,000 | 128,063,000 | 86,000 | (12,925,000 | ) | (645,000 | ) | 181,738,000 | ||||||||||||||||||||||
Exercise of options | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Stock based compensation expense | — | — | 38,000 | — | — | — | — | 38,000 | ||||||||||||||||||||||||
Net (loss) income | — | — | — | (5,394,000 | ) | — | — | 742,000 | (4,652,000 | ) | ||||||||||||||||||||||
Amount reclassified from other comprehensive (loss) income | — | — | — | — | (607,000 | ) | — | — | (607,000 | ) | ||||||||||||||||||||||
Unrealized loss on marketable securities, net | — | — | — | — | (17,000 | ) | — | — | (17,000 | ) | ||||||||||||||||||||||
Purchase of treasury stock | — | — | — | — | — | (54,203,000 | ) | — | (54,203,000 | ) | ||||||||||||||||||||||
Foreign currency translation, net | — | — | — | — | (430,000 | ) | — | — | (430,000 | ) | ||||||||||||||||||||||
Issuance of unrestricted stock | 61,600 | 1,000 | 403,000 | — | — | — | — | 404,000 | ||||||||||||||||||||||||
Distributions to non-controlling interest | — | — | — | — | — | — | (366,000 | ) | (366,000 | ) | ||||||||||||||||||||||
Balance, June 30, 2017 | 13,398,108 | $ | 134,000 | $ | 67,467,000 | $ | 122,669,000 | $ | (968,000 | ) | $ | (67,128,000 | ) | $ | (269,000 | ) | $ | 121,905,000 | ||||||||||||||
Common Stock | Additional | Accumulated | Total | |||||||||||||||||||||||||
Issued | Amount | Paid-in | Retained | Comprehensive | Treasury | Stockholders’ | ||||||||||||||||||||||
Balance, September 30, 2018 | 13,459,708 | $ | 135,000 | $ | 68,551,000 | $ | 82,441,000 | $ | 35,000 | $ | (67,128,000 | ) | $ | 84,034,000 | ||||||||||||||
Cumulative effect of adjustment for adoption of ASC 606, net of tax of $80,000 | — | — | — | 173,000 | — | — | 173,000 | |||||||||||||||||||||
Cumulative effect of adjustment for adoption of ASU No. 2016-01, net of tax of $5,000 | — | — | — | (10,000 | ) | 10,000 | — | — | ||||||||||||||||||||
Adjusted opening equity | 13,459,708 | $ | 135,000 | $ | 68,551,000 | $ | 82,604,000 | $ | 45,000 | $ | (67,128,000 | ) | $ | 84,207,000 | ||||||||||||||
Stock based compensation expense | — | — | 7,000 | — | — | — | 7,000 | |||||||||||||||||||||
Net income | — | — | — | 1,275,000 | — | — | 1,275,000 | |||||||||||||||||||||
Unrealized gain on debt securities, net | — | — | — | — | 135,000 | — | 135,000 | |||||||||||||||||||||
Foreign currency translation, net | — | — | — | — | 80,000 | — | 80,000 | |||||||||||||||||||||
Balance, December 31, 2018 | 13,459,708 | $ | 135,000 | $ | 68,558,000 | $ | 83,879,000 | $ | 260,000 | $ | (67,128,000 | ) | $ | 85,704,000 | ||||||||||||||
Net income | — | — | — | 1,773,000 | — | — | 1,773,000 | |||||||||||||||||||||
Unrealized gain on debt securities, net | — | — | — | — | 88,000 | — | 88,000 | |||||||||||||||||||||
Foreign currency translation, net | — | — | — | — | (44,000 | ) | — | (44,000 | ) | |||||||||||||||||||
Balance, March 31, 2019 | 13,459,708 | $ | 135,000 | $ | 68,558,000 | $ | 85,652,000 | $ | 304,000 | $ | (67,128,000 | ) | $ | 87,521,000 | ||||||||||||||
Common Stock | Additional | Accumulated | Non- | Total | ||||||||||||||||||||||||||||
Issued | Amount | Paid-in | Retained | Comprehensive | Treasury | Controlling | Stockholders’ | |||||||||||||||||||||||||
Balance, September 30, 2015 | 13,061,673 | $ | 131,000 | $ | 65,011,000 | $ | 120,611,000 | $ | (1,685,000 | ) | $ | (1,751,000 | ) | $ | (997,000 | ) | $ | 181,320,000 | ||||||||||||||
Exercise of options | 107,531 | 1,000 | 871,000 | 872,000 | ||||||||||||||||||||||||||||
Stock based compensation expense | — | — | 567,000 | — | — | — | — | 567,000 | ||||||||||||||||||||||||
Restricted stock | 5,000 | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Net income | — | — | — | 3,171,000 | — | — | 2,161,000 | 5,332,000 | ||||||||||||||||||||||||
Unrealized gain on marketable securities, net | — | — | — | — | 1,007,000 | — | — | 1,007,000 | ||||||||||||||||||||||||
Purchase of treasury stock | — | — | — | — | — | (11,174,000 | ) | — | (11,174,000 | ) | ||||||||||||||||||||||
Foreign currency translation, net | — | — | — | — | 505,000 | — | — | 505,000 | ||||||||||||||||||||||||
Purchase of subsidiary shares from non-controlling interest | — | — | (873,000 | ) | — | — | — | (927,000 | ) | (1,800,000 | ) | |||||||||||||||||||||
Issuance of restricted stock to purchase subsidiary shares from non-controlling interest | 123,304 | 1,000 | 999,000 | — | — | — | — | 1,000,000 | ||||||||||||||||||||||||
Distributions to non-controlling interest | — | — | — | — | — | — | (1,139,000 | ) | (1,139,000 | ) | ||||||||||||||||||||||
Balance, June 30, 2016 | 13,297,508 | $ | 133,000 | $ | 66,575,000 | $ | 123,782,000 | $ | (173,000 | ) | $ | (12,925,000 | ) | $ | (902,000 | ) | $ | 176,490,000 | ||||||||||||||
Common Stock | Additional | Accumulated | Total | |||||||||||||||||||||||||
Issued | Amount | Paid-in | Retained | Comprehensive | Treasury | Stockholders’ | ||||||||||||||||||||||
Balance, September 30, 2017 | 13,398,108 | $ | 134,000 | $ | 68,047,000 | $ | 113,736,000 | $ | 18,000 | $ | (67,128,000 | ) | $ | 114,807,000 | ||||||||||||||
Stock based compensation expense | — | — | 79,000 | — | — | — | 79,000 | |||||||||||||||||||||
Net loss | — | — | — | (2,669,000 | ) | — | — | (2,669,000 | ) | |||||||||||||||||||
Unrealized (loss) gain on marketable securities, net | — | — | — | — | (7,000 | ) | — | (7,000 | ) | |||||||||||||||||||
Foreign currency translation, net | — | — | — | — | 29,000 | — | 29,000 | |||||||||||||||||||||
Balance, December 31, 2017 | 13,398,108 | $ | 134,000 | $ | 68,126,000 | $ | 111,067,000 | $ | 40,000 | $ | (67,128,000 | ) | $ | 112,239,000 | ||||||||||||||
Exercise of options | 61,600 | 1,000 | 398,000 | — | — | — | 399,000 | |||||||||||||||||||||
Stock based compensation expense | — | — | 10,000 | — | — | — | 10,000 | |||||||||||||||||||||
Net income | — | — | — | 1,020,000 | — | — | 1,020,000 | |||||||||||||||||||||
Unrealized (loss) gain on marketable securities, net | — | — | — | — | (4,000 | ) | — | (4,000 | ) | |||||||||||||||||||
Foreign currency translation, net | — | — | — | — | (52,000 | ) | — | (52,000 | ) | |||||||||||||||||||
Dividends paid | (35,352,000 | ) | (35,352,000 | ) | ||||||||||||||||||||||||
Balance, March 31, 2018 | 13,459,708 | $ | 135,000 | $ | 68,534,000 | $ | 76,735,000 | $ | (16,000 | ) | $ | (67,128,000 | ) | $ | 78,260,000 | |||||||||||||
See Notesaccompanying notes to Consolidated Financial Statementscondensed consolidated financial statements
ASTA FUNDING, INC. AND SUBSIDIARIES
Condensed ConsolidatedStatements of Cash Flows
(Unaudited)
Nine Months | Nine Months | |||||||
Cash flows from operating activities: | ||||||||
Net (loss) income | $ | (4,652,000 | ) | $ | 5,332,000 | |||
Adjustments to reconcile net (loss) income to net cash used in operating activities: | ||||||||
Depreciation and amortization | 267,000 | 442,000 | ||||||
Deferred income taxes | (2,994,000 | ) | (662,000 | ) | ||||
Impairment of consumer receivables acquired for liquidation | 148,000 | 124,000 | ||||||
| Bad debt recovery | (242,000 | ) | — | |||||
Stock based compensation | 81,000 | 567,000 | ||||||
Loss on sale of available-for-sale securities | 1,011,000 | 63,000 | ||||||
Structured settlements – accrued interest | (4,760,000 | ) | (3,907,000 | ) | ||||
Structured settlements – unrealized gains | (5,238,000 | ) | (4,586,000 | ) | ||||
Realized loss on sale of structured settlements | 5,353,000 | — | ||||||
Unrealized gain on other investments | — | (246,000 | ) | |||||
Unrealized foreign exchange loss on other investments | — | 59,000 | ||||||
Reserve for loss on other investments | — | 1,000,000 | ||||||
Loss on other investments | 3,590,000 | — | ||||||
Operating lease adjustment | — | 21,000 | ||||||
Changes in: | ||||||||
Prepaid and income taxes receivable | (3,956,000 | ) | 2,064,000 | |||||
Due from third party collection agencies and attorneys | (362,000 | ) | 341,000 | |||||
Other assets | 3,140,000 | (964,000 | ) | |||||
Income taxes payable | (252,000 | ) | — | |||||
Other liabilities | 2,229,000 | 2,686,000 | ||||||
Net cash (used in)/ provided by operating activities | (6,637,000 | ) | 2,334,000 | |||||
Cash flows from investing activities: | , | |||||||
Purchase of consumer receivables acquired for liquidation | (2,213,000 | ) | (6,470,000 | ) | ||||
Principal collected on receivables acquired for liquidation | 6,618,000 | 7,414,000 | ||||||
Purchase of available-for-sale securities | (13,193,000 | ) | (11,704,000 | ) | ||||
Proceeds from sale of available-for-sale securities | 62,406,000 | 16,302,000 | ||||||
Purchase of non-controlling interest | — | (800,000 | ) | |||||
Investments in personal injury claims – advances | (14,624,000 | ) | (27,689,000 | ) | ||||
Investments in personal injury claims – receipts | 35,375,000 | 20,673,000 | ||||||
Capital expenditures | (21,000 | ) | (123,000 | ) | ||||
Investments in structured settlements – advances | (13,363,000 | ) | (12,264000 | ) | ||||
Investments in structured settlements – receipts | 7,186,000 | 5,508,000 | ||||||
Proceeds from sale of structured settlements | 7,727,000 | — | ||||||
Net cash provided by/(used in) investing activities | 75,898,000 | (9,153,000 | ) | |||||
Cash flows from financing activities: | ||||||||
Proceeds from exercise of stock options | — | 872,000 | ||||||
Purchase of treasury stock | (54,203,000 | ) | (11,174,000 | ) | ||||
Change in restricted cash | (35,248,000 | ) | — | |||||
Distribution to non-controlling interest | (366,000 | ) | (1,139,000 | ) | ||||
Borrowings from line of credit | 9,600,000 | — | ||||||
Borrowings of other debt – CBC | 30,632,000 | 14,431,000 | ||||||
Repayment of other debt – CBC | (21,632,000 | ) | (3,375,000 | ) | ||||
Net cash used in financing activities | (71,217,000 | ) | (385,000 | ) | ||||
Net decrease in cash and cash equivalents | (1,956,000 | ) | (7,204,000 | ) | ||||
Cash and cash equivalents at beginning of period | 18,526,000 | 24,315,000 | ||||||
Cash and cash equivalents at end of period | $ | 16,570,000 | $ | 17,111,000 | ||||
Supplemental disclosure of cash flow information : | ||||||||
Cash paid for: | ||||||||
Interest | $ | 3,031,000 | $ | 2,353,000 | ||||
Taxes | 6,046,000 | — | ||||||
Supplemental disclosure of non-cash flow investing activities : | ||||||||
Issuance of restricted stock to purchase subsidiary shares from non-controlling interest | $ | — | $ | 1,000,000 | ||||
Issuance of unrestricted stock | $ | 404,000 | — | |||||
Six Months Ended | ||||||||
March 31, 2019 | March 31, 2018 | |||||||
Cash flows from operating activities: | ||||||||
Net income (loss) from continuing operations | $ | 3,048,000 | $ | (1,569,000 | ) | |||
Net loss from discontinued operations | — | (80,000 | ) | |||||
Net income (loss) | $ | 3,048,000 | $ | (1,649,000 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 44,000 | 32,000 | ||||||
Deferred income taxes | 305,000 | 3,486,000 | ||||||
Stock based compensation | 7,000 | 89,000 | ||||||
Unrealized loss on equity securities | (21,000 | ) | — | |||||
Provision for bad debts – personal injury claims | 158,000 | 423,000 | ||||||
Loss (earnings) from equity method investment | 86,000 | (845,000 | ) | |||||
Changes in: | ||||||||
Prepaid and income taxes receivable | (3,109,000 | ) | 996,000 | |||||
Due from third party collection agencies and attorneys | 87,000 | (45,000 | ) | |||||
Accounts receivable | (209,000 | ) | — | |||||
Settlement receivable | (223,000 | ) | — | |||||
Other assets | (449,000 | ) | (472,000 | ) | ||||
Other liabilities | (648,000 | ) | (3,057,000 | ) | ||||
Net cash provided by operating activities of discontinued operations | — | 710,000 | ||||||
Net cash used in operating activities | (924,000 | ) | (332,000 | ) | ||||
Cash flows from investing activities: | ||||||||
Principal collected on receivables acquired for liquidation | 1,026,000 | 1,406,000 | ||||||
Principal collected on consumer receivable accounts represented by account sales | — | 2,000 | ||||||
Purchase of available for sale debt securities and investments in equity securities | (38,474,000 | ) | (77,000 | ) | ||||
Proceeds from sale of available for sale debt securities | 30,480,000 | — | ||||||
Purchase of non-controlling interest | — | (1,800,000 | ) | |||||
Proceeds from sale of CBC | — | 4,491,000 | ||||||
Proceeds from note receivable | 482,000 | 479,000 | ||||||
Proceeds from settlement receivable | 925,000 | — | ||||||
Personal injury claims - advances | — | (60,000 | ) | |||||
Personal injury claims - receipts | 3,957,000 | 1,918,000 | ||||||
Acquisition of personal injury claims portfolios | — | (14,571,000 | ) | |||||
Decrease (increase) in equity method investment | (61,000 | ) | 53,119,000 | |||||
Capital expenditures | (112,000 | ) | — | |||||
Net cash used in investing activities of discontinued operations | — | (1,538,000 | ) | |||||
Net cash (used in) provided by investing activities | (1,777,000 | ) | 43,369,000 | |||||
Cash flows from financing activities: | ||||||||
Proceeds from exercise of stock options | — | 399,000 | ||||||
Dividends paid | — | (35,352,000 | ) | |||||
Net cash provided by financing activities of discontinued operations | — | 1,387,000 | ||||||
Net cash used in financing activities | — | (33,566,000 | ) | |||||
Foreign currency effect on cash | 111,000 | (99,000 | ) | |||||
Net (decrease) increase in cash and cash equivalents including cash and cash equivalents classified within assets related to discontinued operations | (2,590,000 | ) | 9,372,000 | |||||
Less: net decrease in cash and cash equivalents classified within assets related to discontinued operations | — | (316,000 | ) | |||||
Net (decrease) increase in cash and cash equivalents | (2,590,000 | ) | 9,056,000 | |||||
Cash and cash equivalents at beginning of period | 6,284,000 | 17,591,000 | ||||||
Cash and cash equivalents at end of period | $ | 3,694,000 | $ | 26,647,000 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Continued operations: | ||||||||
Cash paid for: Income taxes | $ | 4,000,000 | $ | — | ||||
Discontinued operations: | ||||||||
Cash paid for: Interest | $ | — | $ | 824,000 | ||||
Supplemental disclosure of non-cash investing: | ||||||||
Continuing operations: | ||||||||
Note receivable | $ | — | $ | 5,750,000 | ||||
See Notesaccompanying notes to Consolidated Financial Statementscondensed consolidated financial statements
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1—Business and Basis of Presentation
Business
Asta Funding, Inc. (“Asta”), a Delaware Corporation, together with its wholly owned significant operating subsidiaries Palisades Collection, LLC, Palisades Acquisition XVI, LLC (“Palisades XVI”), Palisades Acquisition XIX, LLC (“Palisades XIX”), Palisades Acquisition XXIII, LLC (“Palisades XXIII”), VATIV Recovery Solutions LLC (“VATIV”), ASFI Pegasus Holdings, LLC (“APH”ASFI”), Fund Pegasus, LLC (“Fund Pegasus”), GAR Disability Advocates, LLC (“GAR Disability Advocates”), Five Star Veterans Disability, LLC (“Five Star”), CBC Settlement Funding,EMIRIC, LLC (“CBC”EMIRIC”), Simia Capital, LLC (“Simia”), Sylvave, LLC (“Sylvave”) (formerly known as Pegasus Funding, LLC (“Pegasus”)), Practical Funding LLC (“Practical Funding”), and other subsidiaries, which are not all wholly owned (the “Company,” “we” or “us”), is engaged in several business segments in the financial services industry including structured settlements through our wholly owned subsidiary CBC, fundingservicing of personal injury claims, through our 80% owned subsidiary Pegasus Funding, LLC (“Pegasus”) and ourthe Company's wholly owned subsidiarysubsidiaries Sylvave, Simia and Practical Funding, social security and disability advocacy through ourthe Company's wholly owned subsidiaries GAR Disability Advocates and Five Star and the business of purchasing, managing for its own account and servicing distressed charged off consumer receivables, including charged off receivables, and semi-performing receivables.
For the period October 1, 2017 to January 12, 2018, Pegasus was 80% owned, but not controlled, and accounted for under the equity method. On January 12, 2018 (“Date of Acquisition”), the Company acquired the remaining 20% minority interest and a controlling financial interest, in Pegasus, and changed its name to Sylvave. Commencing on the Date of Acquisition, the Company consolidated the financial results of this entity.
We operate principally in the United States in three reportable business segments: consumer receivables, social security disability advocacy and personal injury claims. We previously operated a fourth segment when we engaged in the structured settlements business through our wholly owned subsidiary CBC Settlement Funding, LLC (“CBC”), which we sold on December 13, 2017.
As a result of the sale of CBC, all periods presented in the Company's condensed consolidated financial statements account for CBC as a discontinued operation. This determination resulted in the reclassification of the historical assets and liabilities comprising the structured settlement business to assets and liabilities related to discontinued operations in the condensed consolidated balance sheets, and a corresponding adjustment to our condensed consolidated statements of operations to reflect discontinued operations for all periods presented. See Note 7 - Discontinued Operations.
Consumer receivables
The Company started outThis segment is engaged in the business of purchasing, managing for its own account and servicing distressed charged off consumer receivables, business in 1994.including charged off receivables, and semi-performing receivables. Recently, our efforts haveeffort has been in the international areas (mainly South America), as we have not purchasedcurtailed our active purchasing of consumer receivables in the United States since 2010. We define consumer receivables as primary charged-off, semi-performing and distressed depending on their collectability.States. We acquire these consumer receivables at substantial discounts to their face values, based on the characteristics of the underlying accounts of each portfolio.
Personal injury claims
PegasusThis segment is comprised of purchased interests in personal injury claims from claimants who are a party to a personal injury claim. The Company 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 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 historically funded personal injury claims in Simia and Sylvave. The Company formed a new wholly owned subsidiary, Practical Funding on March 16, 2018, to continue in the personal injury claims funding business. To date, Practical Funding has not funded any advances on personal injury claims. On April 8, 2018, Practical Funding changed its name to Arthur Funding, LLC.
Simia commenced operations in January 2017, and conducts its business solely in the United States. Prior to 2017, PegasusSimia obtained its business from external brokers and internal sales professionals soliciting individuals withattorneys and law firms who represent claimants who have personal injury claims. Business was also obtained from the Pegasusits website and through attorneys.
In November 2016, The Company accounted for its investment in Sylvave under the equity method of accounting through January 12, 2018, and for subsequent periods the Company formedincludes the financial results of Sylvave in its consolidated statement of operations. Simia a 100% owned subsidiary. Simia commencedand Sylvave are not funding personal injury settlement claims in January 2017. Simia was formed in response to the Company’s decision not to renew its joint venture with Pegasus Legal Funding, LLC (“PLF”), which expired at the end of December 2016. Pegasus continues to remain in operation to collect its current portfolio of advances, and has not funded any new advances, after December 28, 2016 (see Note 7 – Litigation Funding).but continue to collect on outstanding personal claim advances in the ordinary course.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Structured settlementsNote 1—Business and Basis of Presentation (Continued)
CBC purchases structured settlement and annuity policies through privately negotiated direct consumer purchases and brokered transactions across the United States. CBC funds the purchases primarily from cash, its revolving line of credit, and its securitized debt, issued through its Blue Bell Receivables (“BBR”) subsidiaries.
Social security and Veteran’s benefitdisability advocacy
GAR Disability Advocates and Five Star provide its disabilityThis segment consists of advocacy services forgroups representing individuals and veterans throughout the United States. It relies upon search engine optimization (“SEO”) to bring awareness to its intended market.States in their claims for social security disability and supplemental social security income benefits from the Social Security and Veterans Administration.
Basis of Presentation
The consolidated balance sheet as of June 30 2017,March 31, 2019, the consolidated statements of operations for the three and nine month periodssix months ended June 30, 2017March 31, 2019 and 2016,2018, the consolidated statements of comprehensive income (loss) for the three and nine month periodssix months ended June 30, 2017March 31, 2019 and 2016,2018, the consolidated statements of stockholders’ equity as of and for the ninethree and six months ended June 30, 2017March 31, 2019 and 2016,2018, and the consolidated statements of cash flows for the nine month periodssix months ended June 30, 2017March 31, 2019 and 2016,2018, are unaudited. The September 30, 20162018 financial information included in this report was derived from our audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016.2018. In the opinion of management, all adjustments necessary to present fairly our financial position at June 30, 2017,March 31, 2019, the results of operations for the three and nine month periodssix months ended June 30, 2017March 31, 2019 and 20162018, the statement of comprehensive income (loss) for the three and six months ended March 31, 2019 and 2018, the statement of stockholders' equity for the three and six months ended March 31, 2019 and 2018 and cash flows for the nine month periodssix months ended June 30, 2017March 31, 2019 and 20162018 have been made. The results of operations for the three and nine month periodssix months ended June 30, 2017March 31, 2019 and 20162018 are not necessarily indicative of the operating results for any other interim period or the full fiscal year.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1—Business and Basis of Presentation(continued)
Basis of Presentation(continued)
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 onour Form 10-K for the fiscal year ended September 30, 20162018 filed with the Securities and Exchange Commission.
The condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) and industry practices.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”)US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates including management’s estimates of future cash flows and the resulting rates of return.
The condensed consolidated financial statements include the accounts of Asta Funding, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Liquidity
At March 31, 2019, the Company had $3.7 million in cash and cash equivalents, as well as $46.4 million in investments in debt and equity securities on hand and no debt. In addition, the Company had $87.5 million in stockholders' equity at March 31, 2019.
We believe that our available cash resources and expected cash inflows from operations will be sufficient to fund operations for at least the next twelve months.
Concentration of Credit Risk – Cash and Restricted Cashcash equivalents
The Company considers all highly liquid investments with a maturity date of three months or less at the date of purchase to be cash equivalents.
Cash balances are maintained at various depository institutions and are insured by the Federal Deposit Insurance Corporation (“FDIC”). The Company had cash and restricted cash balances with 13two banks at June 30, 2017March 31, 2019 that each exceeded the balance insured by the FDIC by approximately $35$0.4 million. Additionally, twothree foreign banks with an aggregate $2.2$1.7 million balances are not FDIC insured. There is a $10 million aggregate balance in a domestic bank that is not FDIC insured and has been reclassified to restricted cash in the balance sheet since these assets serve as collateral for the Bank of Hapoalim line of credit (see Note 9– Non Recourse Debt ). The Company does not believe it is exposed to any significant credit risk due to concentration of cash.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
GoodwillNote 1—Business and Basis of Presentation (Continued)
Goodwill representsInvestments in Equity Securities
The Company adopted Accounting Standard Update (“ASU”) No. 2016-01 on October 1, 2018, which requires substantially all equity investments in nonconsolidated entities to be measured at fair value with changes recognized in earnings, except for those accounted for using the excessequity method of accounting. Changes in the fair value of equity securities are included in other income, net on the consolidated statement of operations.
Available-for-Sale Debt Securities
Non-equity investments that the Company intends to hold for an indefinite period of time, but not necessarily to maturity, are classified as available-for-sale debt securities and are carried at fair value. Unrealized gains and losses on available-for-sale debt securities are determined using the specific-identification method. Unrealized gains/losses are recorded in other comprehensive income (loss).
Declines in the fair value of individual available-for-sale debt securities below their respective costs that are other than temporary will result in write-downs of the individual securities to their fair value. Factors affecting the determination of whether an other-than-temporary impairment has occurred include: a downgrading of the security by a rating agency, a significant deterioration in the financial condition of the issuer, or that management would not have the ability to hold a security for a period of time sufficient to allow for any anticipated recovery in fair value.
Equity method investments
Investee companies that are not consolidated, but over which the Company exercises significant influence, are accounted for under the equity method of accounting. Whether or not the Company exercises significant influence with respect to an investee depends on an evaluation of several factors including, among others, representation on the investee company's board of directors and ownership level, which is generally a 20% to 50% interest in voting securities of the investee company. Under the equity method of accounting, an investee company's accounts are not reflected within the Company's consolidated balance sheets and statements of operations; however, the Company's share of the earnings of the investee company is reflected as earnings and loss from equity method investment in the Company's consolidated statement of operations. The Company's carrying value in an equity method investee company is reflected on the Company's consolidated balance sheet, as equity method investment.
When the Company's carrying value in an equity method investee company is reduced to zero, no further losses are recorded in the Company's consolidated financial statements unless the Company guaranteed obligations of the investee company or has committed additional funding. When the investee company subsequently reports income, the Company will not record its share of such income until it equals the amount of its share of losses not previously recognized. There were no impairment losses recorded on our equity method investments for the three and six months ended March 31, 2019 and 2018.
Personal Injury Claim Advances and Impairments
The Company accounts for its investments in personal injury claims at an agreed upon interest rate, in anticipation of a future settlement. The Company's interest purchased in personal injury claim advances consists of the right to receive from a 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, 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 the claimant.
Management assesses the quality of the personal injury claims portfolio through an analysis of the underlying personal injury fundings on a case by case basis. Cases are reviewed through periodic updates with attorneys handling the cases, as well as with third party research tools which monitor public filings, such as motions or judgments rendered on specific cases. The Company specifically reserves for those fundings where the underlying cases are identified as uncollectible, due to anticipated non-favorable verdicts and/or settlements at levels where recovery of the advance outstanding is unlikely. For cases that have not exhibited any specific negative collection indicators, the Company establishes reserves based on the historical collection rates of the Company’s fundings. Fee income on advances is reserved for on all cases where a specific reserve is established on the initially funded amount. In addition, management also monitors its historical collection rates on fee income and establishes reserves on fee income consistent with the historically experienced collection rates. Management regularly analyzes and updates the historical collection rates of its initially funded cases as well as its fee income.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1—Business and Basis of Presentation (Continued)
Income Recognition - Consumer Receivables
The Company accounts for certain of its investments in consumer receivables using the guidance of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310”). Under the guidance of ASC 310, static pools of accounts are established. These pools are aggregated based on certain common risk criteria. Each static pool is recorded at cost and is accounted for as a single unit for the recognition of income, principal payments and loss provision. Due to the substantial reduction of portfolios reported under the interest method, and the inability 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.
Under the guidance of ASC 310-30, the Company must analyze a portfolio upon acquisition to ensure which method is appropriate, and once a static pool is established for a quarter, individual receivable accounts are not added to the pool (unless replaced by the seller) or removed from the pool (unless sold or returned to the seller).
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.
Impairments - Consumer Receivables
The Company accounts for its impairments in accordance with ASC 310, which provides guidance on how to account for differences between contractual and expected cash flows from an investor’s initial investment in loans or debt securities acquired in a transfer if those differences are attributable, at least in part, to credit quality. The recognition of income under ASC 310 is dependent on the Company having the ability to develop reasonable expectations of both the timing and amount of cash flows to be collected. In the event the Company cannot develop a reasonable expectation as to both the timing and amount of cash flows expected to be collected. ASC 310 permits the change to the cost recovery method. The Company will recognize income only after it has recovered its carrying value.
If collection projections indicate the carrying value will not be recovered, an impairment is required. The impairment will be equal to the difference between the carrying value at the time of the forecast and the corresponding estimated remaining future collections. The Company believes it has significant experience in acquiring certain distressed consumer receivable portfolios at a significant discount to the amount actually owed by underlying customers. The Company invests in these portfolios only after both qualitative and quantitative analyses of the underlying receivables are performed and a calculated purchase price overis paid so that it believes its estimated cash flow offers an adequate return on acquisition costs after servicing expenses. 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 it uses for its expected cash flows, and the Company’s ability to recover their cost basis. For the three and six months ended March 31, 2019 and 2018, the Company did not record any impairments on its domestic or international portfolios.
Income Recognition - Social Security Disability Advocacy
Effective October 1, 2018, the Company adopted ASC 606 - “Revenue from Contracts with Customer” (“ASC 606”), which was effective for annual periods beginning on or after December 15, 2017. ASC 606 introduced a five-step approach to revenue recognition. See “Recent Accounting Pronouncements” for a discussion of ASC 606.
The Company applied ASC 606 in accordance with the modified retrospective transitional approach recognizing the cumulative effect of initially applying the revenue standard as an adjustment to the opening balance of retained earnings during this period ( October 1, 2018). Comparative prior year periods were not adjusted. In applying the modified retrospective approach, we elected practical expedients for (a) completed contracts as described in ASC 606-10-65-1-c(2), and (b) contract modifications as described in ASC 606-10-65-1-f(4), allowing (a) the application of the revenue standard only to contracts that were not completed as of the date of initial application, and (b) to reflect the aggregate effect of all modifications that occur before the adoption date in accordance with the new standard when: (i) identifying the satisfied and unsatisfied performance obligations, (ii) determining the transaction price, and (iii) allocating the transaction price to the satisfied and unsatisfied performance obligations. We believe that the impact on the opening balance of retained earnings during the period (October 1, 2018) would not have been significantly different had we not elected to use the practical expedients.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1—Business and Basis of Presentation (Continued)
The Company recognizes disability fee income for GAR Disability Advocates and Five Star when disability claimant’s cases close, when cash is received or when the Company receives a notice of award from the Social Security Administration (“SSA”) or the Veterans Administration that stipulates the amount of fee approved by the SSA to be paid to the Company. The Company establishes a reserve for the differentials in amounts awarded by the SSA compared to the actual amounts received by the Company. Fees paid to the Company are withheld by the SSA against the claimant's disability claim award, and are remitted directly to the Company from the SSA.
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 utilizes third-party collection agencies and attorney networks.
Income taxes
Deferred federal and state taxes arise from (i) recognition of finance income collected for tax purposes, but not yet recognized for financial reporting; (ii) provision for impairments/credit losses, all resulting in timing differences between financial accounting and tax reporting; (iii) amortization of intangibles resulting in timing differences between financial accounting and tax reporting; (iv) stock based compensation; and (v) partnership investments.
Fair Value Hierarchy
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 Company records its available-for-sale debt securities and investments in equity securities at estimated fair value on a recurring basis. The accompanying consolidated financial statements include estimated fair value information regarding its available-for-sale debt securities and investments in equity securities as of March 31, 2019, 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 net assets acquiredor liabilities that are developed using the reporting entities’ estimates and assumptions, which reflect those that market participants would use.
Reclassification
Certain prior period amounts in a business combination, and is accounted for under ASC 350. Goodwill has an indefinite useful life and is evaluated for impairment at the reporting-unit level on an annual basis during the fourth quarter or more frequently if events or changes in circumstances indicate potential impairment between annual measurement dates. The Company has the option of performing a qualitative assessment of impairmentaccompanying condensed consolidated financial statements have been reclassified to determine whether any further quantitative testing for impairment is necessary. The initial qualitative approach assesses whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company determines it is more likely than not that the fair value is less than carrying value, a two step quantitative impairment test is performed. A step 1 analysis involves calculating the fair value of the associated reporting unit and comparing itconform to the reporting unit’s carrying value. If the fair valuecurrent year presentation. These reclassifications had no effect on previously reported net income or stockholders' equity.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1—Business and Basis of Presentation (Continued)
Recent Accounting Pronouncements
In May 2014,Adopted During The Six Months EndedMarch 31, 2019
On October 1, 2018, the Company adopted FASB issued an update to ASC 606 Revenuethat requires use of a single principles-based model for recognition of revenue from Contractscontracts with Customers that will supersede virtually all existing revenue guidance. Under this update, an entitycustomers. The core principle of the model 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 reportingThe Company adopted the new guidance using the modified retrospective approach which did not require the restatement of prior periods, beginning after December 15, 2017 including interim periods within that reporting period. Early application is permitted for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Based onand recognized a cumulative effect adjustment resulting in an increase in total assets and retained earnings of $173,000, net of taxes of $80,000.
The most significant impact of ASC 606 relates to the Company’s evaluation, the Company does not believe this new standard will impact theCompany's accounting for its revenues.revenue associated with disability claimant's contracts. Previously, the Company recognized disability fee income when the disability claimants cases closed with the social security administration and the applicable fees were collected. Under the new guidance, the Company determined that the various advocacy services, performed on behalf of a claimant, constitute one performance obligation as they represent an integrated set of services designed to provide a claimant with a successful award. It was also determined that the benefit of these services is conveyed to the claimant at the point in time that the award is determined to be successful. In addition, the Company has made estimates of variable consideration under the expected value method. Therefore, for these arrangements, the Company will recognize revenue when each case is closed, when cash is received or when the Company receives a notice of award, stipulating the Company's fee earned on each case directly from the social security administration.
In January 2016,The primary impact of adopting the new standard results in acceleration of revenues for the aforementioned contractual arrangements, which relate to the social security disability advocacy segment. Disability fee income represents approximately 24.8% and 23.9% of the Company’s total consolidated revenues for the three and six months ended March 31, 2019.
The following line items in our consolidated statement of operations and comprehensive income for the current reporting period and condensed consolidated balance sheet as of March 31, 2019 have been provided to reflect both the adoption of ASC 606 as well as a comparative presentation in accordance with ASC 605 previously in effect:
Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) for the three months ended March 31, 2019 | As Reported (in accordance with ASC 606) | Balances Without Adoption of ASC 606 | Impact of Adoption Higher/(Lower) | |||||||||
Disability fee income | $ | 1,296,000 | $ | 1,290,000 | $ | 6,000 | ||||||
Income from continuing operations before income tax | $ | 2,411,000 | $ | 2,405,000 | $ | 6,000 | ||||||
Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) for the six months ended March 31, 2019 | As Reported (in accordance with ASC 606) | Balances Without Adoption of ASC 606 | Impact of Adoption Higher/(Lower) | |||||||||
Disability fee income | $ | 2,557,000 | $ | 2,428,000 | $ | 129,000 | ||||||
Income from continuing operations before income tax | $ | 4,157,000 | $ | 4,028,000 | $ | 129,000 | ||||||
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1—Business and Basis of Presentation (Continued)
As of March 31, 2019 | ||||||||||||
Condensed Consolidated Balance Sheet | As Reported (in accordance with ASC 606) | Balances Without Adoption of ASC 606 | Impact of Adoption Higher/(Lower) | |||||||||
Asset | ||||||||||||
Accounts receivable | $ | 382,000 | $ | — | $ | 382,000 | ||||||
Stockholders' equity | ||||||||||||
Retained earnings | $ | 85,652,000 | $ | 85,399,000 | $ | 253,000 | (1) | |||||
(1) Does not include the tax impact of $80,000
On October 1, 2018, the Company adopted FASB issued ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The main objective in developing this update is enhancing the reporting model for financial instrumentsLiabilities, to provide users of financial statements with more decision-useful information. The amendments in this update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The effective datemain provision of this guidance requires certain investments in equity securities to be measured at fair value with changes in fair value recognized in net earnings; separate presentation in other comprehensive income for changes in fair value of financial liabilities measured under the fair value option that are due to instrument-specific credit risk; and changes in disclosures associated with the fair value of financial instruments. Upon adoption of this update isASU, the Company's investments in equity securities are no longer classified as available for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Thesale, and changes in fair value are reflected in other income, net on the Company's condensed consolidated statement of operations. In conjunction with this adoption, the Company is currently evaluating the impact this update will have on its consolidated financial statements.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1—Business$10,000 and Basisan increase to opening accumulated other comprehensive income of Presentation(continued)
��
Recent Accounting Pronouncements(continued)$10,000, net of tax benefit of $5,000.
In FebruaryAugust 2016, the FASB issued ASU No. 2016-02 Leases2016-15 "Statement of Cash Flows (Topic 842)230): Classification of Certain Cash Receipts and Cash Payments." This ASU made eight targeted changes to amend lease accounting requirementshow cash receipts and requires entities to generally recognize oncash payments are presented and classified in the balance sheet operating and financing lease liabilities and corresponding right-of-use assets.statement of cash flows. The new standard will require significant additional disclosures about the amount, timing and uncertainty of cash flows from leases. The standard update is effective for fiscal years beginning after December 15, 2018 and interim periods within those years and early2017. Early adoption iswas permitted. The new standard isrequired adoption on a retrospective basis unless it impracticable to be applied usingapply, in which case the Company would have been required to apply the amendments prospectively as of the earliest date practicable. The Company's adoption of the ASU did not have a modified retrospective approach and includes a numbermaterial effect on the Company’s condensed consolidated statements of optional practical expedients that entities may elect to apply. The Company is currently evaluating the impact of adopting this update on its consolidated financial statements and expects that most of its operating leases will be subject to the accounting standard update and will recognize as operating lease liabilities and right-of-use assets upon adoption. cash flows.
In March 2016,January 2017, the FASB issued ASU No. 2016-09, Compensation-Stock2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.” The new rules provide for the application of a screen test to consider whether substantially all the fair value of the assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If the screen test determines this to be true, the set is not a business. The new standard was effective for the Company in the first quarter of 2019. The adoption of the new accounting rules did not have a material impact on the Company’s consolidated financial condition, results of operations or cash flows.
In March 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share Based Payment Accounting, to simplify and improve areas of generally accepted accounting principles for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The effective date for this update iswas for annual reporting periods beginning after December 15, 2016,2017, including interim periods within that reporting period. The adoption of this update did not have a material impact on the Company's consolidated financial statements.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1—Business and Basis of Presentation (Continued)
Recent Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) which requires lessees to recognize right-of-use assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. For a lease with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize a right-of-use asset and lease liability. Additionally, when measuring assets and liabilities arising from a lease, optional periods should be included only if the lessee is reasonably certain to exercise an option to extend the lease, exercise a purchase option or not exercise an option to terminate the lease. In January 2018, the FASB issued ASU No. 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to ASC 842. ASU No. 2018-01 was issued to address concerns about the cost and complexity of complying with the transition provisions of ASU No. 2018-01. Additionally, in July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements, ” which provides an alternative transition method that permits an entity to use the effective date of ASU No. 2016-02 as the date of initial application through the recognition of a cumulative effect adjustment to the opening balance of retained earnings upon adoption. The standard becomes effective in for fiscal years beginning after December 15, 2019 and interim periods within those years, and early adoption is permitted. The Company is currently evaluatingin the process of reviewing its existing leases, including service contracts for embedded leases to evaluate the impact of this update will havestandard on its consolidated financial statements. statements and the impact on regulatory capital.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For the Company, this update will be effective for interim periods and annual periods beginning after December 15, 2019. Upon adoption, the Company expects that it will accelerate the recording of its credit losses in its financial statements.
In August 2016,January 2017, the FASB issued ASU 2016-15, StatementNo. 2017-04 Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The objective of Cash Flows (Topic 230): Classification this update is to simplify the subsequent measurement of goodwill, by eliminating step 2 from the goodwill impairment test. The amendments in this update are effective for annual periods beginning after December 15, 2019, and interim periods within those fiscal years. The Company does not believe this update will have a material impact on its consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, Reclassificationof Certain Cash ReceiptsTax Effects from Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income (loss) to retained earnings for stranded tax effects resulting from the Tax Cuts and Cash Payments.Jobs Act enacted on December 22, 2017, and requires certain disclosures about stranded tax effects. ASU 2018-02 will be effective for the Company's fiscal year beginning October 1, 2019, with early adoption permitted, and should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Act is recognized. The adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This ASU will make eight targetedmodifies the disclosure requirements on fair value measurements. The ASU removes the requirement to disclose: the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 3 fair value measurements. The ASU requires disclosure of changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to how cash receipts and cash payments are presented and classified in the statement of cash flows. The new standarddevelop Level 3 fair value measurements. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case the Company would be required to apply the amendments prospectively as of the earliest date practicable.2019. The Company is in the process ofcurrently evaluating the provisionsimpact this guidance will have on its consolidated financial statements.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2—Principles of ConsolidationInvestments in Debt and Equity Securities
The consolidated financial statements include the accounts of Asta Funding, Inc. and its wholly owned and majority owned subsidiaries. All significant intercompany balances and transactions have been eliminatedInvestments in consolidation.
Equity Securities
Note 3—Available-for-Sale Investments
Investments classified as available-for-saleof equity securities at June 30, 2017March 31, 2019 and September 30, 2016,2018, consists of mutual funds valued at $8.0 million and $7.6 million, respectively. See (1) below.
Net gains and losses recognized on investments in equity securities for the three and six months ended March 31, 2019 are as follows:
For the Three Months Ended March 31, 2019 | For the Six Months Ended March 31, 2019 | |||||||
Net gains and losses recognized during the period on equity securities | $ | 50,000 | $ | 21,000 | ||||
Less: Net gains and losses recognized during the period on equity securities sold during the period | — | — | ||||||
Unrealized gains and losses recognized during the reporting period on equity securities still held at the reporting date | $ | 50,000 | $ | 21,000 | ||||
Available for Sale Debt Securities
Available for sale debt securities at March 31, 2019 and September 30, 2018, consist of the following:
Amortized | Unrealized | Unrealized | Fair Value | |||||||||||||
June 30, 2017 | $ | 5,500,000 | $ | - | $ | - | $ | 5,500,000 | ||||||||
September 30, 2016 | $ | 55,724,000 | $ | 1,089,000 | $ | (49,000 | ) | $ | 56,764,000 | |||||||
March 31, 2019 | Amortized | Unrealized | Unrealized | Fair Value | ||||||||||||
Available for sale debt securities | $ | 38,080,000 | $ | 310,000 | $ | — | $ | 38,390,000 | ||||||||
TheAt March 31, 2019, the Company had $38.4 million in U.S. Treasury Bills, classified as available-for-sale investments do not have any contractual maturities. The Company solddebt securities on the Company's condensed consolidated balance sheet. These treasury bills had $223,000 (net of tax expense of $87,000) in unrealized gains that were recorded in other comprehensive income for the six investments during the nine months ended JuneMarch 31, 2019.
September 30, 2018 (1) | Amortized | Unrealized | Unrealized | Fair Value | ||||||||||||
Available for sale debt securities | $ | 30,479,000 | $ | — | $ | — | $ | 30,479,000 | ||||||||
(1) At September 30, 2017, with a realized loss of $1,011,000. The Company received $177,000 in capital gains distributions during the nine months ended June 30, 2017. For the nine months ended June 30, 2016,2018, the Company sold threereported investments within equity securities and available for sale debt securities as a realized losssingle line item on the Company's condensed consolidated balance sheet. With the Company's adoption of $63,000 and also received $47,000 in capital gains distributions during that period. The Company recorded an aggregate realized loss of $834,000 related to its available-for-sale securities for the first nine months ended June 30, 2017 compared to an aggregate realized loss of $16,000 for the nine month period ended June 30, 2016. The Company sold three investments during the three months ended June 30, 2017 with a realized loss of $18,000. For the three months ended June 30, 2016,ASU No. 2016-01 on October 1, 2018, the Company sold one investment with a realized loss of $32,000. has included the current breakout above for comparability purposes only.
At JuneSeptember 30, 2017, there was one investment without any recognized unrealized gain or loss. This security is considered2018, the Company had $30.5 million in U.S. Treasury Bills, which are carried at fair value, and are classified as available for sale debt securities. Both the mutual funds and the U.S. Treasury Bills are deemed to be level 2 assets, none of which were in an acceptable credit risk. Based on the evaluation of the available evidence, including recent changes in market rates and credit rating information, management believes if any decline in fair valueunrealized loss position that had existed for these instruments is temporary.12 months or more. In addition, management hashad the ability but did not believe it would be required to hold this investment securitysell those investments in debt securities for a period of time sufficient to allow for an anticipated recovery or maturity. Should the impairment of any securityof those 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 iswere identified.
Unrealized holding gains and losses on available-for-saleavailable for sale debt securities are included in other comprehensive income (loss) within stockholders’ equity. Realized gains (losses) on available-for-saleavailable for sale debt securities are included in other income (loss) and, when applicable, are reported as a reclassification adjustment in other comprehensive income (loss).
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4—3—Consumer Receivables Acquired for Liquidation
Accounts acquired for liquidation are stated at their net estimated realizable valuecost and consist primarily of defaulted consumer loans toof individuals primarily, throughout the United States and South America.
The Company may account for its investments in consumer receivable portfolios, using either:
the interest method; or
the cost recovery method.
Prior to October 1, 2013, the Company accounted for certain of its investments in finance receivables using the interest method in accordance with the guidance of ASC 310, Receivables. 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 in the circumstances.
Although the Company has switched to the cost recovery method on its current inventory of portfolios, the Company must still analyze a portfolio upon acquisition to ensure which method is appropriate, and once a static pool is established for a quarter, individual receivable accounts are not added to the pool (unless replaced by the seller) or removed from the pool (unless sold or returned to the seller).
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 has extensive liquidating experience in the field of distressed credit card receivables, telecommunication receivables, consumer loan receivables, retail installment contracts, consumer receivables, and auto deficiency receivables.
The Company aggregates portfolios of receivables acquired sharing specific common characteristics which were acquired within a given quarter. In addition, the Company uses a variety of qualitative and quantitative factors to estimate collections and the timing thereof. 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 further evidentiary matter, to assist in evaluating and developing collection strategies and in evaluating and modeling the expected cash flows for a given portfolio.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4—Consumer Receivables Acquired for Liquidation(continued)
The following tables summarize the changes in the consolidated balance sheet account of consumer receivables acquired for liquidation during the following periods:
For the Three Months Ended June 30, | For the Three Months Ended March 31, | |||||||||||||||
2017 | 2016 | 2019 | 2018 | |||||||||||||
Balance, beginning of period | $ | 11,651,000 | $ | 16,784,000 | $ | 3,071,000 | $ | 6,010,000 | ||||||||
Acquisitions of receivable portfolio | — | 329,000 | ||||||||||||||
Net cash collections from collection of consumer receivables acquired for liquidation | (6,100,000 | ) | (7,095,000 | ) | (3,889,000 | ) | (4,753,000 | ) | ||||||||
Net cash collections represented by account sales of consumer receivables acquired for liquidation | (1,000 | ) | (83,000 | ) | — | |||||||||||
Impairment | (148,000 | ) | — | |||||||||||||
Effect of foreign currency translation | (264,000 | ) | (7,000 | ) | (37,000 | ) | 167,000 | |||||||||
Finance income recognized | 3,980,000 | 4,612,000 | 3,481,000 | 4,101,000 | ||||||||||||
Balance, end of period | $ | 9,118,000 | $ | 14,540,000 | $ | 2,626,000 | $ | 5,525,000 | ||||||||
Finance income as a percentage of collections | 65.2 | % | 64.3 | % | 89.5 | % | 86.3 | % | ||||||||
For the Six Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Balance, beginning of period | $ | 3,749,000 | $ | 6,841,000 | ||||
Net cash collections from collection of consumer receivables acquired for liquidation | (7,914,000 | ) | (9,698,000 | ) | ||||
Net cash collections represented by account sales of consumer receivables acquired for liquidation | — | (2,000 | ) | |||||
Effect of foreign currency translation | (184,000 | ) | 98,000 | |||||
Finance income recognized | 6,975,000 | 8,286,000 | ||||||
Balance, end of period | $ | 2,626,000 | $ | 5,525,000 | ||||
Finance income as a percentage of collections | 88.1 | % | 85.4 | % | ||||
For the Nine Months Ended June 30, | ||||||||
2017 | 2016 | |||||||
Balance, beginning of period | $ | 13,671,000 | $ | 15,608,000 | ||||
Acquisitions of receivable portfolio | 2,213,000 | 6,470,000 | ||||||
Net cash collections from collection of consumer receivables acquired for liquidation | (18,288,000 | ) | (21,869,000 | ) | ||||
Net cash collections represented by account sales of consumer receivables acquired for liquidation | (191,000 | ) | (83,000 | ) | ||||
Impairment | (148,000 | ) | (124,000 | ) | ||||
Effect of foreign currency translation | (138,000 | ) | (130,000 | ) | ||||
Finance income recognized | 11,999,000 | 14,668,000 | ||||||
Balance, end of period | $ | 9,118,000 | $ | 14,540,000 | ||||
Finance income as a percentage of collections | 64.9 | % | 66.8 | % | ||||
During the three and nine month periodssix months ended June 30, 2017,March 31, 2019 and 2018 the Company purchased $0.0did not purchase any new portfolios.
As of March 31, 2019, the Company held consumer receivables acquired for liquidation from Peru and Colombia of $1.5 million and $35.0$0.7 million, respectively,respectively. The total amount of face valueforeign consumer receivables acquired for liquidation was $2.2 million, or 85.9% of the $2.6 million in total consumer receivables held at March 31, 2019. Of the total consumer receivables three individual portfolios comprise 22%, 14% and 12% of the overall asset balance at a costMarch 31, 2019.
As of $0.0September 30, 2018, the Company held consumer receivables acquired for liquidation from Peru and Colombia of $2.0 million and $2.2$1.3 million, respectively. DuringThe total amount of foreign consumer receivables acquired for liquidation was $3.3 million, or 88.7% of the total consumer receivables held of $3.7 million at September 30, 2018. Of the total consumer receivables three individual portfolios comprise 20%, 11% and 11% of the overall asset balance at September 30, 2018.
As of March 31, 2019, and September 30, 2018, 5.0% and 5.9% of the Company's total assets were related to its international operations, respectively. For the three and nine month periodssix months ended June 30, 2016, the Company purchased $2.2 millionMarch 31, 2019 and $123.2 million,2018, 4.9% and 3.1%, respectively, and 4.9% and 2.7%, respectively, of the Company's total revenue were related to its international operation.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3—Consumer Receivables Acquired for Liquidation (Continued)
At March 31, 2019, and September 30, 2018, approximately 31% of the Company’s portfolio face value portfolioswas serviced by five collection organizations. The Company has servicing agreements in place with these five collection organizations, as well as all of the Company’s other third-party collection agencies and attorneys that cover standard contingency fees and servicing of the accounts. While the five collection organizations represent only 31% as of March 31, 2019 and September 30, 2018, of the Company’s portfolio face value, it does represent approximately 87% of the Company’s portfolio face value at a costall third-party collection agencies and attorneys as of $0.3 millionMarch 31, 2019 and $6.5 million, respectively.September 30, 2018.
The following table summarizes collections received by the Company’s third-party collection agencies and attorneys, less commissions and direct costs, for the three and nine month periodssix months ended June 30, 2017March 31, 2019 and 2016,2018, respectively.
For the Three Months Ended June 30, | For the Nine Months Ended June 30, | For the Three Months Ended March 31, | For the Six Months Ended March 31, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
Gross collections (1) | $ | 10,618,000 | $ | 11,097,000 | 32,736,000 | 33,965,000 | $ | 7,362,000 | $ | 8,590,000 | $ | 15,582,000 | $ | 17,583,000 | ||||||||||||||||||
Commissions and fees (2) | �� | 4,517,000 | 3,919,000 | 14,257,000 | 12,013,000 | (3,473,000 | ) | (3,837,000 | ) | (7,668,000 | ) | (7,883,000 | ) | |||||||||||||||||||
Net collections | $ | 6,101,000 | $ | 7,178,000 | $ | 18,479,000 | $ | 21,952,000 | $ | 3,889,000 | $ | 4,753,000 | $ | 7,914,000 | $ | 9,700,000 | ||||||||||||||||
(1) | Gross collections |
(2) | Commissions |
Note 4—Equity Method Investments
Acquisition of Equity Method Investment
On December 28, 2011, the Company entered into a joint venture, Pegasus Funding, LLC ("Pegasus"), with Pegasus Legal Funding, LLC (“PLF”). The Company had an 80% non-controlling interest in the joint venture from the date of formation through January 12, 2018. During this time period the Company had operational disagreements with PLF, resulting in the amendment of the Pegasus operating agreement, the execution of a liquidation agreement and finally the filing of an arbitration against PLF by the Company.
On January 12, 2018, the Company, ASFI and Fund Pegasus entered into a Settlement Agreement and Release (the “Settlement Agreement”) by and among the Company, ASFI, Fund Pegasus, Pegasus, PLF, Max Alperovich, Alexander Khanas, Larry Stoddard, III, Louis Piccolo and A.L. Piccolo & Co., Inc., a New York corporation. The Settlement Agreement releases certain claims in exchange for, among other things, the parties' entry into the Purchase Agreement (defined below).
On January 12, 2018, ASFI entered into a Membership Interest Purchase Agreement (the “Purchase Agreement) with PLF. Under the Purchase Agreement, ASFI bought PLF’s ownership interests of Pegasus, which was 20% of the issued and outstanding limited liability company interests of Pegasus, for an aggregate purchase price of $1.8 million. As a result of the execution of the Purchase Agreement, ASFI became the owner of 100% of the limited liability company interests of Pegasus, and recognized a loss on acquisition of $1.4 million, which is recorded in the Company’s consolidated financial statements. Immediately on acquisition, the Company changed the name from Pegasus to Sylvave.
The fair values of the assets acquired and liabilities assumed at the acquisition date are as follows:
Fair Value | ||||
Cash | $ | 5,748,000 | ||
Personal injury claim advances portfolio | 14,571,000 | |||
Accounts payable and accrued expenses | (664,000 | ) | ||
Total net assets acquired | $ | 19,655,000 | ||
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4—Equity Method Investments (continued)
As a result of the purchase of PLF’s 20% interest in Pegasus on January 12, 2018, under the Purchase Agreement, beginning on January 13, 2018, the Company consolidated the financial statements of Sylvave.
The results of operations of the Company’s historical equity method investment in Pegasus prior to acquisition on January 12, 2018 were as follows:
Condensed Statement of Operations Information | ||||||||
For the Period January 1, 2018 to January 12, 2018 | For the Period October 1, 2017 to January 12, 2018 | |||||||
Personal injury claims income | $ | 171,000 | $ | 671,000 | ||||
Operating expenses | (445,000 | ) | (386,000 | ) | ||||
Income from operations | $ | 616,000 | $ | 1,057,000 | ||||
Earnings from equity method investment | $ | 493,000 | $ | 845,000 | ||||
Serlefin
Serlefin Peru is the Company's 49% owned joint venture. The other 51% is owned by three individuals who share common ownership with Serlefin BPO&O Serlefin S.A. (“Serlefin”). Each owner maintains voting rights equivalent to their share ownership, and the 51% shareholders collectively manage the operations of the business. Based on the Company's ownership and voting rights, the Company lacks requisite control of Serlefin Peru, and therefore accounts for its investment in Serlefin Peru under the equity method of accounting.
Additionally, the Company and Serlefin jointly purchase international consumer debt portfolios under a purchase agreement. The Company and Serlefin purchase the portfolios on a pro-rata basis of 80% and 20%, respectively. The purchased portfolios are transferred to an administrative and payment trust, where the Company and Serlefin are trustees. Serlefin provides collection services to the trust, and receives a performance fee determined by the parties for each loan portfolio acquired. Serlefin received approximately $0.2 million and $0.5 million in performance fees for the three and six months ended March 31, 2019 and 2018, respectively.
The carrying value of the investment in Serlefin Peru was $0.2 million as of March 31, 2019 and September 30, 2018. The cumulative net loss from our investment in Serlefin Peru from the date of the initial investment through March 31, 2019 was approximately $0.3 million, and was not significant to the Company's consolidated statement of operations.
Note 5—AcquisitionPersonal Injury Claims Funding
Simia and Sylvave
On November 11, 2016, the Company formed Simia, a wholly owned subsidiary, to continue its personal injury claims funding business following the Company's decision not to renew its joint venture with PLF. Simia commenced operation in January 2017, and conducts its business solely in the United States. As of CBCMarch 31, 2019, Simia had a personal injury claims portfolio of $1.6 million, and recognized revenue for the three and six months then ended of $15,000 and $29,000, respectively. As of September 30, 2018, Simia had a personal injury claims portfolio of $2.3 million, and recognized revenue of $141,000 and $247,000, respectively, for the three and six months ended March 31, 2018.
As of March 31, 2019, Sylvave had a personal injury claims portfolio of $5.0 million, and recognized revenue for the three and six months then ended of $441,000 and $1,140,000, respectively. As of September 30, 2018, Sylvave had a personal injury claims portfolio of $8.4 million. For the three and six months ended March 31, 2018, Sylvave recognized revenue of $362,000.
As noted in Note 4 - Equity Method Investments, effective January 12, 2018, the Company accounts for Sylvave, its wholly owned subsidiary, on a consolidated basis. Simia and Sylvave remain in operation to continue to collect on their outstanding personal injury claim portfolios, but will not be funding any new advances to claimants.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5—Personal Injury Claims Funding (continued)
Practical Funding
The Company formed a new wholly owned subsidiary, Practical Funding, on March 16, 2018 to continue in the personal injury claims funding business. To date, Practical Funding has not funded any advances on personal injury claims. On April 8, 2019, Practical Funding changed its name to Arthur Funding, LLC.
The following tables summarize the changes in the balance sheet account of personal injury claim portfolios held by Simia and Sylvave, net of reserves, for the following periods:
For the Three Months ended March 31, | ||||||||
2019 | 2018 | |||||||
Balance, beginning of period | $ | 8,813,000 | $ | 3,150,000 | ||||
Acquisition of personal injury funding portfolio (1) | — | 14,571,000 | ||||||
Personal claim advances | — | — | ||||||
Provision for losses | 45,000 | 16,000 | ||||||
(Write offs) recoveries | — | 36,000 | ||||||
Personal injury claims income | 456,000 | 469,000 | ||||||
Personal injury claims receipts | (2,684,000 | ) | (2,248,000 | ) | ||||
Balance, end of period | $ | 6,630,000 | $ | 15,994,000 | ||||
For the Six Months ended March 31, | ||||||||
2019 | 2018 | |||||||
Balance, beginning of period | $ | 10,745,000 | $ | 3,704,000 | ||||
Acquisition of personal injury funding portfolio (1) | — | 14,571,000 | ||||||
Personal claim advances | — | 60,000 | ||||||
Provision for losses | (158,000 | ) | (459,000 | ) | ||||
(Write offs) recoveries | 36,000 | |||||||
Personal injury claims income | 1,169,000 | 610,000 | ||||||
Personal injury claims receipts | (5,126,000 | ) | (2,528,000 | ) | ||||
Balance, end of period | $ | 6,630,000 | $ | 15,994,000 | ||||
(1) Fully acquired through the acquisition of Pegasus.
The Company recognized personal injury claims income of $0.5 million and $0.5 million for the three months ended March 31, 2019 and 2018, respectively, and $1.2 million and $0.6 million for the six months ended March 31, 2019 and 2018, respectively. The Company has recorded a reserve on principle fundings in personal injury claims of $1.4 million as of March 31, 2019 and $0.5 million as of September 30, 2018.
Note 6—Non-Recourse Debt
Non-Recourse Debt –Bank of Montreal (“BMO”)
In March 2007, Palisades XVI borrowed approximately $227 million under a Receivables Financing Agreement, as amended in July 2007, December 2007, May 2008, February 2009, October 2010 and August 2013 (the “RFA”) from BMO, in order to finance the Portfolio Purchase which had a purchase price of $300 million. The original term of the agreement was three years. This term was extended by each of the Second, Third, Fourth and Fifth Amendments and the most recent agreement signed in August 2013.
On August 7, 2013, Palisades XVI, a 100% owned bankruptcy remote subsidiary, entered into a Settlement Agreement and Omnibus Amendment (the “BMO Settlement Agreement”) with BMO as an amendment to the RFA. In consideration for a $15 million prepayment funded bythe 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 the Company, less certain credits for payments made prior to the consummation of the BMO 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 on the release was Palisades 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”). On June 3, 2014, Palisades XVI paid 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 was entitled to receive $16.9 million of future collections from the Portfolio Purchase before BMO would be entitled to receive any payments with respect to its Income Interest.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6—Non-Recourse Debt (continued)
During the month of June 2016, the Company received the balance of the $16.9 million and, as of March 31, 2019 and September 30, 2018, the Company recorded a liability to BMO of approximately $129,000 and $121,000, respectively, which has been recorded in accounts payable and accrued expenses on the Company’s consolidated balance sheet. The funds were subsequently remitted to BMO on April 11, 2019 and October 10, 2018, respectively. The liability to BMO is recorded when actual collections are received.
Note 7—Discontinued Operations
On December 31, 2013, the Company acquired 80% ownership of CBC and its affiliate, CBC Management Services, LLC for approximately $5.9 million.
On December 31, 2015, the Company acquired the remaining 20% ownership of CBC for $1,800,000,$1.8 million, through the issuance of restricted stock valued at approximately $1,000,000$1.0 million and $800,000$0.8 million in cash. Each of the two original principals of CBC received 61,652 shares of restricted stock at a fair market value of $7.95 per share and $400,000$0.4 million in cash. An aggregate of 123,304 shares of restricted stock were issued as part of the transaction. These shares are subject to a one year lock-up period in which the holders cannot sell the shares. In addition, the shares are subject to certain sales restrictions following the initial lock-up period, which expired on December 31, 2016 (see Note 15 – Stock Based Compensation).
On January 1, 2016, the Company renewed the expiring two-year employment agreements of the two CBC principals for one yearone-year terms. The employment contracts of the original two principals expired at the end of December 2016. The Company did not renew those contracts. Ryan Silverman was appointed CEO/General Counsel effective January 1, 2017 (see Note 11 – Commitments and Contingencies).
2017.
Note 6—Structured Settlements (At Fair Value)During November 2017, a competitor of CBC alleged that CBC had unlawfully purchased certain of the competitor's trade secrets and customer lists from intermediaries who allegedly arranged and/or paid for said materials from the competitor. CBC denied any wrongdoing and disclaimed liability. The parties settled the matter for a payment of $0.5 million on or about November 22, 2017, in exchange for a complete release.
On December 13, 2017, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement) with CBC purchasesHoldings LLC, a Delaware limited liability company (the “Buyer”). Under the Securities Purchase Agreement, the Company sold all of the issued and outstanding equity capital of CBC for an aggregate purchase price of approximately $10.3 million. Of the aggregate purchase price, approximately $4.5 million was paid in cash, and $5.8 million was paid under a promissory note at an annual interest rate of 7% to be paid quarterly to the Company and secured by a first priority security interest in and lien on such Buyer’s affiliates’ rights to certain servicing fees. See Note 8 - Note Receivable. The remaining amount of the aggregate purchase price was paid as reimbursement of certain invoices of CBC. The Company recognized a loss of approximately $2.4 million on the above sale of CBC as of September 30, 2017.
As a result of the sale of CBC, all prior periods presented in the Company's consolidated financial statements will account for CBC as a discontinued operation. This determination resulted in the reclassification of the assets and liabilities comprising the structured settlement business to assets related to discontinued operations in the consolidated balance sheets, and a corresponding adjustment to our consolidated statements of operations to reflect discontinued operations for all periods presented.
As of March 31, 2019, and September 30, 2018, the Company had no assets or liabilities designated as discontinued operations. For the three and six months ended March 31, 2019 and 2018, the components of the Company designated as discontinued operations reported a loss, net of income tax benefit of $0 and $80,000, respectively.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7—Discontinued Operations (Continued)
The following table presents the operating results for the three and six months ended March 31, 2019 and 2018, for the components of the Company designated as discontinued operations:
For the Three Months ended | For the Six Months ended | |||||||||||||||
March 31, 2019 | March 31, 2018 | March 31, 2019 | March 31, 2018 | |||||||||||||
Revenues: | ||||||||||||||||
Unrealized gain on structured settlements | $ | — | $ | — | $ | — | $ | 244,000 | ||||||||
Interest income on structured settlements | — | — | — | 2,005,000 | ||||||||||||
Total revenues | — | — | — | 2,249,000 | ||||||||||||
Other income | — | 11,000 | ||||||||||||||
| — | — | |||||||||||||||
| — | 2,260,000 | |||||||||||||||
Expenses: | — | — | ||||||||||||||
General and administrative expenses | — | — | — | 1,560,000 | ||||||||||||
Interest expense | �� | 824,000 | ||||||||||||||
| — | — | |||||||||||||||
| — | 2,384,000 | |||||||||||||||
| — | — | |||||||||||||||
Loss from discontinued operations before income tax | — | — | — | (124,000 | ) | |||||||||||
Income tax benefit from discontinuing operations | $ | — | $ | — | — | (44,000 | ) | |||||||||
Loss from discontinued operations, net of income tax | $ | — | $ | — | $ | — | $ | (80,000 | ) | |||||||
Prior to its sale, we, through CBC, purchased periodic payments under structured settlements and annuity policies from individuals in exchange for a lump sum payment. The Company elected to carry the structured settlements at fair value. Unearned income on structured settlements is recognized as interest income using the effective interest method over the life of the related structured settlement. Changes in fair value are recorded in unrealized gain (loss) on structured settlements in the Company’s statements of operations. Unrealized gains on structured settlements is comprised of both unrealized gains resulting from fair market valuation at the date of acquisition of the structured settlements and the subsequent fair value adjustments resulting from the change in the discount rate. Of the $5.2$0.2 million of unrealized gains recognized infor the nine month periodsix months ended June 30, 2017,March 31, 2018, approximately $5.9$0.2 million is due to day one gains on new structured settlements financed during the period, $0.8 million gain due to a change in the discount rate, offset by a decrease of $1.5 million in realized gains recognized as realized interest income on structured settlements during the period. There were no other changes in assumptions during the period.
We elected the fair value treatment under ASC 825-10-50-28 through 50-32 to be transparent to the user regarding the underlying fair value of the structured settlement which collateralizes the debt of CBC. The Company believes any change in fair value is driven by market risk as opposed to credit risk associated with the underlying structured settlement annuity issuer.
The purchased personal injury structured settlements result in payments over time through an annuity policy. Most of the annuities acquired involve guaranteed payments with specific defined ending dates. CBC also purchases a small number of life contingent annuity payments with specific ending dates but the actual payments to be received could be less due to the mortality risk associated with the measuring life. CBC records a provision for loss each period. The life contingent annuities are not a material portion of assets at June 30, 2017.
On April 28, 2017, CBC entered into an Assignment Agreement (the “Assignment Agreement”) by and among CBC and an unrelated third party (Assignee”). The Assignment Agreement provided for the sale of a portion of the Company’s life contingent asset portfolio included in the Company’s structured settlements to the Assignee for a purchase price of $7.7 million. The Company realized a loss from the sale of $5.3 million for the three months and nine months ended June 30, 2017.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6—Structured Settlements (At Fair Value)(continued)
Structured settlements consist of the following as of June 30, 2017 and September 30, 2016:
June 30, 2017 | September 30, 2016 | |||||||
Maturity (1) (2) | $ | 135,132,000 | $ | 133,059,000 | ||||
Unearned income | (46,087,000 | ) | (47,351,000 | ) | ||||
Structured settlements, net | $ | 89,045,000 | $ | 85,708,000 | ||||
|
|
|
|
Encumbrances on structured settlements as of June 30, 2017 and September 30, 2016 are as follows:
June 30, 2017 | September 30, 2016 | |||||||
Notes payable secured by settlement receivables with principal and interest outstanding payable until June 2025 (3) | $ | 1,716,000 | $ | 1,862,000 | ||||
Notes payable secured by settlement receivables with principal and interest outstanding payable until August 2026 (3) | 3,947,000 | 4,242,000 | ||||||
Notes payable secured by settlement receivables with principal and interest outstanding payable until April 2032 (3) | 3,907,000 | 3,987,000 | ||||||
Notes payable secured by settlement receivables with principal and interest outstanding payable until February 2037 (3) | 17,765,000 | 18,978,000 | ||||||
Notes payable secured by settlement receivables with principal and interest outstanding payable until March 2034 (3) | 13,780,000 | 14,507,000 | ||||||
Notes payable secured by settlement receivables with principal and interest outstanding payable until February 2043 (3) | 13,259,000 | 13,705,000 | ||||||
Notes payable secured by settlement receivables with principal and interest outstanding payable until January 2069 (3) | 17,761,000 | — | ||||||
$25,000,000 revolving line of credit (3) | 4,300,000 | 10,154,000 | ||||||
Encumbered structured settlements | 76,435,000 | 67,435,000 | ||||||
Structured settlements not encumbered | 12,610,000 | 18,273,000 | ||||||
Total structured settlements | $ | 89,045,000 | $ | 85,708,000 | ||||
|
|
At June 30, 2017, the expected cash flows of structured settlements based on maturity value are as follows:
September 30, 2017 (3 months) | $ | 2,679,000 | ||
September 30, 2018 | 9,020,000 | |||
September 30, 2019 | 9,312,000 | |||
September 30, 2020 | 8,989,000 | |||
September 30, 2021 | 9,474,000 | |||
Thereafter | 95,658,000 | |||
Total | $ | 135,132,000 |
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7—Litigation Funding
Personal Injury Claims
On December 28, 2011, the Company entered into a joint venture with Pegasus Legal Funding, LLC (“PLF”) in the operating subsidiary of Pegasus. Pegasus purchases interests in 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 wholly owned subsidiary, Simia, which commenced operations in January 2017, also engages in the personal injury claims business. The Company earned $10.0 million and $5.6 million in interest and fees during the nine and three month periods ending June 30, 2017, respectively, compared to $14.8 million and $9.8 million, respectively, during the nine and three month periods ending June 30, 2016. The Company had a net invested balance of $27.5 million and $48.3 million on June 30, 2017 and September 30, 2016, respectively. The Company records reserves for bad debts, which, at June 30, 2017 and 2016, amounted to $10.7 million and $7.0 million, as follows:
Three Months Ended June 30, 2017 | Three Months Ended June 30, 2016 | Nine Months Ended June 30, 2017 | Nine Months Ended June 30, 2016 | |||||||||||||
Balance at beginning of period | $ | 10,652,000 | $ | 6,175,000 | $ | 8,542,000 | $ | 5,459,000 | ||||||||
Provisions for losses | 1,247,000 | 1,087,000 | 4,521,000 | 2,223,000 | ||||||||||||
Write offs | (1,195,000 | ) | (268,000 | ) | (2,359,000 | ) | (688,000 | ) | ||||||||
Balance at end of period | $ | 10,704,000 | $ | 6,994,000 | $ | 10,704,000 | $ | 6,994,000 | ||||||||
On November 8 2016, the Company entered into a binding Term Sheet (the “Term Sheet”) with ASFI Pegasus Holdings, LLC, Fund Pegasus, LLC, Pegasus Funding, LLC, Pegasus Legal Funding, LLC, Max Alperovich and Alexander Khanas. Pegasus is currently the Company’s personal injury claims funding business and is a joint venture that is 80% owned by the Company and 20% owned by PLF. The Company and PLF decided not to renew the Pegasus joint venture that, by its terms, terminated on December 28, 2016. The Term Sheet amends certain provisions to Pegasus’ operating agreement dated as of December 28, 2011 (as amended, the “Operating Agreement”) and governs the terms relating to the collection of its existing Pegasus portfolio (the “Portfolio”). —Note Receivable
Pursuant to the Term Sheet, the parties agreed that Pegasus will continue in existence in order to collect advances on its existing Portfolio. The Company will fund overhead expenses relatingSecurities Purchase Agreement, CBC sold to the collectionBuyer all of its Portfolio based on a budget agreed upon bythe issued and outstanding equity capital of CBC for $10.3 million. In conjunction with this sale the Company and PLF. Any cash received by Pegasus will be distributed to its members in the order provided for in the Operating Agreement. The Company will be repaid an amount equal to 20% of all principal collected on each investment paid back beginning October 1, 2016 and continuing through the collection of the Portfolio, which will be applied against the outstanding balance of overhead expenses previously advanced by the Company to Pegasus. Since January 2, 2017, additional overhead expenses advanced are being paid back monthly as incurred by the Company prior to the calculation and distribution of any profits.
In connection with the Term Sheet, the parties also entered into a customary mutual release and non-disparagement agreement as well as a release from the non-competition obligations under the Operating Agreement.
On November 11, 2016, the Company announced that it is continuing its personal injury claims funding business through the formation of a wholly owned subsidiary, Simia. On March 24, 2017, Simia purchased a portfolio of personal injury claims from a third party for approximately $3.0 million. The Company plans to grow Simia organically, but may from time to time purchase portfolio of assets from a third party if the opportunity presented aligns with the Company’s strategic growth plans.
The Company filed for arbitration with the American Arbitration Association ("AAA") against Pegasus in April 2017 for breaches in the Operating and Term Sheet. On April 18, 2017, the Company was granted an Emergent Award restraining the cash in Pegasus, until a formal arbitration panel is confirmed and can review the case. As of June 30, 2017 there was approximately $24.7$4.5 million in cash, that was restrained under the Emergent Award, and is classified as restricted on the Company's consolidated balance sheet.
On July 17, 2017, an arbitration panel was confirmed, and a hearing date has been scheduledPromissory Note (the “Note”) for August 25, 2017 on$5.8 million from the Company's motion to have PLF removed from managing Pegasus and replacing them with Company designated representatives, and to permit disbursements to the Company in accordance with the Operating and Liquidation Agreements.
Matrimonial Claims (included in Other Assets)
On May 8, 2012, the Company formed EMIRIC, LLC, a wholly owned subsidiary of the Company. EMIRIC, LLC entered into a joint venture with California-based Balance Point Divorce Funding, LLC (“BP Divorce Funding”) to create the operating subsidiary BP Case Management, LLC (“BPCM”). BPCM is 60% owned by the Company and 40% owned by BP Divorce Funding. BPCM provides non-recourse funding to a spouse in a matrimonial action. In 2012, the Company provided a $1.0 million revolving line of credit to partially fund BPCM’s operations, with such loan bearingBuyer. The Note bears interest at the prevailing prime rate, with an initial term7% per annum, payable in quarterly installments of twenty-four months. In September 2014, theagreement was revised to extend the term of the loan to August 2016, increase the credit line to $1.5 millionprinciple and include a personal guarantee of the principal of BP Divorce Funding. Effective August 14, 2016, the Company extended its revolving line of credit with BP Divorce Funding until March 31, 2017, at substantially the same terms as the September 2014 amendment. On April 1, 2017, BP Divorce Funding defaulted on this agreement,interest through December 13, 2020, and as such, the loan balance of approximately $1.5 million was deemed uncollectible and was written off in general and administrative expenses on the consolidated statement of operations during the second quarter of fiscal 2017. As of June 30, 2017, the Company’s investment in cases through BPCM was approximately $1.7 million. There was no income recognized for the nine months ended June 30, 2017 and 2016 and the Company recorded bad debt expense of $0.7 million during the three months ended June 30, 2017.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
N
ote 8—Furniture & Equipment
Furniture and equipment consist of the following as of the dates indicated:
June 30, | September 30, | |||||||
2017 | 2016 | |||||||
Furniture | $ | 417,000 | $ | 417,000 | ||||
Equipment | 242,000 | 234,000 | ||||||
Software | 1,363,000 | 1,350,000 | ||||||
| 2,022,000 | 2,001,000 | |||||||
Less accumulated depreciation and amortization | 1,844,000 | 1,758,000 | ||||||
Balance, end of period | $ | 178,000 | $ | 243,000 | ||||
Note 9—Non Recourse Debt
Non-Recourse Debt –Bank of Montreal (“BMO”)
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 (the “RFA”) from BMO, in order to finance the Portfolio Purchase which had a purchase price of $300 million. The original term of the agreement was three years. This term was extended by each of the Second, Third, Fourth and Fifth Amendments and the most recent agreement signed in August 2013.
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 Palisades 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”). 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 was entitled to receive $16.9 million of future collections from the Portfolio Purchase before BMO would be entitled to receive any payments with respect to its Income Interest.
During the month of June 2016, the Company received the balance of the $16.9 million, and, as of June 30, 2017, the Company recorded a liability to BMO of approximately $164,000, which has been recorded in other liabilities in the Company’s consolidated balance sheet. The funds were subsequently remitted to BMO on July 10, 2017. The liability to BMO is recorded when actual collections are received.
Bank Hapoalim B.M. (“Bank Hapoalim”) Line of Credit
On May 2, 2014, the Company obtained a $20 million line of credit facility from Bank Hapoalim, pursuant to a Loan Agreement (the “Loan Agreement”) among the Company and its subsidiary, Palisades Collection, LLC, as borrowers (the “Borrowers”), and Bank Hapoalim, as agent and lender. The Loan Agreement provided 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 was 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 included covenants that required the Company to maintain a minimum net worth of $150 million and pay an unused line fee. The facility was secured pursuant to a Security Agreement among the parties to the Loan Agreement,(the “Security Agreement”) with propertyan affiliate of the Borrowers serving as collateral.Buyer. Under the Security Agreement the Company has a first priority security interest and lien on all servicing fees received by the affiliate. The payment due from the Buyer on March 13, 2019 was not received by the Company, and accordingly, the Buyer was not current on its obligations under the Note at March 31, 2019. On March 30, 2016,April 11, 2019, the Company signed a forbearance agreement with the First AmendmentBuyer, whereby the Company agreed to forbear from exercising any enforcement remedies with respect to the Loan Agreement (the “First Amendment”) with Bank Hapoalim which amended certain termsloan documents, as long as payment in full of their banking arrangement.all amounts due were received by the Company no later than April 15, 2019. The First Amendment includes (a) the reduction of the interest rate to LIBOR plus 225 basis points; (b) a decrease in the minimum net worth requirement by $50 million, to $100principle amount outstanding on this Note at March 31, 2019 and September 30, 2018 was $3.8 million and (c) modifies$4.3 million, respectively. For the Net Loss requirement from a quarterly to an annual basis. All other terms ofthree and six months ended March 31, 2019 and 2018, the original agreement remainCompany recorded $65,000 and $80,000, respectively, and $154,000 and $101,000, respectively, in effect. The Company has borrowed $9.6 million against the facility, which was outstanding as of June 30, 2017. There is a $10.0 million aggregate balance in Bank Hapoaliminterest income, which has been reclassifiedclassified as restricted cashother income in the Company’s consolidated balance sheet since these assets serve as collateral for the linestatements of credit (seeoperations, associated with this note. See Note 1 – Business and Basis of Presentation). The line of credit facility expired on August 2, 2017 (see Note 22 – Subsequent Events). 7 - Discontinued Operations.
On April 15, 2019, the Company received a lump sum payment of $4 million from the buyer, consisting of $3.8 million in principle and $0.2 million in interest income. Effective April 15, 2019, the Note was paid in full, and the security interests that were secured by the Security Agreement were released by the Company back to the Buyer.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 9 — Settlements
In August 2014, the Company filed a lawsuit in Delaware state court against a third-party servicer arising from the third-party servicer’s failure to pay the Company certain amounts that are due the Company under a servicing agreement. The third-party servicer filed a counterclaim in the Delaware action alleging that the Company owes certain amounts to the third-party servicer for court costs pursuant to an alleged arrangement between the companies. On or about July 12, 2018, the parties agreed to settle the action pursuant to a settlement agreement and release, which provides for, among other things, the payment by the third-party servicer of $4.4 million to the Company pursuant to an agreed upon schedule with a lump sum payment to be made at the third anniversary of the agreement.
Note 10—Other Debt—CBC
These fee-based settlements are required to total $2.4 million and $4.4 million by the second and third anniversaries, respectively. To the extent that these fee-based settlement fees are less than these amounts, the servicer is required to make lump sum true-up payments.
The Company assumed $25.9 milliondetermined the fair value of debt relatedthis settlement using (i) historical collection history to estimate the CBC acquisition (see Note 5)fee based settlement fees that are expected to be received each month from the servicer; (ii) the contractual true-up dates, discussed above, in order to estimate the anticipated true-up payments that will be received from the servicer on December 31, 2013, including a $12.5 million line of credit withthe second and third anniversaries; and (iii) an imputed interest rate floor of 5.5%8.5%. Between March 27, 2014 and September 29, 2014, CBC entered into three amendments (Sixth Amendment through Eighth Amendment), resulting in the line of credit increasing to $22.0 million and the interest rate floor reduced to 4.75%. On March 11, 2015, CBC entered into the Ninth Amendment. This amendment, effective March 1, 2015, extended the maturity date on its credit line from February 28, 2015 to March 1, 2017. Additionally, the credit line was increased from $22.0 million to $25.0 million and the interest rate floor was decreased from 4.75% to 4.1%. Other terms and conditions were materially unchanged. In March 2017, the credit line was extended to April 28, 2017. On April 28, 2017, CBC entered into the Tenth Amendment, extending the credit line maturity date to June 30, 2017. On July 27, 2017 CBC entered into the Eleventh Amendment, extending the credit line maturity date to June 30, 2019 (see Note 22 – Subsequent Events).
On November 26, 2014, CBC completed its fourth private placement, backed by structured settlement and fixed annuity payments. CBC issued, through its subsidiary, BBR IV, LLC, approximately $21.8 million of fixed rate asset-backed notes with a yield of 5.4%. On September 25, 2015, CBC completed its fifth private placement, backed by structured settlement and fixed annuity payments. CBC issued, through its subsidiary, BBR V, LLC, approximately $16.6 million of fixed rate asset-backed notes with a yield of 5.1%. On July 8, 2016, CBC issued, through its subsidiary, BBR VI, approximately $14.8 million of fixed rate asset-backed notes with a yield of 4.85%. On April 7, 2017, CBC completed its seventh private placement, through its subsidiary, BBR VII, and issued approximately $18.3 million of fixed rate asset-backed notes with a yield of 5.0%.
As of June 30, 2017, the remaining debt amounted to $76.4 million, which consisted of $4.3 million drawdown from a line of credit from an institutional source and $72.1 million of notes payable issued by entities 100%-owned and consolidated by CBC. These entities are bankruptcy-remote entities created to issue notes secured by structured settlements. The following table details the other debt at June 30, 2017March 31, 2019, and September 30, 2016:2018, the Company has a settlement receivable due from this third-party servicer of $2.6 million and $3.3 million, respectively. During the six months ended March 31, 2019, the Company received $1.1 million in payments from this third-party servicer. For the three and six months ended March 31, 2019 and 2018, the Company recorded $58,000 and $0, respectively, and $126,000 and $0, respectively, in interest income, which is included in other income on the Company's consolidated statements of operations.
Interest Rate | June 30, | September 30, | ||||||||||
Notes payable secured by settlement receivables with principal and interest outstanding payable until June 2025 | 8.75 | % | $ | 1,716,000 | $ | 1,862,000 | ||||||
Notes payable secured by settlement receivables with principal and interest outstanding payable until August 2026 | 7.25 | % | 3,947,000 | 4,242,000 | ||||||||
Notes payable secured by settlement receivables with principal and interest outstanding payable until April 2032 | 7.125 | % | 3,907,000 | 3,987,000 | ||||||||
Notes payable secured by settlement receivables with principal and interest outstanding payable until February 2037 | 5.39 | % | 17,765,000 | 18,978,000 | ||||||||
Notes payable secured by settlement receivables with principal and interest outstanding payable until March 2034 | 5.07 | % | 13,780,000 | 14,507,000 | ||||||||
Notes payable secured by settlement receivables with principal and interest outstanding payable until February 2043 | 4.85 | % | 13,259,000 | 13,705,000 | ||||||||
Notes payable secured by settlement receivables with principal and interest outstanding payable until January 2069 | 5.0 | % | 17,761,000 | — | ||||||||
Subtotal notes payable | 72,135,000 | 57,281,000 | ||||||||||
$25,000,000 revolving line of credit expiring on June 30, 2019 | 4.1 | % | 4,300,000 | 10,154,000 | ||||||||
Total other debt – CBC | $ | 76,435,000 | $ | 67,435,000 | ||||||||
Additionally, on March 31, 2019 the Company recorded a settlement receivable due from a third-party servicer of $0.2 million in the Company's consolidated balance sheet, in conjunction with prior overcharges billed to the Company in excess of contractually permitted amounts. For the three and six months ended March 31, 2019, the Company recognized $0.3 million in settlement income associated with the excess charges, and has recorded as a gain on settlement in the Company's consolidated statements of operations.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 11—10—Commitments and Contingencies
Employment AgreementAgreements
TheOn March 10, 2016, the Company entered into an employment contractsagreement with an executive of the original two CBC principals expired atCompany. Under this agreement, the endexecutive will receive a base salary of December 2016.$275,000, subject to annual increases, and will be eligible to receive cash and non-cash bonuses. The Company did not renew those contracts. Ryan Silverman was appointed CEO/General Counsel, effective January 1, 2017. agreement has an 18 month non-compete and non-solicitation provision and has a one year term, and the term will be extended by one year on each anniversary date of the agreement.
As of July 17, 2017, Patrick F. Preece is no longer employed as Chief Executive Officer of Simia. On an interim basis Gary Stern, Chairman, Chief Executive Officer and President of the Company, will undertake the responsibilities of Simia’s Chief Executive Officer.
Leases
The Company leases its facilities in Englewood Cliffs, NJ, Houston, TX, New York, NY and Conshohocken, PA.Louisville, KY. The lease in Louisville, KY expired in December 2018 and was not renewed. Rent expense for the three and six months ended March 31, 2019 and 2018 was $68,000 and $74,000 and $140,000 and $144,000 respectively.
Legal Matters
In June 2015, a putative class action complaint was filed against the Company, and one of its third-party law firm servicers, alleging violation of the federal Fair Debt Collection Practices Act and Racketeer Influenced and Corrupt Organizations Act (“RICO”) and state law arising from debt collection activities and default judgments obtained against certain debtors.
The Company filed a motion to strike the class action allegations and compel arbitration or, to the extent the court declines to order arbitration, to dismiss the RICO claims. On or about March 31, 2015, the court denied the Company’s motion. The Company filed an appeal with the United States Court of Appeals for the Second Circuit. A mediation session was held in July 2015, at which the Company agreed to settle the action on an individual basis for a payment of $13,000 to each named plaintiff, for a total payment of $39,000. Payment was made on or about July 24, 2015. The third-party law firm servicer has not yet settled and remains a defendant in the case.
The plaintiffs’ attorneys advised that they were contemplating the filing of another putative class action complaint against the Company alleging substantially the same claims as those that were asserted in this matter. In anticipation of such an eventuality, the Company agreed to non-binding mediation in order to reach a global settlement with other putative class members, which would avert the possibility of further individual or class actions with respect to the affected accounts. To date, the parties have attended two mediation sessions and are continuing to discuss a global settlement. In connection with such discussions, the parties agreed in principle to settle the action for a payment of $3.9 million (which would be split equally between the Company and the law firm servicer). The Company and law firm servicer have also agreed to cease collection activity on the affected accounts.
Accordingly, the Company set up a reserve for settlement costs of $2.0 million during the three months ended March 31, 2016, which was included in general and administrative expenses in the Company's consolidated statement of operations.
The Company reassessed the situation at September 30, 2016 and deemed that an additional $0.3 million was necessary to account for legal expenses, which was made during the three month period ended September 30, 2016. The Company reviewed the case as of June 30, 2017 and deemed that the $2.3 million reserve remains sufficient.
The Company is a defendant in a lawsuit filed in Montana state court alleging fraud and abuse of process arising from the Company’s business relationship with an entity that finances divorce litigation proceedings. As of June 30, 2017, and based on its assessments of current facts and circumstances, the Company believes that it has recorded adequate reserves to cover future obligations associated with this lawsuit.
The Company filed a lawsuit in Delaware state court against a third party servicer arising from the third party servicer’s failure to pay the Company certain amounts that are due the Company under a servicing agreement. The third party servicer filed a counterclaim in the Delaware action alleging that the Company owes certain amounts to the third party servicer for court costs pursuant to an alleged arrangement between the companies. The Company believes that it has meritorious defenses against this counterclaim and will continue to vigorously defend itself against any such action.
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 areThe Company is not involved in any other material litigation in which we are a defendant.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 12—11—Income Recognition, Impairments, and Commissions and Fees
Income RecognitionTaxes
The Company accounts for certain of its investments in finance receivables using the guidance of FASB Accounting Standards Codification (“ASC”), Receivables — Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310”). Under the guidance of ASC 310, static pools of accounts are established. These pools are aggregated based on certain common risk criteria. Each static pool is recorded at cost and is accounted for as a single unit for the recognition of income, principal payments and loss provision. Due to the substantial reduction of portfolios reported under the interest method, and the inability 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.
Under the guidance of ASC 310-30, the Company must analyze a portfolio upon acquisition to ensure which method is appropriate, and once a static pool is established for a quarter, individual receivable accounts are not added to the pool (unless replaced by the seller) or removed from the pool (unless sold or returned to the seller).
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 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 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. When a case is closed and the 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 the claimant.
The funding of matrimonial actions is on a non-recourse basis. Revenue from matrimonial actions is 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 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 settlement. Changes in fair value are recorded in unrealized gain (loss) in structured settlements in our statements of operations.
The Company recognizes revenue for GAR Disability Advocates and Five Star when cases close and fees are collected.
Impairments
The Company accounts for its impairments in accordance with ASC 310, which provides guidance on how to account for differences between contractual and expected cash flows from an investor’s initial investment in loans or debt securities acquired in a transfer if those differences are attributable, at least in part, to credit quality. The recognition of income under ASC 310 is dependent on the Company having the ability to develop reasonable expectations of both the timing and amount of cash flows to be collected. In the event the Company cannot develop a reasonable expectation as to both the timing and amount of cash flows expected to be collected, ASC 310 permits the change to the cost recovery method. The Company will recognize income only after it has recovered its carrying value. If collection projections indicate the carrying value will not be recovered, an impairment is required. The impairment will be equal to the difference between the carrying value at the time of the forecast and the corresponding estimated remaining future collections.
In October 2014, the Company invested $5.0 million in Class A shares of the Topaz MP Fixed Income Fund (“Topaz Fund”), a closed end fund. The Topaz Fund invests indirectly in various portfolios of Non-Performing Small Consumer Loans. The objective of the fund is to obtain a fixed return cash flow representing interest on the invested capital. According to the investment memorandum of the fund, the Topaz Fund proposed to make semi-annual distributions of 14% annual compounded interest on June and December of each year. Since December 2015, no distribution has been received by the Company. The Company received letters from the fund’s General Partner explaining that the distributions were not made due to the negative performance of the fund for the periods.
During the fiscal year 2016, the Company recorded an impairment loss on this investment of $1.0 million, which was included in general and administrative expenses in the consolidated statements of operations. In fiscal year 2017, the Company received an announcement that the investment was being liquidated. After careful consideration, the $3.4 million carrying value of this investment was written off as of March 31, 2017.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 12—Income Recognition, Impairments, and Commissions and Fees(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 utilizes third party collection agencies and attorney networks.
Note 13—Income Taxes
At the end of each interim reporting period, the Company estimates its effective income tax rate expected to be applicable for the full year. The estimate is used in providing for income taxes on a year-to-date basis and may change in subsequent interim periods. The Company’s effective tax rate from operations for the three and six months ended June 30, 2017March 31, 2019 was 26.5% and nine months ended June 30, 2017 was 40% and 41% for each period,26.7% ,respectively, compared to 38%34% and 32%107.9%, respectively, in the same periods ofin the prior year. The effective rate for fiscal 20172019 and 2018 differed from the U.S. federal statutory rate of 34% due to state income taxes,21% and other permanent differences. The effective rate for fiscal 2016 differed from the U.S. federal statutory rate of 35%28%, respectively, primarily due to state income taxes, and other permanent differences.differences, and the first full year the reduced federal tax rate of 21% was applicable.
On December 22, 2017, the Tax Cuts and Jobs Act (the "Tax Act") was enacted into law in the United States. The Tax Act significantly revises corporate income tax law by, among other things, lowering the corporate income tax rates from 35% to 21%. Under GAAP, deferred taxes must be adjusted for enacted changes in tax laws or rates during the period in which new tax legislation is enacted. During the year ended September 30, 2018, tax expense of approximately $4.4 million was recorded, representing the revaluation of deferred tax assets and liabilities as a result of the lower corporate tax rate established by the Tax Act.
The Company files income tax returns in the U.S federal jurisdiction, various state jurisdictions, and various foreign countries. The tax returns for the 2014 through 2015 fiscal years are currently under examination by the Internal Revenue Service. The Company does not have any uncertain tax positions. The Company is no longer subject to examination by U.S federal income tax authorities for tax years prior to 2016. The Company has closed the Internal Revenue Service audit of its federal tax returns for years September 30, 2014 and 2015. Effective March 21, 2019, the Company received an approval of its 2014 carry-back claim of $3.2 million as part of this audit.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 14—12—Net Income (Loss) per Share
Basic per share data is calculateddetermined by dividing net income (loss) by the weighted average shares outstanding during the period. Diluted earnings per share data is calculated similarly, except that it includescomputed by dividing net income (loss) by the weighted average shares outstanding, assuming all dilutive effect of the assumed exercise of securities, including the effect ofpotential common shares issuable under the Company’s stock based compensation plans. With respect to thewere issued. The assumed proceeds from the exercise of dilutive options are calculated using the treasury stock method is calculated usingbased on the average market price for the period.
The following table presents the computation of basic and diluted per share data for the three and six months ended June 30, 2017March 31, 2019 and 2016 (rounded to the nearest thousands, except share data):2018:
For the Three Months Ended March 31, 2019 | For the Three Months Ended March 31, 2018 | For the Six Months Ended March 31, 2019 | For the Six Months Ended March 31, 2018 | |||||||||||||||||||||||||||||||||||||
Income (Loss) from continuing operations | $ | 1,773,000 | $ | 1,020,000 | $ | 3,048,000 | $ | (1,569,000 | ) | |||||||||||||||||||||||||||||||
Loss from discontinued operations | — | — | — | (80,000 | ) | |||||||||||||||||||||||||||||||||||
Net Income (Loss) | $ | 1,773,000 | $ | 1,020,000 | 3,048,000 | $ | (1,649,000 | ) | ||||||||||||||||||||||||||||||||
Basic earnings (loss) per common share from continuing operations | $ | 0.27 | $ | 0.15 | 0.46 | (0.24 | ) | |||||||||||||||||||||||||||||||||
Basic loss per common share from discontinued operations | — | — | — | (0.01 | ) | |||||||||||||||||||||||||||||||||||
Basic earnings (loss) per share | $ | 0.27 | $ | 0.15 | 0.46 | $ | (0.25 | ) | ||||||||||||||||||||||||||||||||
Three Months Ended June 30, 2017 | Three Months Ended June 30, 2016 | |||||||||||||||||||||||||||||||||||||||
Net | Weighted | Per | Net | Weighted | Per | |||||||||||||||||||||||||||||||||||
Diluted earnings (loss) per common share from continuing operations | $ | 0.27 | $ | 0.15 | 0.46 | (0.24 | ) | |||||||||||||||||||||||||||||||||
Diluted loss per common share from discontinuing operations | — | — | — | (0.01 | ) | |||||||||||||||||||||||||||||||||||
Diluted earnings (loss) per share | $ | 0.27 | $ | 0.15 | 0.46 | $ | (0.25 | ) | ||||||||||||||||||||||||||||||||
Weighted average number of common shares outstanding: | ||||||||||||||||||||||||||||||||||||||||
Basic | $ | 1,832,000 | 6,577,784 | $ | 0.28 | $ | 3,196,000 | 11,897,139 | $ | 0.27 | 6,685,415 | 6,655,855 | 6,685,415 | 6,639,659 | ||||||||||||||||||||||||||
Effect of Dilutive Stock | 301,298 | (0.01 | ) | 536,285 | (0.01 | ) | ||||||||||||||||||||||||||||||||||
Dilutive effect of stock options | 412 | 3,499 | 360 | — | ||||||||||||||||||||||||||||||||||||
Diluted | $ | 1,832,000 | 6,879,082 | $ | 0.27 | $ | 3,196,000 | 12,433,424 | $ | 0.26 | 6,685,827 | 6,659,354 | 6,685,775 | 6,639,659 | ||||||||||||||||||||||||||
The following table presents the computation of basic and diluted per share data for the nine months ended June 30, 2017 and 2016 (rounded to the nearest thousands, except share data):
Nine Months Ended June, 2017 | Nine Months Ended June 30, 2016 | |||||||||||||||||||||||
Net | Weighted | Per | Net | Weighted | Per | |||||||||||||||||||
Basic | $ | (5,394,000 | ) | 9,389,864 | $ | (0.57 | ) | $ | 3,171,000 | 12,023,156 | $ | 0.26 | ||||||||||||
Effect of Dilutive Stock | — | 270,917 | — | |||||||||||||||||||||
Diluted | $ | (5,394,000 | ) | 9,389,864 | $ | (0.57 | ) | $ | 3,171,000 | 12,294,073 | $ | 0.26 | ||||||||||||
For the three months ended June 30, 2017, 942,067 options at a weighted average exercise price of $8.15 were not included in the diluted earnings per share calculation as they were antidilutive.
For the three months ended June 30, 2016, 56,007 options at a weighted average exercise price of $12.55 were not included in the diluted earnings per share calculation as they were antidilutive
For the nine months ended June 30, 2016, 186,082 options at a weighted average exercise price of $10.88 were not included in the diluted earnings per share calculation as they were antidilutive
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 13—Stock Option Plans
Note 15—Stock Based Compensation2012
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.
On December 16, 2015, the Compensation Committee of the Board (“Compensation Committee”) granted 67,100 stock options to non-officer employees of the Company, of which 9,100 options vested immediately and the remaining 58,000 stock options vest in three equal annual installments and accounted for as one graded vesting award. The exercise price of these options was at the market price on that date. The weighted average assumptions used in the option pricing model were as follows:
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On December 16, 2015, the Compensation Committee granted 5,000 restricted shares to a non-officer employee of the Company. These shares vested fully in March 2016. On December 31, 2015, the Company issued an aggregate of 123,304 shares to the two former CBC principals (see Note 5 – Acquisition of CBC). These shares are subject to a one year lock up period in which the holders cannot sell the shares. In addition, the shares are subject to certain sales restrictions following the initial lock-up period which expired on December 31, 2016 (see Note 5 – Acquisition of CBC).
On June 8, 2017, the Compensation Committee granted 56,600 stock options to an officer and employees of the Company, of which 10,000 options vested immediately, 10,000 options vest on January 1, 2018, 10,000 options vest on January 1, 2019 and the remaining 26,600 stock options vest in three equal annual installments and accounted for as one graded vesting award. The exercise price of these options was at the market price on that date. The weighted average assumptions used in the option pricing model were as follows:
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Note 16—Stock Option Plans
2012 Stock Option and Performance Award Plan
On February 7, 2012, the BoardCompany 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 replacesreplaced the Equity Compensation Plan (as defined below).
The 2012 Plan provides the Company with flexibility with respect to equity awards by providing for grants of stock awards (i.e. restricted or unrestricted), stock purchase rights and stock appreciation rights, in addition to the granting of stock options.
The Company authorized 2,000,000 shares of Common Stock for issuance under the 2012 Plan. Under the 2012 Plan, the Company has granted options to purchase an aggregate of 540,800 shares, an award ofawarded 245,625 shares of restricted stock, and has cancelled 67,868111,868 options, leaving 1,281,4431,325,443 shares available as of June 30, 2017. As of June 30, 2017, approximately 88March 31, 2019. At March 31, 2019, 55 of the Company’s employees were able to participate in the 2012 Plan.
Equity Compensation Plan
On December 1, 2005, the BoardCompany adopted the Company’s Equity Compensation Plan (the “Equity Compensation Plan”), which was approved by the stockholders of the Company on March 1, 2006. The Equity Compensation Plan was adopted to supplement the Company’s 2002 Stock Option Plan (as defined below).
In addition to permitting the grant of stock options as are permitted under the 2002 Stock Option Plan, the Equity Compensation Plan allowsallowed the Company flexibility with respect to equity awards by also providing for grants of stock awards (i.e. restricted or unrestricted), stock purchase rights and stock appreciation rights.
The Company authorized 1,000,000 shares of Common Stock for issuance under the Equity Compensation Plan. As of March 21, 2012, no more awards maycould be issued under this plan.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 16—Stock Option Plans
20022002 Stock Option Plan
On March 5, 2002, the BoardCompany adopted the Company’s 2002 Stock Option Plan (the “2002 Plan”), which was approved by the stockholders of the Company on May 1, 2002. The 2002 Plan was adopted in order to attract and retain qualified directors, officers and employees of, and consultants to, the Company.
The 2002 Plan authorizesauthorized the granting of incentive stock options (as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”)) and non-qualified stock options to eligible employees of the Company, including officers and directors of the Company (whether or not employees) and consultants of the Company.
The Company authorized 1,000,000 shares of Common Stock authorized for issuance under the 2002 Plan. As of March 5, 2012, no more awards could be issued under this plan.
Stock Based Compensation
The Company accounts for stock-based employee compensation under ASC No. 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 condensed consolidated statement of operations.
Summary of the Plans
Compensation expense for stock options and restricted stock is recognized over the requisite vesting or service period. Compensation expense for restricted stock is based upon the market price of the shares underlying the awards on the grant date.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 13—Stock Option Plans (Continued)
The following table summarizes stock option transactions under the 2012 Plan, the 2002Equity Compensation Plan and the Equity Compensation Plan:2002 Plan (collectively the “Plans”):
Nine Months Ended June 30, |
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2017 | 2016 |
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Number | Weighted | Number | Weighted |
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| Weighted |
| ||||||||||||||||||||
Outstanding options at the beginning of period | 949,667 | $ | 8.47 | 1,043,566 | $ | 8.47 |
| 728,533 |
| $ | 8.17 |
| 880,067 |
| $ | 8.05 |
| |||||||||||||||
Options granted | 56,600 | 6.55 | 67,100 | 7.93 | ||||||||||||||||||||||||||||
Options exercised | — | — | (107,531 | ) | 8.11 | — | (61,600 | ) | 6.48 | |||||||||||||||||||||||
Options forfeited/cancelled | (53,800 | ) | 14.01 | (8,300 | ) | 8.14 |
|
| (1,766 | ) |
| 8.21 |
|
| (21,700 | ) |
| 8.40 |
| |||||||||||||
Outstanding options at the end of period | 952,467 | $ | 8.05 | 994,835 | $ | 8.47 |
|
| 726,767 |
| $ | 8.17 |
|
| 796,767 |
| $ | 8.16 |
| |||||||||||||
Exercisable options at the end of period | 867,195 | $ | 8.13 | 874,826 | $ | 8.51 |
|
| 726,767 |
| $ | 8.17 |
|
| 778,594 |
| $ | 8.16 |
| |||||||||||||
Three Months Ended June 30, |
| For the Six Months Ended March 31, |
| |||||||||||||||||||||||||||||
2017 | 2016 |
| 2019 |
| 2018 |
| ||||||||||||||||||||||||||
Number | Weighted | Number | Weighted |
| Number |
| Weighted |
| Number |
| Weighted |
| ||||||||||||||||||||
Outstanding options at the beginning of period | 896,867 | $ | 8.14 | 1,094,867 | $ | 8.45 |
| 728,867 |
| $ | 8.17 |
| 880,567 |
| $ | 8.05 |
| |||||||||||||||
Options granted | 56,600 | 6.55 | — | — | ||||||||||||||||||||||||||||
Options exercised | — | — | (100,032 | ) | 8.24 | — | — | (61,600 | ) | 6.48 | ||||||||||||||||||||||
Options forfeited/cancelled | (1,000 | ) | 7.93 | — | — |
|
| (2,100 | ) |
| 8.17 |
|
| (22,200 | ) |
| 8.39 |
| ||||||||||||||
Outstanding options at the end of period | 952,467 | $ | 8.05 | 994,835 | $ | 8.47 |
|
| 726,767 |
| $ | 8.17 |
|
| 796,767 |
| $ | 8.16 |
| |||||||||||||
Exercisable options at the end of period | 867,195 | $ | 8.13 | 874,826 | $ | 8.51 |
|
| 726,767 |
| $ | 8.17 |
|
| 778,594 |
| $ | 8.16 |
| |||||||||||||
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 16—Stock Option Plans(continued)
The following table summarizes information about the 2012 Plan, 2002 Plan, and the Equity Compensation PlanPlans outstanding options as of June 30, 2017:March 31, 2019:
| Options Outstanding | Options Exercisable |
|
|
| Options Outstanding |
| Options Exercisable |
| |||||||||||||||||||||||||||||||||||||
Range of Exercise Price | Range of Exercise Price | Number of Shares Outstanding | Weighted Remaining Contractual Life (in Years) | Weighted Average Exercise Price | Number of Shares Exercisable | Weighted Average Exercise Price | Range of Exercise Price |
| Number |
| Weighted Years) |
| Weighted |
| Number |
| Weighted |
| |||||||||||||||||||||||||||
| $2.8751 | – | $4.3000 | 3,800 | 1.8 | 2.95 | 3,800 | $ | 2.95 | - | $5.7500 |
| 1,200 |
| 0.1 |
| $ | 2.95 |
| 1,200 |
| $ | 2.95 |
| ||||||||||||||||||||||
| $5.7501 | – | $8.6250 | 824,167 | 5.1 | 7.86 | 738,895 | 7.94 | - | $8.6250 |
| 616,067 |
| 3.2 |
| 7.97 |
| 616,067 |
| 7.97 |
| |||||||||||||||||||||||||
| $8.6251 | – | $11.5000 | 124,500 | 5.6 | 9.40 | 124,500 | 9.40 | - | $11.5000 |
|
| 109,500 |
| 3.8 |
| 9.37 |
|
| 109,500 |
| 9.37 |
| |||||||||||||||||||||||
| 952,467 | 5.1 | 8.05 | 867,195 | $ | 8.13 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||
|
|
|
|
| 726,767 |
| 3.3 |
| $ | 8.17 |
|
| 726,767 |
| $ | 8.17 |
| ||||||||||||||||||||||||||||
The Company recognized $38,000$0 and $30,000$7,000 of compensation expense related to the stock options vested during the three and six months ended March 31, 2019, respectively. The Company recognized $10,000 and $89,000 of compensation expense related to the stock option grants during the ninethree and three month periodssix months ended June 30, 2017, respectively. The Company recognized $453,000 and $126,000 of compensation expense related to the stock option grants during the nine and three month periods ended June 30, 2016,March 31, 2018, respectively. As of June 30, 2017,March 31, 2019, there was $132,000 ofno unrecognized compensation cost related to stock option awards. The weighted average period over which such costs are expected to be recognized is 2.0 years.
The intrinsic value of the outstanding and exercisable options as of June 30, 2017March 31, 2019 was approximately $287,000 and $208,000, respectively.$2,000. The weighted average remaining contractual life of exercisable options is 4.73.3 years. There were no options exercised during the ninethree and six months ended March 31, 2019. There were 61,600 options exercised during the three month periodsand six months ended June 30, 2017.March 31, 2018 for $399,000. The fair value of the stock options that vested during the ninethree and three month periodssix months ended June 30, 2017March 31, 2019 was approximately $734,000$0 and $81,000,$84,000, respectively. The fair value of the stock options that vested during the ninethree and three month periodssix months ended June 30, 2016March 31, 2018 was approximately $1,368,000$1,000 and $120,000,$245,000, respectively. There fair value of thewere no options granted during the ninethree and three month periodssix months ended June 30, 2017 was $371,000 for both periods. The fair value of the options granted during the nineMarch 31, 2019 and three month periods ended June 30, 2016 was approximately $709,000 and $0, respectively.
The following table summarizes information about restricted stock transactions:2018.
Nine Months Ended June 30, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
Number of | Weighted | Number of | Weighted | |||||||||||||
Unvested at the beginning of period | — | $ | — | 44,107 | $ | 9.28 | ||||||||||
Awards granted | — | — | 128,304 | 7.89 | ||||||||||||
Vested | — | — | (39,107 | ) | 9.57 | |||||||||||
Forfeited | — | — | — | — | ||||||||||||
Unvested at the end of period | — | $ | — | 133,304 | $ | 7.92 | ||||||||||
Three Months Ended June 30, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
Number of | Weighted | Number of | Weighted | |||||||||||||
Unvested at the beginning of period | — | $ | — | 138,304 | $ | 7.92 | ||||||||||
Awards granted | — | — | — | — | ||||||||||||
Vested | — | — | (5,000 | ) | — | |||||||||||
Forfeited | — | — | — | |||||||||||||
Unvested at the end of period | — | $ | — | 133,304 | $ | 7.92 | ||||||||||
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 16—13—Stock Option Plans(continued)(Continued)
The Company did not recognizegrant any compensation expense related to the restricted stock awards during both the nine and three month periods ended June 30, 2017, respectively. The Company recognized $114,000 and $13,000 of compensation expense related to the restricted stock awards during the ninethree and three month periodssix months ended June 30, 2016, respectively.March 31, 2019 and 2018. As of JuneMarch 31, 2019, and September 30, 2017,2018, there was no unrecognized compensation cost related to restricted stock awards. An aggregate
Note 14—Stockholders’ Equity
The Company has 5,000,000 authorized preferred shares with a par value of 5,000$0.01 per share. The Board of Directors are authorized to divide the authorized shares of restricted stock was granted during the first nine months of fiscal year 2016, allPreferred Stock into one or more series, each of which were grantedshall be so designated as to a non-officer employee. The fair valuedistinguish the shares thereof from the shares of the awards vested during the nine month periods ended June 30, 2017all other series and 2016 was $0 and $326,000 respectively. classes.
The Company recognized an aggregate totalThere were no shares of $38,000preferred stock issued and $30,000 in compensation expense for the nineoutstanding as of March 31, 2019 and three month periods ended June 30, 2017, respectively, for the stock options and restricted stock grants. The Company recognized an aggregate total of $567,000 and $139,000 in compensation expense for the nine and three month periods ended June 30, 2016, respectively, for the stock options and restricted stock grants. As of June 30, 2017, there was a total of $132,000 of unrecognized compensation cost related to unvested stock options and restricted stock grants. The method used to calculate stock based compensation is the straight line pro-rated method.
Note 17—Stockholders’ Equity2018.
Dividends are declared at the discretion of the Board and depend upon the Company’s financial condition, operating results, capital requirements and other factors that the Board deems relevant. In addition, agreements with the Company’s lenders may, from time to time, restrict the ability to pay dividends. As of June 30, 2017,March 31, 2019, there were no such restrictions. No dividends were declared during the three and nine month periodssix months ended June 30, 2017 and 2016.
On August 11, 2015, the Board approved the repurchase of up to $15,000,000 of the Company’s common stock and authorized management of the Company to enter into the Shares Repurchase Plan under Sections 10b-18 and 10b5-1 of the Securities Exchange Act (the “Shares Repurchase Plan”). The Shares Repurchase Plan was to have been effective to December 31, 2015. On December 17, 2015 the Board approved the extension of the Plan to March 31, 2016 and reset the maximum to an additional $15 million in repurchases.2019. On March 17, 2016, having repurchased approximately $9.9 million of the Company’s common stock, the Board approved further extension of the Plan to December 31, 2016 and reset the maximum to $15 million in repurchases. On March 22, 2016, a Company shareholder commenced a tender offer on the Company’s common stock. Per the provisions of the Shares Repurchase Plan, it terminated immediately, and no further purchases were permitted under the Shares Repurchase Plan. Through September 30, 2016, the Company purchased approximately 1,186,000 shares at an aggregate cost of approximately $10.1 million under the Shares Repurchase Plan.
On May 25, 2016, the Company entered into a Mutual Confidentiality Agreement (the “Agreement”) with MPF InvestCo 4, LLC, a wholly owned subsidiary of The Mangrove Partners Master Fund, Ltd. (“Mangrove”), pursuant to which Mangrove and the Company agreed to (1) provide certain Confidential Information (as defined below) to the other party to the Agreement and the other party’s representatives, (2) the confidentiality of the Confidential Information, and (3) certain restrictions on the activities of the parties to the Agreement.
As of December 31, 2016, and for the three month periods ended December 31, 2015 and 2016, Mangrove, due to their ownership in the Company's common stock, which was acquired in a series of OTC transactions, was deemed to be a related party.
Pursuant to the Agreement, the Company made available to Mangrove and its representatives certain confidential information relating to the Company or its subsidiaries, and Mangrove agreed to make available to the Company and its representatives certain confidential information relating to Mangrove and its affiliates (collectively, the “Confidential Information”). The Company and Mangrove agreed not to disclose the Confidential Information, and to cause each of their representatives, respectively, not to disclose the Confidential Information, except as required by law. Pursuant to the Agreement, the Company provided information requested by Mangrove to one or more of Mangrove’s representatives and such representatives prepared summaries of such information (the “Summaries”). The Company approved the Summaries, and the approved Summaries were provided to Mangrove. The Company agreed to release the approved Summaries publicly on or prior to the end of the Extended Period (as defined in the Agreement), to the extent that the information contained in the Summaries has not already been disclosed.
Further, under the terms of the Agreement, Mangrove and the Company had agreed to certain restrictions during the Discussion Period, which began on May 25, 2016 and the Extended Period, including that, unless consented to by the other party to the Agreement or required by applicable law, neither party will, and shall cause its affiliates and representatives not to, (i) commence any litigation against the other party, (ii) make any filing with the Securities and Exchange Commission of proxy solicitation materials, preliminary proxy statement, definitive proxy statement or otherwise or call any annual or special meeting of stockholders of the Company, (iii) publicly refer to: (a) the Confidential Information or Discussion Information (as defined in the Agreement), (b) any annual or special meetings of stockholders of the Company or (c) any prior discussions between the parties, including in any filing with the Securities and Exchange Commission (including any proxy solicitation materials, preliminary proxy statement, definitive proxy statement or otherwise), in any press release or in any other written or oral disclosure to a third party, (iv) make any purchases of the Company’s securities, including, but not limited to, pursuant to any stock buyback plans, tender offers, open-market purchases, privately negotiated transactions or otherwise, (v) make any demand under Section 220 of the Delaware General Corporation Law, (vi) make or propose to make any amendments to the Company’s Certificate of Incorporation, as amended, or By-laws, as amended, (vii) adopt, renew, propose or otherwise enter into a Shareholder Rights Plan with respect to the Company’s securities, (viii) adopt or propose any changes to the Company’s capital structure or (ix) negotiate, discuss, enter into, propose or otherwise transact in any extraordinary transactions with respect to the Company, outside the ordinary course of business, including, but not limited to, any mergers, asset sales or asset purchases.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 17—Stockholders’ Equity (continued )
On November 21, 2016, Mangrove notified the Company that Mangrove was terminating the Agreement with the Company. Under the Agreement, the Company and Mangrove agreed to (1) provide certain Confidential Information (as defined below) to the other party to the Agreement and the other party’s representatives, (2) maintain the confidentiality of the Confidential Information, and (3) certain restrictions on the activities of the parties to the Agreement. Upon termination of the Discussion Period, the agreement provides for a period of 30 days thereafter (the “Extended Period”). Throughout the Extended Period of the Agreement, the parties are subject to the standstill provisions of the Agreement. Following the Discussion Period and the Extended Period, nothing in the Agreement shall prohibit any party from taking any of the activities referred to as the Restricted Activities, and specifically nothing shall restrict Mangrove or its representatives from calling a special meeting, nominating one or more candidates to serve as directors of the Company or commencing, or announcing its intention to commence, a “solicitation” of “proxies” (as such terms are used in Regulation 14A of the Securities Exchange Act of 1934, as amended) to vote with respect to any meeting of stockholders of the Company. The effective termination date of this Agreement was January 6, 2017.
On January 6, 2017, the Company entered into a settlement agreement (the “ Settlement Agreement ”) with Mangrove and, for limited purposes stated therein, Gary Stern, Ricky Stern, Emily Stern, Arthur Stern, Asta Group, Incorporated and GMS Family Investors LLC (collectively, the “ Stern Family ”).
The Settlement Agreement provided that, within ten business days following the date of the Settlement Agreement, the Company will commence a self-tender offer (“ Tender Offer ”) to repurchase for cash 5,314,009 shares of its common stock at a purchase price of $10.35 per share. The Tender Offer will expire no later than February 28, 2017. Pursuant to the Settlement Agreement, Mangrove will tender its 4,005,701 shares for purchase by the Company. The Stern Family has agreed not to tender any of their shares in the Tender Offer. In addition, pursuant to a securities purchase agreement dated January 6, 2017 between Mangrove and Gary Stern (the “Purchase Agreement”), Gary Stern will purchase any remaining shares owned by Mangrove eleven business days following the closing of the Tender Offer for $10.35 per share.
The Settlement Agreement includes customary standstill and related provisions. Mangrove and the Company also agreed on a mutual release of claims. Additionally, the Company indemnified Mangrove from and against any excise tax imposed as a result of this Settlement Agreement.
The Settlement Agreement was terminable by either the Company or Mangrove by written notice at any time after the close of business on the second anniversary of the Settlement Agreement. The Settlement Agreement will also terminate if the Tender Offer does not close on or before February 28, 2017 or the Company amends the terms of the Tender Offer in a manner adverse to Mangrove.
In connection with the Settlement Agreement, the Company also entered into a Voting Agreement dated January 6, 2017 (the “ Voting Agreement ”) with Gary Stern, Ricky Stern, Emily Stern, Asta Group, Incorporated and GMS Family Investors LLC (collectively, the “ Stern Stockholders ”). The Voting Agreement provides that the Stern Stockholders will not have the right to vote more than 49% of the Company’s total outstanding shares, and any additional shares held by the Stern Stockholders will be voted in a manner proportionate to the votes of the outstanding shares not held by the Stern Stockholders.
On January 19, 2017, the Company commenced a self-tender offer to purchase for cash up to 5,314,009 shares of its common stock at a purchase price of $10.35 per share, less applicable withholding taxes and without interest. The Company made the tender offer pursuant to the Settlement Agreement dated as of January 6, 2017, by and among the Company, Mangrove and certain of their respective affiliates, pursuant to which Mangrove and its affiliates would tender their 4,005,701 shares. The tender offer would reduce the number of shares in the public market.
If more than 5,314,009 shares had been tendered, the Company would have purchased all tendered shares on a pro rata basis, subject to the conditional tender provisions described in the Offer to Purchase. Pursuant to the Settlement Agreement, Gary Stern (or his permitted assignees) had unconditionally agreed to purchase from Mangrove and its affiliates any shares owned by Mangrove and its affiliates that the Company did not purchase in the tender offer.
The tender offer expired on February 15, 2017, at 11:59 p.m., New York City time. Based on the final count by American Stock Transfer & Trust Company, LLC ("AMSTOCK"), the depositary for the tender offer, a total of approximately 6,022,253 shares of the Company’s common stock were validly tendered and not validly withdrawn. Because the tender offer was oversubscribed by 708,244 shares, the Company purchased only a prorated portion of the shares properly tendered by each tendering stockholder. The depositary had informed the Company that the final proration factor for the tender offer was approximately 88.24% of the shares validly tendered and not validly withdrawn. AMSTOCK promptly issued payment for the 5,314,009 shares accepted pursuant to the tender offer and returned all other shares tendered and not purchased. The shares acquired represented approximately 44.7% of the total number of shares of the Company’s common stock issued and outstanding as of February 6, 2017. As a result of this tender offer, the Company recorded during the second quarter an additional $54.2 million in treasury stock, and $797,000 was charged to general and administrative expenses in the consolidated statements of operations which represent the excess of the current market price of the Company’s common stock on January 18, 2017 of $10.20 per share. Additionally, the Ricky Stern Family 2012 Trust (as Gary Stern's permitted assignee), acquired 471,086 Shares under the Purchase Agreement on March 10, 2017 for $4.9 million.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 17—Stockholders’ Equity (continued )
Stockholder Rights Agreement
On May 5, 2017,2018, the Board of the Company adopted a stockholder rights plan (the “Rights Agreement”), pursuant to whichDirectors of the Company declared a special cash dividend in the amount of one right (a “Right”) for each$5.30 per share with respect to its Common Stock, payable on February 28, 2018 to holders of record of the Company’s issued and outstanding shares of common stock. The dividend was paid to the stockholders of recordCommon Stock at the close of business on May 15, 2017. Each Right entitles the holder, subject to the termsFebruary 16, 2018, with an ex-dividend date of the Rights Agreement, to purchase from the Company one one-thousandth of a share of the Company’s Series A Junior Participating Preferred Stock (the “Preferred Stock”) at a price of $28.60, subject to certain adjustments.
The Rights generally become exercisable on the earlier of (i) ten business days after any person or group obtains beneficial ownership of 10% or more of the Company’s outstanding common stock (an “Acquiring Person”), or (ii) ten business days after commencement of a tender or exchange offer resulting in any person or group becoming an Acquiring Person.
The exercise price payable and the number of shares of Preferred Stock or other securities or property issuable, upon exercise of the Rights are subject to adjustment from time to time to prevent dilution. In the event that, after a person or a group has become an Acquiring Person, the Company is acquired in a merger or other business combination transaction (or 50% or more of the Company’s assets or earning power are sold), proper provision will be made so that each holder of a Right will thereafter have the right to receive, upon the exercise thereof at the then-current exercise price of the Right, that number of shares of common stock of the acquiring company having a market value at the time of that transaction equal to two times the exercise price. The Company may redeem the Rights at any time before a person or group becomes an Acquiring Person at a price of $0.01 per Right, subject to adjustment. At any time after any person or group becomes an Acquiring Person, the Company may generally exchange each Right in whole or in part at an exchange ratio of one shares of common stock per outstanding Right, subject to adjustment.
Unless terminated on an earlier date pursuant to the terms of the Rights Agreement, the Rights will expire on June 1, 2018, or such later date as may be established by the Board as long as any such extension is approved by a vote of the stockholders of the Company by JuneMarch 1, 2018. The Company concluded any value associated with the Right givenaggregate payment to shareholders as a dividend is deemed deminimus.was approximately $35 million.
Note 18—15—Fair Value of Financial Measurements and Disclosures
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:
June 30, 2017 | September 30, 2016 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Financial assets | ||||||||||||||||
Cash and cash equivalents (Level 1) | $ | 16,570,000 | $ | 16,570,000 | $ | 18,526,000 | $ | 18,526,000 | ||||||||
Restricted cash (Level 1) | 35,248,000 | 35,248,000 | — | — | ||||||||||||
Available-for-sale investments (Level 1) | 5,500,000 | 5,500,000 | 56,764,000 | 56,764,000 | ||||||||||||
Consumer receivables acquired for liquidation (Level 3) | 9,118,000 | 41,488,000 | 13,671,000 | 47,233,000 | ||||||||||||
Structured settlements (Level 3) | 89,045,000 | 89,045,000 | 85,708,000 | 85,708,000 | ||||||||||||
Other investments, net (1) | — | — | 3,590,000 | 3,590,000 | ||||||||||||
Financial liabilities | ||||||||||||||||
Other debt – CBC, revolving line of credit (Level 3) | 4,300,000 | 4,300,000 | 10,154,000 | 10,154,000 | ||||||||||||
Other debt – CBC, non-recourse notes payable with varying installments (Level 3) | 72,135,000 | 72,135,000 | 57,281,000 | 57,281,000 | ||||||||||||
|
|
March 31, 2019 | September 30, 2018 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Financial assets | ||||||||||||||||
Cash equivalents (Level 1) | $ | 20,000 | $ | 20,000 | $ | 1,786,000 | $ | 1,786,000 | ||||||||
Investments in equity securities (Level 1) | 7,989,000 | 7,989,000 | 7,575,000 | 7,575,000 | (1) | |||||||||||
Available-for-sale debt securities (Level 2) | 38,390,000 | 38,390,000 | 30,479,000 | 30,479,000 | (1) | |||||||||||
Consumer receivables acquired for liquidation (Level 3) | 2,626,000 | 27,346,000 | 3,749,000 | 27,574,000 | ||||||||||||
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 18—Fair Value(1) At September 30, 2018, the Company reported investments in equity securities and available-for-sale debt securities as a single line item on the Company's consolidated balance sheet. With the Company's adoption of Financial Measurements and Disclosures(continued)
Disclosures about Fair Value of Financial Instruments(continued)ASU No. 2016-01 on October 1, 2018, the Company has included the current breakout above for comparability purposes only.
Disclosure of the estimated fair values of financial instruments often requires the use of estimates. The Company uses the following methods and assumptions to estimate the fair value of financial instruments:
Cash andequivalents - The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents –equivalents. The carrying amount of cash and cash equivalents approximates fair value.
Restricted cash –Investments in equity securities - The carrying amount of restricted cash approximates fair value.
Available-for-sale investments – The available-for-sale securitiesin equity consist of mutual funds that are valued based on quoted prices in active markets.
Available-for-sale debt securities - The available-for-sale debt securities consist of U.S. treasury bills that are valued based on quoted prices in active markets. The U.S. treasury bills have been classified as available for sale by the Company, as they are deemed to be short term investments, and can be liquidated as needed by the Company.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 15—Fair Value of Financial Measurements and Disclosures (continued)
The Company’s investments in equity securities and available-for-sale debt securities are classified as Level 1 and Level 2 financial instruments, respectively, based on the classifications described above. The Company did not have any transfers into (out of) Level 1 investments during the fiscal year ended September 30, 2018. The Company had Level 3 available-for-sale investments during the three and six months ended March 31, 2019.
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 monthly collections for consumer receivables based on variables fully described in Note 4 - Consumer Receivables Acquired for Liquidation.over the estimated collection period, which is currently July of 2019 through December of 2024. These cash flows are discounted to determine thethen fair value.
Structured settlements – The Company determined the fair value based on the discounted forecasted future collections of the structured settlements. Unrealized gains (losses) on structured settlements is comprised of both unrealized gains resulting from fair market valuation at the date of acquisition of the structured settlements and the subsequent fair value adjustments resulting from the change in the discount rate.
Other investments – The Company estimated the fair valuevalued using the net asset value per share of the investment. There are no unfunded commitments and the investment cannot be redeemed for 5 years from the date of the initial investment (October 2014).
Other debt CBC, revolving line of credit – The Company determined the fair value based on similar instruments in the market.
Other debt CBC, non-recourse notes payable with varying installments – The fair value at June 30, 2017 was based on the discounted forecasted future collections of the structured settlements.
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, 2017, 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.
A significant unobservable input used in the fair value measurement of structured settlements is the discount rate. Significant increases and decreases in the discount rate used to estimate the fair value of structured settlements could decrease or increase the fair value measurement of the structured settlements. The discount rate could be affected by factors which include, but are not limited to, creditworthiness of insurance companies, market conditions, specifically competitive factors, credit quality of receivables purchased, the diversity of the payers of the receivables purchased, the weighted average life of receivables, current benchmark rates (i.e. 10 year treasury or swap rate) and the historical portfolio performance of the originator and/or servicer.21%.
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, 2017. The Company had no Level 2 or Level 3 available-for-sale investments during the first nine months of fiscal year 2017.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 18—Fair Value of Financial Measurements and Disclosures(continued)
Fair Value Hierarchy(continued)
The following table sets forth the Company’s quantitative information about its Level 3 fair value measurements as of June 30, 2017:
Fair Value | Valuation Technique |
| Significant Unobservable | Weighted Average Rate | ||||||||
Structured settlements at fair value | $ | 89,045,000 | Discounted cash flow |
| Discount rate | 4.71% | – | 6.05% | ||||
A significant unobservable input used in the fair value measurement of the Company's structured settlements measured at fair value using unobservable inputs (Level 3) is the discount rate. The inputs comprising the discount rate include A-rated U.S. Financial yield curve, plus illiquidity spread, and cash flows of the portfolio are adjusted to take into consideration survival probabilities, if applicable.
The changes in structured settlements at fair value using significant unobservable inputs (Level 3) during the nine months ended June 30, 2017 were as follows:
Balance, September 30, 2016 | $ | 85,708,000 | ||
Total losses included in earnings | (115,000 | ) | ||
| Change in allowance | 242,000 | |||
Purchases | 13,363,000 | |||
Sales | (7,727,000 | ) | ||
Interest accreted | 4,760,000 | |||
Payments received | (7,186,000 | ) | ||
Balance, June 30, 2017 | $ | 89,045,000 |
Realized and unrealized gains and losses included in earnings in the accompanying consolidated statements of operations for the nine months ended June 30, 2017 are reported in the following revenue categories:
The amount of total gains for the nine months period included in earnings attributable to the change in unrealized gains relating to assets held at June 30, 2017 | $ | 5,238,000 | ||
| Realized loss relating to assets sold during the nine months ended June 30, 2017 | $ | (5,353,000 | ) | |
| Total losses included in the nine months ended June 30, 2017 | $ | (115,000 | ) |
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19—16—Segment Reporting
The Company operates through strategic business units that are aggregated into fourthree reportable segments: Consumer receivables, personal injury claims structured settlements, and GAR Disability Advocates.social security disability advocacy. The fourthree reportable segments consist of the following:
• | Consumer receivables |
• | Personal injury claims – |
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• | Social Security benefit advocacy –GAR Disability |
Certain non-allocated administrative costs, interest income interest expense and various other non-operating income and expenses are reflected in Corporate. Corporate assets include cash and cash equivalents, restricted cash,investments in equity securities and available-for-sale debt securities, furniturea note receivable, property and equipment, goodwill, deferred taxes and other assets.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 19—16—Segment Reporting(continued)
The following table shows results by reporting segment for the three and nine month periodssix months ended June 30, 2017March 31, 2019 and 2016.2018:
(Dollars in millions) | Consumer | Social Security Disability | Personal Injury Claims (2) | Corporate (3) | Total | |||||||||||||||
Three Months Ended March 31, | ||||||||||||||||||||
2019: | ||||||||||||||||||||
Revenues | $ | 3.5 | $ | 1.3 | $ | 0.4 | $ | — | $ | 5.2 | ||||||||||
Other income | 0.4 | — | — | 0.2 | 0.6 | |||||||||||||||
Segment profit (loss) | 3.6 | 0.4 | 0.4 | (2.0 | ) | 2.4 | ||||||||||||||
2018: | ||||||||||||||||||||
Revenues | 4.1 | 1.1 | 0.5 | — | 5.7 | |||||||||||||||
Other income | — | — | — | 0.1 | 0.1 | |||||||||||||||
Segment profit (loss) | 4.1 | 0.2 | 0.9 | (3.6 | ) | 1.6 | ||||||||||||||
Six Months Ended March 31, | ||||||||||||||||||||
2019: | ||||||||||||||||||||
Revenues | 7.0 | 2.6 | 1.1 | — | 10.7 | |||||||||||||||
Other income | 0.5 | — | — | 0.3 | 0.8 | |||||||||||||||
Segment profit (loss) | 6.5 | 0.8 | 0.9 | (4.1 | ) | 4.1 | ||||||||||||||
Segment Assets (1) | 10.0 | 0.9 | 7.1 | 71.1 | 89.1 | |||||||||||||||
2018: | ||||||||||||||||||||
Revenues | 8.3 | 2.1 | 0.6 | — | 11.0 | |||||||||||||||
Other income | — | — | — | 0.1 | 0.1 | |||||||||||||||
Segment profit (loss) | 7.8 | 0.2 | 0.8 | (5.8 | ) | 3.0 | ||||||||||||||
Segment Assets (1) | 27.0 | 1.9 | 19.3 | 32.0 | 80.2 | |||||||||||||||
The Company eliminatesdoes not have any intersegment revenue between segments.transactions.
Personal | GAR | |||||||||||||||||||||||
(Dollars in millions) | Consumer | Injury | Structured | Disability | Corporate | Total | ||||||||||||||||||
Three Months Ended June 30, | ||||||||||||||||||||||||
| 2017: | ||||||||||||||||||||||||
Total Revenues | $ | 4.0 | $ | 5.6 | $ | 4.1 | $ | 1.1 | $ | — | $ | 14.8 | ||||||||||||
Other income | — | — | — | — | 0.1 | 0.1 | ||||||||||||||||||
Income (loss) before income tax | 3.3 | 3.6 | 1.0 | — |
| (3.6 | ) | 4.3 | ||||||||||||||||
2016: | ||||||||||||||||||||||||
Total Revenues | 4.6 | 9.8 | 3.2 | 1.2 | — | 18.8 | ||||||||||||||||||
Other income | — | — | — | — | 0.2 | 0.2 | ||||||||||||||||||
Income (loss) before income tax | 4.2 | 7.7 | 1.0 | (1.8 | ) | (3.5 | ) | 7.6 | ||||||||||||||||
Nine Months Ended June 30, | ||||||||||||||||||||||||
2017: | ||||||||||||||||||||||||
Total Revenues | 12.0 | 10.0 | 5.7 | 4.0 | — | 31.7 | ||||||||||||||||||
Other income | — | — | — | — | — | — | ||||||||||||||||||
Income (loss) before income tax | 10.3 | 3.2 | (2.5 | ) | (1.4 | ) | (17.5 | ) | (7.9 | ) | ||||||||||||||
Total Assets | 20.0 | 53.5 | 86.0 | 3.3 | 53.4 | 216.2 | ||||||||||||||||||
2016: | ||||||||||||||||||||||||
Total Revenues | 14.7 | 14.8 | 9.0 | 2.7 | — | 41.2 | ||||||||||||||||||
Other income | — | — | — | — | 1.1 | 1.1 | ||||||||||||||||||
Income (loss) before income tax | 10.6 | 10.0 | 2.4 | (6.3 | ) | (8.9 | ) | 7.8 | ||||||||||||||||
Total Assets | 19.4 | 45.3 | 76.4 | 1.6 | 103.1 | 245.8 | ||||||||||||||||||
(1) | Includes other amounts in other line items on the consolidated balance sheet. |
(2) | The Company recorded Pegasus as an equity investment in its consolidated financial statements through January 12, 2018. Commencing on January 13, 2018, Sylvave is consolidated in the Company’s financial statements. For segment reporting the Company has included its pro-rated share of the earnings and losses from its investment under the Personal Injury Claims segment. |
(3) | Corporate is not part of the three reportable segments, as certain expenses and assets are not earmarked to any specific operating segment. |
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 20—17 - Accumulated Other Comprehensive Income (Loss) Income
Accumulated other comprehensive income (loss) income consists of:
June 30, 2017 | September 30, 2016 | |||||||||||||||||||||||
Unrealized Gain (loss) on marketable securities | Foreign currency translation, net | Total | Unrealized Gain (loss) on marketable securities | Foreign currency translation, net | Total | |||||||||||||||||||
Beginning Balance | $ | 624,000 | $ | (538,000 | ) | $ | 86,000 | $ | (205,000 | ) | $ | (1,480,000 | ) | $ | (1,685,000 | ) | ||||||||
Change in unrealized (losses) gains on foreign currency translation, net of tax benefit/(expense) of $287,000 and ($628,000) at June 30 2017, and September 30, 2016, respectively. | — | (430,000 | ) | (430,000 | ) | — | 942,000 | 942,000 | ||||||||||||||||
Change in unrealized (losses) gains on marketable securities, net of tax benefit/ (expense) of $404,000 and ($529,000) at June 30 2017, and September 30, 2016, respectively. | (607,000 | ) | — | (607,000 | ) | 868,000 | — | 868,000 | ||||||||||||||||
Amount reclassified from accumulated other comprehensive loss, net of tax benefit of $11,000 and $24,000 at June 30 2017, and September 30, 2016, respectively. | (17,000 | ) | — | (17,000 | ) | (39,000 | ) | — | (39,000 | ) | ||||||||||||||
Net current-period other comprehensive (loss) income | (624,000 | ) | (430,000 | ) | (1,054,000 | ) | 829,000 | 942,000 | $ | 1,771,000 | ||||||||||||||
Ending balance | $ | — | $ | (968,000 | ) | $ | (968,000 | ) | $ | 624,000 | $ | (538,000 | ) | $ | 86,000 | |||||||||
For the Six Months Ended March 31, 2019 | For the Year Ended September 30, 2018 | |||||||||||||||||||||||
Unrealized gain (loss) on marketable securities | Foreign currency translation, net | Total | Unrealized gain (loss) on marketable securities | Foreign currency translation, net | Total | |||||||||||||||||||
Beginning Balance | $ | (10,000 | ) | $ | 45,000 | $ | 35,000 | $ | 7,000 | $ | 11,000 | $ | 18,000 | |||||||||||
Cumulative effect adjustment for adoption of ASU No. 2016-01, net of tax of $5,000 | 10,000 | - | 10,000 | - | - | - | ||||||||||||||||||
Adjusted opening balance | $ | - | $ | 45,000 | $ | 45,000 | $ | 7,000 | $ | 11,000 | $ | 18,000 | ||||||||||||
Change in unrealized (losses) gains on foreign currency translation, net of tax benefit/(expense) of ($7,000) and ($17,000) at March 31 2019, and September 30, 2018, respectively. | - | 36,000 | 36,000 | - | 34,000 | 34,000 | ||||||||||||||||||
Change in unrealized (losses) gains on marketable securities, net of tax benefit/ (expense) of ($87,000) and $9,000 at March 31, 2019, and September 30, 2018, respectively. | 223,000 | - | 223,000 | (17,000 | ) | - | (17,000 | ) | ||||||||||||||||
Net current-period other comprehensive income (loss) | 223,000 | 36,000 | 259,000 | (17,000 | ) | 34,000 | $ | 17,000 | ||||||||||||||||
Ending balance | $ | 223,000 | $ | 81,000 | $ | 304,000 | $ | (10,000 | ) | $ | 45,000 | $ | 35,000 | |||||||||||
June 30,2016 | ||||||||||||
Unrealized Gain (loss) on marketable securities | Foreign currency translation, net | Total | ||||||||||
Beginning Balance | $ | (205,000 | ) | $ | (1,480,000 | ) | $ | (1,685,000 | ) | |||
Change in unrealized (losses) gains on foreign currency translation, net of tax benefit/(expense) of $650,000 during the nine month period ended June 30, 2016. | - | 505,000 | 505,000 | |||||||||
Change in unrealized (losses) gains on marketable securities, net of tax benefit/ (expense) of ($647,000) during the nine month period ended June 30, 2016. | 1,046,000 | - | 1,046,000 | |||||||||
Amount reclassified from accumulated other comprehensive loss, net of tax benefit of $24,000 during the nine month period ended June 30, 2016. | (39,000 | ) | - | (39,000 | ) | |||||||
Net current-period other comprehensive (loss) income | 1,007,000 | 505,000 | 1,512,000 | |||||||||
Ending balance | $ | 802,000 | $ | (975,000 | ) | $ | (173,000 | ) | ||||
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 21—Related Party Transactions
On September 17, 2015, the Company and Piccolo Business Advisory (“Piccolo”), which is owned by Louis Piccolo, a director of the Company, entered into a Consulting Agreement, pursuant to which Piccolo provides consulting services which includes, but is not limited to, analysis of proposed debt and equity transactions, due diligence and financial analysis and management consulting services (“services”). The Consulting Agreement is for a period of two years, which ends on September 17, 2017. For the three and nine months ended June 30, 2017 and 2016, the Company paid $20,000 and $60,000, respectively, to Piccolo for such services.
In addition, A. L. Piccolo & Co., Inc. (“ALP”), which is also owned by Louis Piccolo, received a fee from Pegasus which was calculated based on amounts loaned to Pegasus by Fund Pegasus up to maximum of $700,000. The fee is payable over six years including interest at 4% per annum from Pegasus during the term of the Pegasus Operating Agreement that expired on December 28, 2016. Thereafter, it is payable by PLF and its affiliates. For the three and nine months ended June 30, 2017 and 2016, Pegasus paid ALP $33,000 and $100,000, respectively.
In June 2015, CBC entered into an asset purchase agreement with Fortress Funding, LLC (“Fortress”) to acquire an interest in certain tangible and intangible assets of Fortress, which included customer lists, equipment and other intellectual property. In consideration for these assets CBC agreed to pay Fortress $0.5 million, as well as up to an additional $1.2 million based on conversion of customers from the acquired lists obtained in the transaction. Fortress is owned by Michelle Silverman, the wife of Ryan Silverman, who in connection with the agreement was offered employment as General Counsel of CBC. Effective January 2017, Silverman was appointed as CEO, and currently serves as the CEO/General Counsel of CBC, which was previously undisclosed as a related party.
For the three and nine months ended June 30, 2017, the Company paid Fortress $0 and $0.1 million, and for the three and nine months ended June 30, 2016, $0.1 million and $0.3 million, respectively.
In June 2017, CBC reached an agreement with Fortress; to settle the remaining $0.6 million owed under the agreement, which included any future amounts that could have been paid under the agreement in exchange for shares of Asta's common stock. Under the settlement agreement the Company issued Fortress 55,000 unrestricted shares of the Company's common stock as a complete release of any future obligations under the agreement. In conjunction with this transaction the Company recognized a charge to expense of $0.4 million for the three months and nine months ended June 30, 2017, which represents the market price of the shares at the date of issuance. The Company did not recognize a gain on the settlement of this obligation.
Note 22—Subsequent Events
On August 2, 2017, the Bank Hapoalim $9.6 million line of credit expired and the Company satisfied the debt with cash that was held in deposit as collateral with the bank (see Note 9 – Non Recourse Debt).
On July 27, 2017, CBC entered into the Eleventh Amendment, extending the line of credit to June 30, 2019. The interest rate shall be the greater of prime rate and the prime rate floor of 4.1%. The Libor based rate is no longer available. Certain financial covenants were amended to remove the tangible net worth calculation to be replaced with an adjusted capitalization ratio as defined in the agreement to be maintained at all times of $16 million.
As of July 17, 2017, Patrick F. Preece is no longer employed as Chief Executive Officer of Simia. On an interim basis Gary Stern, Chairman, Chief Executive Officer and President of the Company, will undertake the responsibilities of Simia’s Chief Executive Officer.
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, as amended and Section 21 E of the Securities Exchange Act of 1934.1934, as amended. All statements other than statements of historical facts included or incorporated by reference in this Quarterly Report on Form 10-Q,report, including without limitation, statements regarding our future financial position, business strategy, budgets, projected revenues, projected costs and plans and objective of management for future operations, are forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expects,” “intends,” “plans,” “projects,” “estimates,” “anticipates,” or “believes” or the negative thereof or any variation there on or similar terminology or expressions.
We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are not guarantees and are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Important factors which could materially affect our results and our future performance include, without limitation, the restatement of previously issued financial statements, the identified material weaknesses in our internal control over financial reporting and our ability remediate those material weaknesses, our ability to purchase defaulted consumer receivables at appropriate prices, changes in government regulations that affect our ability to collect sufficient amounts on our defaulted consumer receivables, our ability to employ and retain qualified employees, changes in the credit or capital markets, changes in interest rates, deterioration in economic conditions, negative press regarding the debt collection industry which may have a negative impact on a debtor’s willingness to pay the debt we acquire, and statements of assumption underlying any of the foregoing, as well as other factors set forth under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016 and Item 1A of this Quarterly Report on Form 10-Q.2018.
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. (“Asta”), a Delaware Corporation, together with itsour wholly owned significant operating subsidiaries Palisades Collection, LLC, Palisades Acquisition XVI, LLC (“Palisades XVI”), Palisades Acquisition XIX, LLC (“Palisades XIX”), Palisades Acquisition XXIII, LLC (“Palisades XXIII”), VATIV Recovery Solutions LLC (“VATIV”), ASFI Pegasus Holdings, LLC (“APH”ASFI”), Fund Pegasus, LLC (“Fund Pegasus”), GAR Disability Advocates, LLC (“GAR Disability Advocates”), Five Star Veterans Disability, LLC (“Five Star”), CBC Settlement Funding,EMIRIC, LLC (“CBC”EMIRIC”), Simia Capital, LLC (“Simia”), Sylvave, LLC (“Sylvave”) (formerly known as Pegasus Funding, LLC (“Pegasus”)), Practical Funding LLC (“Practical Funding”), and other subsidiaries, which are not all wholly owned (the “Company”,“Company,” “we” or “us”), isare engaged in several business segments in the financial services industry including structured settlements, through our wholly owned subsidiary, CBC, funding of personal injury claims, through our 80% owned subsidiary, Pegasus Funding, LLC (“Pegasus”) andthe our wholly owned subsidiary,subsidiaries Sylvave, Simia and Practical Funding, social security and disability advocacy through our wholly owned subsidiary,subsidiaries GAR Disability Advocates and Five Star and the business of purchasing, managing for itsour own account and servicing distressed consumer receivables, including charged off receivables, and semi-performing receivables. The Company started out
For the period October 1, 2017 to January 12, 2018, Pegasus was 80% owned, but not controlled, and accounted for under the equity method. On January 12, 2018 (“Date of Acquisition”), we acquired the remaining 20% minority interest and a controlling financial interest, in the consumer receivable business in 1995 as a subprime auto lender. The primary charged-off receivables are accounts that have been written-off by the originatorsPegasus and may have been previously serviced by collection agencies. Semi-performing receivables are accounts where the debtor is currently making partial or irregular monthly payments, but the accounts may have been written-off by the originators. Our efforts in this area have been in the international arena as we have discontinued our active purchasingchanged its name to Sylvave and now own 100% of consumer receivables in the United States since 2010. We acquire these and other consumer receivable portfolios at substantial discounts to their face values. The discounts are basedSylvave. Commencing on the characteristics (issuer, account size, debtor location and ageDate of debt)Acquisition, we consolidated the financial results of the underlying accounts of each portfolio.this entity.
GAR Disability Advocates and Five Star is a social security disability advocacy firm. GAR Disability Advocates assists claimants while Five Star assists veterans in obtaining long term disability and supplemental security benefits from the United States Social Security Administration and the Veterans Benefits Administration.
Pegasus provides funding for individuals in need of short term funds pending insurance settlements of their personal injury claims. The funds are recouped when the underlying insurance settlements are paid. The long periods of time taken by insurance companies to settle and pay such claims resulting from lengthy litigation and the court process is fueling the demand for such funding.
In November 2016, the Company formed Simia, a 100% owned subsidiary. Simia commenced funding personal injury settlement claims in January 2017. Simia was formed in response to the Company’s decision not to renew its joint venture with Pegasus Legal Funding, LLC (“PLF”), which expired at the end of December 2016. Pegasus continues to remain in operation to collect its current portfolio of advances, but has not funded any new advances after December 28, 2016. Simia is being operated by a management team, with significant experience in the personal injury funding business.
CBC invests in structured settlements and provides liquidity to consumers by purchasing certain deferred payment streams including, but not limited to, structured settlements and annuities. CBC generates business from direct marketing as well as through wholesale purchases from brokers or other third parties. CBC has its principal office in Conshohocken, Pennsylvania. CBC primarily warehouses the receivables it originates and periodically resells or securitizes those assets on a pooled basis. The structured settlement marketplace is regulated by federal and state law, requiring that each transaction is reviewed and approved by court order.
The Company operatesWe operate principally in the United States in fourthree reportable business segments.segments: consumer receivables, social security disability advocacy and personal injury claims. We previously operated a fourth segment when we engaged in the structured settlements business through our wholly owned subsidiary CBC Settlement Funding, LLC (“CBC”), which we sold on December 13, 2017.
As a result of the sale of CBC, all periods presented in our consolidated financial statements account for CBC as a discontinued operation. This determination resulted in the reclassification of the historical assets and liabilities comprising the structured settlement business to assets and liabilities related to discontinued operations in the condensed consolidated balance sheets, and a corresponding adjustment to our condensed consolidated statements of operations to reflect discontinued operations for all periods presented. See Note 7 - Discontinued Operations in our notes to condensed consolidated financial statements.
For a detailed description of our segments, please read Note 16 – Segment Reporting, in our notes to condensed consolidated financial statements.
Financial Information About Operating Segments
The Company operates through strategic business units that are aggregated into four reportable segments consisting ofconsumer receivables segment and the following:
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Three of the Company’s business segments accounted for 10% or more of consolidated net revenue for the three month period ended June 30, 2017. All four of the Company’s business segments accounted for 10% or more of consolidated net revenue for the nine month period ended June 30, 2017. Three of the Company’s business segments accounted for 10% or more of consolidated net revenue for the three and nine monthsix months ended March 31, 2019 and March 31, 2018. The personal injury claims segment accounted for its investment in Sylvave under the equity method of accounting through January 12, 2018, for subsequent periods ended June 30, 2016.we included the financial results of Sylvave in our consolidated statement of operations, while Simia is a consolidated entity. The following table summarizes total revenues by percentage from the fourour three lines of business for the three months ended March 31, 2019 and nine month periods ended June 30, 2017 and 2016:2018:
Three Month Ended | Nine Month Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Finance income (consumer receivables) | 26.9 | % | 24.5 | % | 37.9 | % | 35.6 | % | ||||||||
Personal injury claims | 37.7 | % | 52.3 | % | 31.6 | % | 35.8 | % | ||||||||
Structured settlements | 27.7 | % | 17.0 | % | 17.9 | % | 22.0 | % | ||||||||
GAR Disability Advocates | 7.7 | % | 6.2 | % | 12.6 | % | 6.6 | % | ||||||||
Total revenues | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Finance income (consumer receivables) | 66.5 | % | 71.7 | % | 65.2 | % | 75.6 | % | ||||||||
Personal injury claims income | 8.7 | 8.2 | 10.9 | 5.6 | ||||||||||||
Disability fee income | 24.8 | 20.1 | 23.9 | 18.8 | ||||||||||||
Total revenues | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
International operations are included in the consumer receivables segment and are not significant to the overall operations of that segment.
Information about the results of each of the Company’sour reportable segments for the three and nine month periodssix months ended June 30, 2017March 31, 2019 and 2016,March 31, 2018, reconciled to the Company’s consolidated results, are set forth below:below. Separate segment MD&A is not provided, as segment revenue corresponds to the revenue presented in our condensed consolidated statement of operations, and material expense items are not allocable to any specific segment.
Personal | GAR | |||||||||||||||||||||||
(Dollars in millions) | Consumer | Injury | Structured | Disability | Corporate | Total | ||||||||||||||||||
Three Months Ended June 30, | ||||||||||||||||||||||||
2017: | ||||||||||||||||||||||||
Total Revenues | $ | 4.0 | $ | 5.6 | $ | 4.1 | $ | 1.1 | $ | — | $ | 14.8 | ||||||||||||
Other income | — | — | — | — | 0.1 | 0.1 | ||||||||||||||||||
Income (loss) before income tax | 3.3 | 3.6 | 1.0 | — |
| (3.6 | ) | 4.3 | ||||||||||||||||
2016: | ||||||||||||||||||||||||
Total Revenues | 4.6 | 9.8 | 3.2 | 1.2 | — | 18.8 | ||||||||||||||||||
Other income | — | — | — | — | 0.2 | 0.2 | ||||||||||||||||||
Income (loss) before income tax | 4.2 | 7.7 | 1.0 | (1.8 | ) | (3.5 | ) | 7.6 | ||||||||||||||||
Nine Months Ended June 30, | ||||||||||||||||||||||||
2017: | ||||||||||||||||||||||||
Total Revenues | 12.0 | 10.0 | 5.7 | 4.0 | — | 31.7 | ||||||||||||||||||
Other income | — | — | — | — | — | — | ||||||||||||||||||
Income (loss) before income tax | 10.3 | 3.2 | (2.5 | ) | (1.4 | ) | (17.5 | ) | (7.9 | ) | ||||||||||||||
Total Assets | 20.0 | 53.5 | 86.0 | 3.3 | 53.4 | 216.2 | ||||||||||||||||||
2016: | ||||||||||||||||||||||||
Total Revenues | 14.7 | 14.8 | 9.0 | 2.7 | — | 41.2 | ||||||||||||||||||
Other income | — | — | — | — | 1.1 | 1.1 | ||||||||||||||||||
Income (loss) before income tax | 10.6 | 10.0 | 2.4 | (6.3 | ) | (8.9 | ) | 7.8 | ||||||||||||||||
Total Assets | 19.4 | 45.3 | 76.4 | 1.6 | 103.1 | 245.8 | ||||||||||||||||||
(Dollars in millions) | Consumer | Social Security Disability | Personal Injury Claims (2) | Corporate (3) | Total | |||||||||||||||
Three Months Ended March 31, | ||||||||||||||||||||
2019: | ||||||||||||||||||||
Revenues | $ | 3.5 | $ | 1.3 | $ | 0.4 | $ | — | $ | 5.2 | ||||||||||
Other income | 0.4 | — | — | 0.2 | 0.6 | |||||||||||||||
Segment profit (loss) | 3.6 | 0.4 | 0.4 | (2.0 | ) | 2.4 | ||||||||||||||
2018: | ||||||||||||||||||||
Revenues | 4.1 | 1.1 | 0.5 | — | 5.7 | |||||||||||||||
Other income | — | — | — | 0.1 | 0.1 | |||||||||||||||
Segment profit (loss) | 4.1 | 0.2 | 0.9 | (3.6 | ) | 1.6 | ||||||||||||||
Six Months Ended March 31, | ||||||||||||||||||||
2019: | ||||||||||||||||||||
Revenues | 7.0 | 2.6 | 1.1 | — | 10.7 | |||||||||||||||
Other income | 0.5 | — | — | 0.3 | 0.8 | |||||||||||||||
Segment profit (loss) | 6.5 | 0.8 | 0.9 | (4.1 | ) | 4.1 | ||||||||||||||
Segment Assets (1) | 10.0 | 0.9 | 7.1 | 71.1 | 89.1 | |||||||||||||||
2018: | ||||||||||||||||||||
Revenues | 8.3 | 2.1 | 0.6 | — | 11.0 | |||||||||||||||
Other income | — | — | — | 0.1 | 0.1 | |||||||||||||||
Segment profit (loss) | 7.8 | 0.2 | 0.8 | (5.8 | ) | 3.0 | ||||||||||||||
Segment Assets (1) | 27.0 | 1.9 | 19.3 | 32.0 | 80.2 | |||||||||||||||
The Company eliminatesWe do not have any intersegment revenue between segments.transactions.
(1) | Includes other amounts in other line items on the consolidated balance sheet. |
(2) | We recorded Pegasus as an equity investment in our consolidated financial statements through January 12, 2018. Commencing on January 13, 2018, Sylvave is consolidated in our financial statements. For segment reporting we have included our pro-rated share of the earnings and losses from its investment under the Personal Injury Claims segment. |
(3) | Corporate is not part of our three reportable segments, as certain expenses and assets are not earmarked to any specific operating segment |
Consumer Receivables
The consumer receivable 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; and |
• | semi-performing receivables — accounts where the debtor is making partial or irregular monthly payments, but the accounts may have been written-off by the originators. |
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 investment after 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 privately negotiated direct sales, brokered transactions and auctions in which sellers of receivables seek bids from several pre-qualified debt purchasers. We pursue new acquisitions of consumer receivable portfolios on an ongoing basis through:
our relationships with industry participants, financial institutions, collection agencies, investors and our financing sources;
brokers who specialize in the sale of consumer receivable portfolios; and
other sources.
Litigation Funding Business
In 2011, the Company purchased an 80% interest in Pegasus. “PLF”, an unrelated third party, holds the other 20% interest. The Company is committed to loan up to $22.4 million per year to Pegasus for a term of five years, all of which is secured by the assets of Pegasus. These loans has provided financing for the personal injury litigation claims and operating expenses of Pegasus.
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 are made only after the repayment of Fund Pegasus’ principal amount loaned, plus an amount equal to advances for overhead expenses.
On November 8, 2016, the CompanyDecember 28, 2011, we entered into a binding Term Sheet (the “Term Sheet”) with ASFI Pegasus Holdings, LLC, Fund Pegasus, LLC,joint venture, Pegasus Funding, LLC ("Pegasus"), with Pegasus Legal Funding, LLC Max Alperovich and Alexander Khanas. The Company and(“PLF”). We had an 80% non-controlling interest in the joint venture from the date of formation through January 12, 2018. During this time period we had operational disagreements with PLF, decided not to renewresulting in the amendment of the Pegasus joint venture that, by its terms, terminated on December 28, 2016. The Term Sheet amended certain provisions to Pegasus’ Operating Agreement dated asoperating agreement, the execution of December 28, 2011a liquidation agreement and governs the terms relating to the liquidationfinally our filing of the existing Pegasus portfolio. an arbitration against PLF.
Pursuant to the Term Sheet, the parties have agreed thatOn January 12, 2018, we, ASFI and Fund Pegasus will continue in existence to collect advances on its Portfolio. The Company will fund overhead expenses relating to its Portfolio based on a budget agreed upon by the Company and PLF. Any cash received by Pegasus will be distributed to its members in the order provided for in the Operating Agreement. The Company will be allocated an amount equal to 20% of all principal collected on each investment paid back beginning October 1, 2016 and continuing through the collection of the Portfolio, which will be applied against the outstanding balance of overhead expenses previously advanced by the Company to Pegasus. After January 2, 2017, additional overhead expenses advanced will be paid back monthly as incurred by the Company prior to the calculation and distribution of any profits. In connection with the Term Sheet, the parties also entered into a customary mutual releaseSettlement Agreement and non-disparagement agreement as well asRelease (the “Settlement Agreement”) by and among the parties, ASFI, Fund Pegasus, Pegasus, the Seller, Max Alperovich, Alexander Khanas, Larry Stoddard, III, Louis Piccolo and A.L. Piccolo & Co., Inc., a release fromNew York corporation. The Settlement Agreement releases certain claims in exchange for, among other things, the non-competition obligations underparties' entry into the Operating Agreement.
The Company filed for arbitration with the American Arbitration Association ("AAA") against Pegasus in April 2017 for breaches in the Operating and Liquidation Agreements. On April 18, 2017, the Company was granted an Emergent Award restraining the cash in Pegasus, until a formal arbitration panel is confirmed and can review the case. As of June 30, 2017 there was approximately $24.7 million in cash that was restrained under the Emergent Award, and is classified as restricted on the Company's consolidated balance sheet.Purchase Agreement (defined below).
On July 17, 2017,January 12, 2018, ASFI entered into a Membership Interest Purchase Agreement (the “Purchase Agreement) with PLF. Under the Purchase Agreement, ASFI bought PLF’s ownership interests of Pegasus, which was 20% of the issued and outstanding limited liability company interests of Pegasus, for an arbitration panel was confirmed, andaggregate purchase price of $1.8 million. As a hearing date has been scheduled for August 25, 2017 onresult of the Company's motion to have PLF removed from managingexecution of the Purchase Agreement, ASFI became the owner of 100% of the limited liability company interests of Pegasus, and replacing them with Company designated representatives,recognized a loss on acquisition of $1.4 million, which is recorded in our condensed consolidated financial statements. Immediately on acquisition, we changed the name from Pegasus to Sylvave.
As of January 12, 2018, we owned 100% of Pegasus, and commencing in the quarter ending March 31, 2018, the financial activity of Pegasus was consolidated into our financial statements. As of January 12, 2018, we were entitled to permit disbursements to the Company in accordance with the Operating and Term Sheet.100% of all distributions made from Pegasus.
On November 11, 2016, the Companywe formed Simia, a wholly owned subsidiary, in response to the Company’s decision not to renew its joint venture with PLF.subsidiary. Simia commenced funding personal injury settlement claims in January 2017. Simia was formed in response to our decision not to renew our joint venture with PLF. As of June 30, 2017, the Company’sMarch 31, 2019, Sylvave’s net investment in personal injury cases wasclaim advances were approximately $27.5$5.0 million, and Simia's personal injury claim advances were approximately $1.6 million.
In 2012, theThe Company announced the formation of EMIRIC, LLC,formed a new wholly owned subsidiary, of the Company. EMIRIC, LLC entered into a joint venture (the “Venture”) with California-based Balance Point DivorcePractical Funding, LLC (“BP Divorce Funding”)on March 16, 2018 to create the operating subsidiary BP Case Management, LLC (“BPCM”). BPCM is 60% owned by the Company and 40% owned by BP Divorce Funding. The Venture provides non-recourse funding to a spouse in a matrimonial action where the marital assets exceed $2,000,000. Such funds can be used for legal fees, expert costs and necessary living expenses. The Venture receives an agreed percentage of the proceeds received by such spouse upon final resolution of the case. BP Divorce Funding's profits and losses will be distributed 60% to BPCM and 40% to BP Divorce Funding, after the return of the Company’s investment on a case by case basis and after a 15% preferred return to the Company. BPCM’s initial investmentcontinue in the Venture consisted of up to $15 million to fund divorcepersonal injury 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 the Company. At the Company’s option, there could be an additional $35 million investment in divorce claims in tranches of $10 million, $10 million, and $15 million, also with a 15% preferred return and such investments may even exceed a total of $50 million, at BPCM’s sole option. Should the preferred return be less than 15%funding business. To date, Practical Funding has not funded any advances on any $5 million tranche, the 60%/40% profit and loss split would be adjusted to reflect BPCM’s priority to a 15% preferred return. As of June30, 2017, BPCM has invested $1.7 million, net of reserve charges, in cases managed by this Venture.
In 2012, 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. In September 2014, the agreement was revised to extend the term of the loan to August 2016, increase the credit line to $1.5 million and include a personal guarantee of the principal of BP Divorce Funding. The revolving line of credit is collateralized by BP Divorce Funding’s profits share in the venture and other assets. Effective August 14, 2016, BPCM extended its revolving line of credit with BP Divorce Funding until March 31, 2017, at substantially the same terms as the September 2014 amendment.injury claims. On April 1, 2017, BP Divorce8, 2019, Practical Funding defaulted on this agreement, and as such, the loan balance of approximately $1.5 million was deemed uncollectible and was written off in general and administrative expenses on the consolidated statement of operations during the nine months ended June 30, 2017. changed its name to Arthur Funding, LLC.
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 agreed to provide financing to CBC of up to $5.0 million, amended to $7.5 million in March 2015. On December 31, 2015, the Company acquired the remaining 20% ownership of CBC for $1.8 million, through the issuance of restricted stock valued at $1.0 million and $800,000 in cash. Each of the two original principals received 61,652 shares of restricted stock at an agreed upon market price of $8.11 per share and $400,000 in cash. An aggregate of 123,304 shares of restricted stock were issued, and $800,000 was paid. CBC purchases periodic payments under structured settlements and annuity policies from individuals in exchange for a lump sum payment.
CBC has a portfolio of structured settlements which is financed by approximately $76.4 million of debt, consisting of an $4.3 million line of credit with an institutional source and $72.1 million in notes issued by CBC to third party investors. The employment contracts of the original two principals expired at the end of December 2016. The Company did not renew those contracts. Ryan Silverman was appointed CEO/General Counsel, effective January 1, 2017.
Social Security BenefitDisability Advocacy Business
GAR Disability Advocates and Five Star is a social securityare disability advocacy group,groups, which representsfor a fee obtain and represent individuals and veterans in their claims for social security disability, and supplemental security income benefits from the United States Social Security Administration and veterans benefits with the Veteran's Administration.
Critical Accounting Policies
Critical Accounting PoliciesIncome Recognition - Consumer Receivables
We may account for certain of our investments in consumer receivable portfolios, using either:
the interest method; or
the cost recovery method.
Our extensive liquidating experience in certain asset classes such as distressed credit card receivables, consumer loan receivables and mixed consumer receivables has matured, we use 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 in which we do not possess the same expertise or history, or we cannot reasonably estimate the timing of the cash flows, we utilize 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 FASBFinancial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 310,, Receivables —- Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310”). Under the guidance of ASC 310, static pools of accounts are established. These pools are aggregated based on certain common risk criteria. Each static pool is recorded at cost and is accounted for as a single unit for the recognition of income, principal payments and loss provision. Due to the substantial reduction of portfolios reported under the interest method, and the inability to reasonably estimate cash collections required to account for those portfolios under the interest method, the Companywe concluded the cost recovery method is the appropriate accounting method under the circumstances.
Under the guidance of ASC 310, the Company310-30, we must analyze a portfolio upon acquisition to ensure which method is appropriate, and once a static pool is established for a quarter, individual receivable accounts are not added to the pool (unless replaced by the seller) or removed from the pool (unless sold or returned to the seller).
The Company usesWe use 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.
Impairments - Consumer Receivables
We account for our impairments in accordance with ASC 310, which provides guidance on how to account for differences between contractual and expected cash flows from an investor’s initial investment in loans or debt securities acquired in a transfer if those differences are attributable, at least in part, to credit quality. The Companyrecognition of income under ASC 310 is dependent on us having the ability to develop reasonable expectations of both the timing and amount of cash flows to be collected. In the event we cannot develop a reasonable expectation as to both the timing and amount of cash flows expected to be collected. ASC 310 permits the change to the cost recovery method. We will recognize income only after we have recovered our carrying value.
If collection projections indicate the carrying value will not be recovered, an impairment is required. The impairment will be equal to the difference between the carrying value at the time of the forecast and the corresponding estimated remaining future collections. We believe we have significant experience in acquiring certain distressed consumer receivable portfolios at a significant discount to the amount actually owed by underlying customers. We invest in these portfolios only after both qualitative and quantitative analyses of the underlying receivables are performed and a calculated purchase price is paid so that it believes its estimated cash flow offers an adequate return on acquisition costs after servicing expenses. Additionally, when considering larger portfolio purchases of accounts, or portfolios from issuers with whom we have 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 it uses for its expected cash flows, and our ability to recover our cost basis. For the three and six months ended March 31, 2019 and 2018, we did not record any impairments on our domestic or international portfolios.
Personal Injury Claim Advances and Impairments
We account for our investments in personal injury claims at an agreed upon interest rate, in anticipation of a future settlement. TheOur interest purchased by Pegasus in eachpersonal injury claim will consistadvances consists of the right to receive from sucha claimant part of the proceeds or recoveries which such claimant receives by reason of a settlement, judgment or awardreward 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, 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 the claimant.
CBC purchasesWe assess the quality of the personal injury claims portfolio through an analysis of the underlying personal injury fundings on a case by case basis. Cases are reviewed through periodic payments under structuredupdates with attorneys handling the cases, as well as with third party research tools which monitor public filings, such as motions or judgments rendered on specific cases. We specifically reserve for those fundings where the underlying cases are identified as uncollectible, due to anticipated non-favorable verdicts and/or settlements at levels where recovery of the advance outstanding is unlikely. For cases that have not exhibited any specific negative collection indicators, we establish reserves based on the historical collection rates of our fundings. Fee income on advances is reserved for on all cases where a specific reserve is established on the initially funded amount. In addition, we also monitor our historical collection rates on fee income and annuity policiesestablish reserves on fee income consistent with the historically experienced collection rates. We regularly analyze and update the historical collection rates of our initially funded cases as well as our fee income.
Income Recognition - Social Security Disability Advocacy
Effective October 1, 2018, we adopted ASC 606 - “Revenue from individualsContracts with Customer,” which is effective for annual periods beginning on or after December 15, 2017. ASC 606 introduced a five‑step approach to revenue recognition. Details of the new requirements as well as the impact on our unaudited condensed consolidated financial statements are described below.
We applied ASC 606 in exchangeaccordance with the modified retrospective transitional approach recognizing the cumulative effect of initially applying the revenue standard as an adjustment to the opening balance of retained earnings during this period (October 1, 2018). Comparative prior year periods were not adjusted. In applying the modified retrospective approach, we elected practical expedients for a lump sum payment. The Company(a) completed contracts as described in ASC 606-10-65-1-c(2), and (b) contract modifications as described in ASC 606-10-65-1-f(4), allowing (a) the application of the revenue standard only to contracts that were not completed as of the date of initial application, and (b) to reflect the aggregate effect of all modifications that occur before the adoption date in accordance with the new standard when: (i) identifying the satisfied and unsatisfied performance obligations, (ii) determining the transaction price, and (iii) allocating the transaction price to the satisfied and unsatisfied performance obligations. We believe that the impact on the opening balance of retained earnings during the period (October 1, 2018) would not have been significantly different had we not elected to carry structured settlements at fair value. Unearned income on structured settlements is recognized as interest income usinguse the effective interest method over the life of the related settlement. Changes in fair value are recorded in unrealized gain (loss) in structured settlements in our statements of income. practical expedients.
The Company recognizes revenueWe recognize disability fee income for GAR Disability Advocates and Five Star when disability claimant���s cases close, when cash is received, or when we receive a notice of award from the Social Security Administration (“SSA”) that stipulates the amount of fee approved by the SSA to be paid to us. We establish a reserve for the differentials in amounts awarded by the SSA and feesVeterans Administration compared to the actual amounts received by us. Fees paid to us are collected.withheld by the SSA and Veterans Administration against the claimant's disability claim award, and are remitted directly to us from the SSA and Veterans Administration.
In the following discussions, most percentages and dollar amounts have been rounded to aid in the presentation. As a result, all figures are approximations.
Results of Operations
NineSix Months Ended June 30, 2017,March 31, 2019, Compared to the NineSix Months Ended June 30, 2016March 31, 2018
Finance incomeincome.. For the ninesix months ended June 30, 2017,March 31, 2019, finance income decreased $2.7$1.3 million, or 18.2%15.8%, to $12.0$7.0 million from $14.7$8.3 million for the ninesix months ended June 30, 2016.March 31, 2018. During the ninesix months ended June 30, 2017,March 31, 2019 and 2018 the Company purchased $35.0 million of face value portfolios at a cost of $2.2 million. During the first nine months of fiscal year 2016, the Company purchased $123.2 million of face value portfolios at a cost of $6.5 million.did not purchase any consumer portfolios. Net collections for the ninesix months ended June 30, 2017March 31, 2019 decreased 15.8%18.4% to $18.5$7.9 million from $22.0$9.7 million for the same prior year period. During the first ninesix months of fiscal year 2017,2019, gross collections decreased 3.6%11.4% or $1.3$2.0 million to $32.7$15.6 million from $34.0$17.6 million for the ninesix months ended June 30, 2016.March 31, 2018. Commissions and fees associated with gross collections from our third partythird-party collection agencies and attorneys increased $2.2decreased $0.2 million, or 18.7%2.7%, to $14.3$7.7 million for the current fiscal nine month periodsix months ended March 31, 2019 from $12.0$7.9 million for the ninesix months ended June 30, 2016.March 31, 2018. Commissions and fees amounted to 43.6%49.2% of gross collections for the nine month periodsix months ended June 30, 2017,March 31, 2019, compared to 35.4%44.8% in the same period of the prior year, resulting fromdue to a higher percentage of commissionable collections in the current year period.
Personal injury claims incomeDisability fee income.. For the ninesix months ended June 30, 2017,March 31, 2019, disability fee income increased $0.5 million, or 24.2%, to $2.6 million as compared to $2.1 million for the six months ended March 31, 2018, due to the increase in the number of disability claimant cases closed with the Social Security Administration during the current period.
Earnings (loss) from equity method investee. Earnings from equity method investment decreased by $0.9 million to a loss of $86,000 for the six months ended March 31, 2019 from income of $0.8 million during the six months ended March 31, 2018 due to the acquisition of the remaining 20% interest in Pegasus and Sylvave now being consolidated in our financial statements.
Gain on Settlement. For the six months ended March 31, 2019, the Company recognized $0.3 million in settlement income associated with prior overcharges billed to the Company by a third-party servicer in excess of contractually permitted amounts.
Other income (loss), net. The following table summarizes other income (loss) for the six months ended March 31, 2019 and 2018:
For the Six Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Interest and dividend income | $ | 454,000 | $ | 124,000 | ||||
Realized gain | 25,000 | — | ||||||
Unrealized gain | 21,000 | — | ||||||
Other | 40,000 | (21,000 | ) | |||||
| $ | 540,000 | $ | 103,000 | |||||
During the six months ended March 31, 2019, interest income was primarily earned on the Company's note receivable from its sale of CBC, settlement interest and interest income from available for sale investments.
General and administrative expenses. For the six months ended March 31, 2019, general and administrative expense decreased $0.2 million, or 2.6%, to $7.3 million from $7.5 million for the six months ended March 31, 2018, primarily due to a decrease in bad debt expense of $0.6 million, offset by unfavorable foreign exchange variance of $0.4 million.
Interest expense. For the six months ended March 31, 2019, there was no interest expense as compared to interest expense of $2,000 for the six months ended March 31, 2018.
Segment profit – Consumer Receivables. For the six months ended March 31, 2019, segment profit decreased $1.3 million to $6.5 million from $7.8 million for the six months ended March 31, 2018, primarily due the decrease in revenue of $1.3 million, and an unfavorable foreign exchange of $0.4 million offset by an increase in other income of $0.4 million.
Segment profit – Personal Injury Claims. For the six months ended March 31, 2019, segment profit was $0.9 million as compared to segment profit of $0.8 million for the six months ended March 31, 2018. The increase is attributable to the Company's continued earning of interest and fees on portfolio advances combined with reduced bad debt write downs on personal injury claims income decreased $4.8claimant advances.
Segment profit – Social Security Benefit Advocacy. For the six months ended March 31, 2019, segment profit was $0.8 million or 32.2% from $14.8as compared to $0.2 million for the same period in the prior year to $10.0year. The increase in profit of $0.6 million in the current year,period is primarily the result of increased revenues of $0.5 million and a reduction in overhead expenses of $0.1 million.
Income tax (benefit) expense. Income tax expense, consisting of federal and state components, for six months ended March 31, 2019, was $1.1 million, as compared to an income tax expense for continuing and discontinued operations, consisting of federal and state income taxes, of $4.5 million for the six months ended March 31, 2018. In response to the Tax Cuts and Jobs Act signed in December 2017, we remeasured our U.S. federal and state deferred tax assets and liabilities, which resulted in a decrease in our net deferred tax assets by approximately $3.5 million. This adjustment was recorded as a one-time charge to income taxes for the three months ended December 31, 2017. For the six months ended March 31, 2019 and 2018, we recorded $1.1 million and $1.0 million, respectively, of income tax expense after removing the December 31, 2017 one-time charge of $3.5 million.
Income (loss) from continuing operations. As a result of the liquidationabove, the Company had a net income from continuing operations for the six months ended March 31, 2019 of $3.0 million compared to $1.6 million net loss from continuing operations for the six months ended March 31, 2018.
Loss from discontinued operations. As a result of the Pegasus joint venture, effectivesale of CBC on December 28, 2016, partially offset by13, 2017, the Company had no income earned by Simia. or loss from discontinued operations for the six months ended March 31, 2019, compared to $0.1 million of net loss from discontinued operations for the six months ended March 31, 2018.
Structured settlement income. For the nine months ended June 30, 2017, structured settlement income of $5.7$2.2 million includes $5.2$0.2 million of unrealized gain, $5.8losses and $2.0 million of interest income and a loss on sale of structured settlements $5.3 million. Forfor the ninesix months ended June 30, 2016, structured settlement income of $9.0 million included $4.5 million of unrealized gains and $4.5 million of interest income. This decrease in income primarily results from the loss on sale of a portion of CBC’s life contingent annuities portfolio.March 31, 2018. Unrealized gains on structured settlements is comprised of both unrealized gains resulting from fair market valuation at the date of acquisition of the structured settlements and the subsequent fair value adjustments resulting from the change in the discount rate.settlements. Of the $5.2$0.2 million of unrealized lossgains recognized infor the nine month periodsix months ended June 30, 2017,March 31, 2018, approximately $5.9$0.2 million is due to day one gains on new structured settlements financed during the period, $0.8 million gain due to a change in the discount rate, offset by a decrease of $1.5 million in realized gains recognized as realized interest income on structured settlements during the period. There were no other changes in assumptions during the period.
Social security benefit advocacy fee income. For the nine months ended June 30, 2017, disability fee income increased $1.3 million, or 47.8%, to $4.0 million as compared to $2.7 million for the nine months ended June 30, 2016, due to the increase in the number of closed cases with the United States Social Security Administration.
Other income (loss). The following table summarizes other income (loss) for the nine months ended June 30, 2017 and 2016:
June 30, | ||||||||
2017 | 2016 | |||||||
Interest and dividend income | $ | 828,000 | $ | 866,000 | ||||
Realized (loss)/gain | (833,000 | ) | (16,000 | ) | ||||
Other | (26,000 | ) | 258,000 | |||||
| $ | (31,000 | ) | $ | 1,108,000 | ||||
General and administrative expenses. For the nine months ended June 30, 2017, general and administrative expense increased $4.3 million, or 13.4 %, to $36.3 million from $32.0 million for the nine months ended June 30, 2016, primarily due to an increase in professional fees of $2.5 million, primarily related to the Mangrove matter, increase in bad debt expense of $3.5 million, and a loss on investment of $3.4 million, partially offset by the reduction in litigation settlement costs of $2.1 million, reduction in GAR Disability Advocates office salaries of $1.5 million and advertising expense of $1.2 million.
Interest expense. For the nine months ended June 30, 2017, interest expense increased $0.7 million to $3.0 million as compared to $2.3 million for the nine months ended June 30, 2016. The increased interest expense is a result of the additional CBC debt incurred during the period to expand the investment in structured settlements and the interest expense related to the Bank Hapoalim line of credit.
Segment profit – Consumer Receivables. For the nine months ended June 30, 2017, segment profit decreased $0.3 million to $10.3 million from $10.6 million for the nine months ended June 30, 2016, primarily due to lower revenues of $2.7 million partially offset by the reduction in litigation settlement costs of $2.1 million.
Segment profit – Personal Injury Claims. For the nine months ended June 30, 2017, segment profit was $3.2 million as compared to segment profit of $10.0 million for the nine months ended June 30, 2016. The decrease is primarily attributable to increased bad debt expense of $2.3 million and the liquidation of the Pegasus joint venture that was effective December 28, 2016.
Segment loss – Structured Settlements. For the nine months ended June 30, 2017, segment loss was $2.5 million as compared to segment profit of $2.4 million for the nine months ended June 30, 2016. The $4.9 million decrease in profitability was primarily due to the loss on sale of CBC’s life contingent annuities portfolio of $5.4 million, increase in interest expense of $0.5 million, outside services of $0.4 million, advertising expense of $0.3 million partially offset by increased revenues derived from the investment in structured settlements of $1.9 million.
Segment loss – GAR Disability Advocates. For the nine months ended June 30, 2017, segment loss was $1.4 million as compared to a $6.3 million loss for the same period in the prior year. This reduced loss in the current period is primarily the result of increased revenues of $1.3 million and the reduction in general and administrative expenses of $3.5 million
Income tax (benefit) expense. For the nine months ended June 30, 2017, income tax benefit, consisting of federal and state income taxes, was $3.2 million as compared to an income tax expense of $2.5 million for the nine months ended June 30, 2016, as a result of the taxable loss in the current year.
Net loss.income (loss). As a result of the above, the Company had a net income for the six months ended March 31, 2019 of $3.0 million compared to $1.6 million net loss for the ninesix months ended June 30, 2017 of $4.7 million, as compared to $5.3 million net income for the nine months ended June 30, 2016.March 31, 2018.
Income attributable to non-controlling interest. The income attributable to non-controlling interest of $0.7 is the portion attributable to Pegasus for the nine months ended June 30, 2017, as compared to $2.2 million attributable to Pegasus and CBC for the nine months ended June 30, 2016.
Net loss attributable to Asta Funding, Inc. Net loss attributable to Asta Funding, Inc. was $5.4 million for the nine months ended June 30, 2017 as compared to net income of $3.2 million for the nine months ended June 30 2016.
The following table details non-controlling interest for the nine months ended June 30, 2017 and 2016:
For theNine Months EndedJune 30, 2017 | For theNine Months EndedJune 30, 2016 | |||||||||||||||||||||||
CBC | TotalNon- | CBC | TotalNon- | |||||||||||||||||||||
Pegasus | Settlement | Controlling | Pegasus | Settlement | Controlling | |||||||||||||||||||
Funding, LLC | Funding, LLC | Interests | Funding, LLC | Funding, LLC | Interests | |||||||||||||||||||
Balance, beginning of period | $ | (645,000 | ) | $ | — | $ | (645,000 | ) | $ | (1,768,000 | ) | $ | 771,000 | $ | (997,000 | ) | ||||||||
Purchase of subsidiary shares from non-controlling interest | — | — | — | — | (927,000 | ) | (927,000 | ) | ||||||||||||||||
Income from non-controlling interest | 742,000 | — | 742,000 | 2,005,000 | 156,000 | 2,161,000 | ||||||||||||||||||
Distributions to non-controlling interest | (366,000 | ) | — | (366,000 | ) | (1,139,000 | ) | — | (1,139,000 | ) | ||||||||||||||
Balance, end of period | $ | (269,000 | ) | $ | — | $ | (269,000 | ) | $ | (902,000 | ) | $ | — | $ | (902,000 | ) | ||||||||
Three Months Ended June 30, 2017,March 31, 2019, Compared to the Three Months Ended June 30, 2016March 31, 2018
Finance income. For the three months ended June 30, 2017,March 31, 2019, finance income decreased $0.6 million, or 13.7%15.1%, to $4.0$3.5 million from $4.6$4.1 million for the three months ended June 30, 2016.March 31, 2018. The decrease in finance income is due to reduction in the collections on portfolios during the three months ended March 31, 2019 compared to the three months ended March 31, 2018 and the overall age of the portfolios. During the three months ended June 30, 2017,March 31, 2019 and 2018, the Company did not purchase any consumer portfolios. During the three months ended June 30, 2016, the Company purchased $2.2 million in face value of new portfolios at a cost of $0.3 million. Net collections for the three months ended June 30, 2017,March 31, 2019 decreased 15.0%18.1% to $6.1$3.9 million from $7.2$4.8 million for the three months ended June 30, 2016. DuringMarch 31, 2018. For the third quarter of fiscal year 2017,three months ended March 31, 2019 gross collections decreased 4.3%14.3%, or $0.5$1.2 million, to $10.6$7.4 million from $11.1$8.6 million for the three months ended June 30, 2016. CommissionsMarch 31, 2018. For the three months ended March 31, 2019 commissions and fees associated with gross collections from third partyour third-party collection agencies and attorneys increaseddecreased 9.5% or $0.4 million to $4.5$3.5 million from $3.8 million for the three months ended June 30, 2017 from $3.9 million for the three months ended June 30, 2016.March 31, 2018. Commissions and fees amounted to 42.5%47.2% of gross collections for the three months ended June 30, 2017,March 31, 2019, compared to 35.3%44.7% for the three months ended June 30, 2016,March 31, 2018 resulting from higher percentage of commissionable collections in the current year period.
Personal injury claims income. For the three months ended June 30, 2017, personal injury claims income decreased $4.2 million to $5.6 million as compared to $9.8 million for the three months ended June 30, 2016, as a result of the liquidation of the Pegasus joint venture, effective December 28, 2016, partially offset by income earned by Simia.
Structured settlement income. For the three months ended June 30, 2017, structured settlement income of $4.1million included $7.5 million of unrealized gains and $1.9 million of interest income offset by a loss of $5.3 million on the sale of CBC’s life contingent annuities portfolio. For the three months ended June 30, 2016, structured settlement income of $3.2 million included $1.4 million of unrealized gains and $1.8 million of interest income. Unrealized gains on structured settlements is comprised of both unrealized gains resulting from the fair market valuation at the date of acquisition of the structured settlements and the subsequent fair value adjustments resulting from the change in the discount rate. Of the $7.5 million of unrealized gains recognized in the three months ended June 30, 2017, approximately $1.6 million is due to day one gains on new structured settlements financed during the period, a decrease of $5.4 million in unrealized losses recognized as loss on sale of structured settlements and a $0.5 million gain due to a change in the discount rate. There were no other changes in assumptions during the period.
Social security benefit advocacy fee income. For the three months ended June 30, 2017, disabilityDisability fee income decreased $0.1increased $0.2 million, or 12.9%, to $1.1 million as compared to $1.2$1.3 million for the three months ended June 30, 2016,March 31, 2019 from $1.1 million for the three months ended March 31, 2018, due to the timing of thean increase in disability claimants cases closed with the United States Social Security Administration.and Veterans Administration during the current year.
Earnings (loss) from equity method investee. Earnings from equity method investment decreased by $0.5 million to a loss of $56,000 for the three months ended March 31, 2019 from income of $0.5 million during the three months ended March 31, 2018 due to the acquisition of the remaining 20% interest in Pegasus and Sylvave now being consolidated in our financial statements.
Gain on Settlement. For the three months ended March 31, 2019, the Company recognized $0.3 million in settlement income associated with prior overcharges billed to the Company by a third-party servicer in excess of contractually permitted amounts.
Other income, (loss).net. The following table summarizes other income (loss) for the three months ended June 30, 2017March 31, 2019 and 2016:2018:
June | For the Three Months Ended March 31, | |||||||||||||||
2017 | 2016 | 2019 | 2018 | |||||||||||||
Interest and dividend income | $ | 145,000 | $ | 199,000 | $ | 255,000 | $ | 93,000 | ||||||||
Realized loss | (18,000 | ) | (32,000 | ) | ||||||||||||
Realized gain | — | — | ||||||||||||||
Unrealized gain | 50,000 | — | ||||||||||||||
Other | (29,000 | ) | 48,000 | 1,000 | (24,000 | ) | ||||||||||
| $ | 98,000 | $ | 215,000 | $ | 306,000 | $ | 69,000 | |||||||||
During the three months ended March 31, 2019, interest income was primarily earned on the Company's note receivable from its sale of CBC, settlement interest and interest income from available for sale investments.
General and administrative expenses. For the three months ended June 30, 2017,March 31, 2019, general and administrative expense decreased $1.2expenses increased $0.1 million, or 11.7 %,2.8%, to $9.4$3.4 million from $10.6$3.3 million for the three months ended June 30, 2016,March 31, 2018, primarily attributabledue to an increase in salaries $0.3 million, unfavorable foreign exchange variance of $0.2 million, offset by a reductiondecrease in GAR Disability expenses for advertising and payroll costs .professional fees of $0.4 million.
Interest expenseSegment profit – Consumer Receivables. For the three months ended June 30, 2017, interest expense increased $0.3Segment profit decreased $0.5 million to $1.1 million as compared to $0.8$3.6 million for the three months ended June 30, 2016. The increased interest expense in the current period is the result of the additional CBC debt incurred to expand the investment in structured settlements and interest expense related to the Bank Hapoalim line of credit.
Segment profit – Consumer Receivables. For the three months ended June 30, 2017, segment profit decreased $0.9 million to $3.3 million as compared to $4.2March 31, 2019 from $4.1 million for the three months ended June 30, 2016, primarily due toMarch 31, 2018. This decrease in profitability is a decrease inresult of decreased revenue of $0.6 million and impairment chargesa foreign exchange loss of approximately $0.2 million, offset by a gain on settlement of $0.3 million.
Segment profit–profit – Personal Injury Claims. For the three months ended June 30, 2017, segmentSegment profit was $3.6decreased $0.5 million as compared to $7.7$0.4 million profit for the three months ended June 30, 2016. TheMarch 31, 2019, from $0.9 million for the three months ended March 31, 2018. This decrease in profitability is primarily attributable to thea result of decreased revenue of $0.2 million, decrease in other income of $0.1 million and an increase in bad debt expense of $0.2 million and the liquidation of the Pegasus joint venture that was effective December 28, 2016.million.
Segment profit– Structured Settlementprofit – GAR Disability Advocates. For the three months ended June 30, 2017, segmentThe Segment profit was $1.0$0.4 million as compared to $1.0 million profit for the three months ended June 30, 2016.
Segment loss – GAR Disability Advocates. ForMarch 31, 2019 as compared $0.2 million for the three months ended June 30, 2017, segment loss was $0.0March 31, 2018. The increase in profitability of $0.2 million as compared to a $1.8 million loss for the same period in the prior year. This reduced loss in the current fiscal year is primarily the result a of reduction in general and administrative expensesincreased revenue of $1.8$0.2 million.
Income tax expenseDiscontinued Operations. For– The Company had no income or loss from discontinued operations during the three months ended June 30, 2017, incomeMarch 31, 2019 and 2018 as a result of the sale of CBC on December 13, 2017.
Income tax expense . Income tax expense, consisting of federal and state components, for three months ended March 31, 2019, was $1.7$0.6 million, as compared to income tax expense of $2.9$0.5 million for the three months ended June 30, 2016, resulting from decreased taxable income in the current period.March 31, 2018.
Net income.income (loss). As a result of the above, we generated net income for the three months ended June 30, 2017, the Company had a net incomeMarch 31, 2019 of $2.6$1.8 million, as compared to a net income of $4.7$1.0 million for the three months ended June 30, 2016.March 31, 2018.
Income attributable to non-controlling interest. The income attributable to non-controlling interest of $0.7 million is the portion of results attributable to Pegasus for the three months ended June 30, 2017, as compared to income attributable to non-controlling interest of $1.5 million income for the three months ended June 30, 2016.
Net income attributable to Asta Funding, Inc. Net income attributable to Asta Funding, Inc. was $1.8 million for the three months ended June 30, 2017 as compared to net income of $3.2 million for the three months ended June 30, 2016.
The following table details non-controlling interest for the three months ended June 30, 2017 and 2016:
For the Three Months Ended June 30, 2017 | For the Three Months Ended June 30, 2016 | |||||||||||||||
TotalNon- | TotalNon- | |||||||||||||||
Pegasus | Controlling | Pegasus | Controlling | |||||||||||||
Funding, LLC | Interests | Funding, LLC | Interests | |||||||||||||
Balance, beginning of period | $ | (999,000 | ) | $ | (999,000 | ) | $ | (2,101,000 | ) | $ | (2,101,000 | ) | ||||
Income from non-controlling interest | 730,000 | 730,000 | 1,549,000 | 1,549,000 | ||||||||||||
Distributions to non-controlling interest | — | — | (350,000 | ) | (350,000 | ) | ||||||||||
Balance, end of period | $ | (269,000 | ) | $ | (269,000 | ) | $ | (902,000 | ) | $ | (902,000 | ) | ||||
Liquidity and Capital Resources
Our primary source of cash from operations is collections on the receivable portfolios we have acquired and the funds generated from the liquidation of our personal injury claims and structured settlement business segments.claim portfolios. Our primary uses of cash include repayments of debt and associated interest payment, purchases of structured settlements and advances of personal injury claims, costs involved in the collection of consumer receivables, taxesthe liquidation of our personal injury portfolio, and the costs to support the day-to-day operations of the Company.run our disability advocacy business.
Receivables Financing Agreement (“RFA”)
In March 2007, Palisades XVI borrowed approximately $227 million under the RFA,Receivables Financing Agreement, as amended in July 2007, December 2007, May 2008, February 2009, October 2010 and August 2013 (the “RFA”) from BMO, in order to finance the Portfolio Purchase which had a purchase price of $300 million. The original term of the agreement was three years. This term was extended by each of the Second, Third, Fourth, and Fifth Amendments and the most recent agreement signed in August 2013, discussed below.2013.
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 (the “BMO Settlement Agreement”) with BMO as an amendment to the RFA. In consideration for a $15 million prepayment funded by the Company, BMO has agreed to significantly reduce minimum monthly collection requirements and the interest rate. If and when BMO were to receive the next $15 million of collections from the Portfolio Purchase, (the “Remaining Amount”) less certain credits for payments made prior to the consummation of the BMO Settlement Agreement, the CompanyPalisades XVI 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 CompanyPalisades XVI would be released from the remaining contractual obligation of the RFA and the Settlement Agreement.RFA.
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 was entitled to receive $16.9 million of future collections from the Portfolio Purchase before BMO is entitled to receive any payments with respect to its Income Interest. During the month of June 2016, the Companywe received the balance of the $16.9 million, and, as of June 30, 2017, the CompanyMarch 31, 2019, we recorded a liability to BMO of approximately $.02$0.1 million. The funds were subsequently remitted to BMO on April 11, 2019. The liability to BMO is recorded when actual collections are received.
Bank Hapoalim B.M. (“Bank Hapoalim”) Line of CreditDiscontinued Operations – Structured Settlements
On May 2, 2014,December 13, 2017, we entered into a Securities Purchase Agreement (the “Securities Purchase Agreement) with CBC Holdings LLC, a Delaware limited liability company (the “Buyer”). Under the Securities Purchase Agreement, the Company obtained a $20 million line of credit facility from Bank Hapoalim, pursuant to a Loan Agreement (the “Loan Agreement”) among the Company and its subsidiary, Palisades Collection, LLC, as borrowers, and Bank Hapoalim, as agent and lender. The Loan Agreement provides for a $20.0 million committed line of credit and an accordion feature providing an increase in the line of credit of up to $30 million, at the discretion of the lenders. The facility is for a term of three years at an interest rate of either LIBOR plus 275 basis points or prime, at the Company’s option. The Loan Agreement includes covenants that require the Company to maintain a minimum net worth of $150 million and pay an unused line fee. The facility is secured pursuant to a Security Agreement among the parties to the Loan Agreement. On March 30, 2016, the Company signed the First Amendment to the Loan Agreement (the “First Amendment”) with Bank Hapoalim which amended certain terms of their banking arrangement. The First Amendment includes (a) the reduction of the interest rate to LIBOR plus 225 basis points; (b) a decrease in the minimum net worth requirement by $50 million, to $100 million and (c) modifies the No Net Loss requirement from a quarterly to an annual basis. All other terms of the original agreement remain in effect. The Company has $9.6 million as outstanding balance against the facility as of June 30, 2017. There is a $10.0 million aggregate balance on deposit at Bank Hapoalim which has been reclassified to restricted cash in the consolidated balance sheet since these assets serve as collateral for the line of credit. On April 28, 2017, the Company renewed the line of credit facility with the new maturity date of August 2, 2017, under the existing terms and conditions as of June 30, 2017. On August 2, 2017, the Bank Hapoalim $9.6 million line of credit expired and the Company satisfied the debt with cash that was held in deposit as collateral with the bank.
Tender Offer of Company Common Shares
On March 22, 2016, MPF InvestCo 4, LLC, a wholly owned subsidiary of The Mangrove Partners Master Fund, Ltd. ("Mangrove"), filed a Tender Offer Statement with the SEC, announcing the commencement of an unsolicited tender offer to acquire up to 3,000,000 shares of Asta common stock at price of $9.00 per share (“the Mangrove Offer”). The Mangrove Offer was sent to the holders of common stock of the Issuer. If the Offer is fully subscribed, the Mangrove Offer would represent approximately 25.0%sold all of the issued and outstanding Shares and would resultequity capital of CBC, our wholly owned subsidiary engaging in Mangrove owningstructured settlements, for an aggregate purchase price of approximately 5,102,427 Shares, which would represent$10.3 million. Of the aggregate purchase price, approximately 42.5%$4.5 million was paid in cash, and $5.8 million was paid under a promissory note at an annual interest rate of issued7% to be paid quarterly to us and outstanding Shares, basedsecured by a first priority security interest in and lien on such Buyer’s affiliates’ rights to certain servicing fees. The remaining amount of the 12,011,476 Shares, issued and outstandingaggregate purchase price was paid as reimbursement of certain invoices of CBC. As of March 31, 2016.2019, there is approximately $3.8 million outstanding on the promissory note.
On March 31, 2016, the Company announced that its Board of Directors, after careful consideration and in consultation with a special committee of the Board and its financial and legal advisors, has unanimously determined to recommend that shareholders reject the Mangrove Offer. Furthermore, the Company has announced its intention to commence an issuer tender offer for 3,000,000 shares of Asta common stock pursuant to a "Dutch Auction" format at a price range of $9.50 to $10.25 per share.
On April 15, 2016, Mangrove amended its previously announced unsolicited tender offer to acquire up to 3,000,000 shares of Asta’s common stock, increasing the price per share from $9.00 to $9.50, and extending the expiration date to May 9, 2016. In addition, the amendment added certain additional conditions to Mangrove’s obligation to consummate its offer. On April 21, 2016, The Company’s Board of Directors unanimously reaffirmed its recommendation to shareholders that they reject the unsolicited offer, citing the fact that the increased offer is still at the bottom of the range in the Company’s self-tender, as described above.
On April15, 2016, MPF InvestCo 4, LLC and Mangrove Master Fund (“Mangrove”) amended its previously announced unsolicited tender offer to acquire up to 3,000,000 shares of Asta’s common stock, increasing the price per share from $9.00 to $9.50, and extending the expiration date to May 9, 2016. In addition, the amendment added certain additional conditions to Mangrove’s obligation to consummate its offer. On April 21, 2016, The Company’s Board of Directors unanimously reaffirmed its recommendation to shareholders that they reject the unsolicited offer, citing the fact that the increased offer is still at the bottom of the range in the Company’s self-tender, as described above. On April 26, 2016, Mangrove announced the termination of its Tender Offer, previously due to expire on May 9, 2016. Mangrove terminated its offer because it determined that a condition of the offer would not be satisfied. None of the shares of the Company’s common stock were purchased under the Mangrove offer.
The Company’s Tender offer expired on May 12, 2016.
On January 19, 2017, the Company commenced a self-tender offer to purchase for cash up to 5,314,009 shares of its common stock at a purchase price of $10.35 per share, less applicable withholding taxes and without interest. The Company made the tender offer pursuant to the Settlement Agreement dated as of January 6, 2017, by and among the Company, Mangrove and certain of their respective affiliates, pursuant to which Mangrove and its affiliates will tender their 4,005,701 shares. The tender offer will reduce the number of shares in the public market.
If more than 5,314,009 shares had been tendered, the Company would have purchased all tendered shares on a pro rata basis, subject to the conditional tender provisions described in the Offer to Purchase. Pursuant to the Settlement Agreement, Gary Stern (or his permitted assignees) had unconditionally agreed to purchase from Mangrove and its affiliates any shares owned by Mangrove and its affiliates that the Company did not purchase in the tender offer.
The tender offer expired on February 15, 2017, at 11:59 p.m., New York City time. Based on the final count by American Stock Transfer & Trust Company, LLC ("AMSTOCK"), the depositary for the tender offer, a total of approximately 6,022,253 shares of the Company’s common stock were validly tendered and not validly withdrawn. Because the tender offer was oversubscribed by 708,244 shares, the Company purchased only a prorated portion of the shares properly tendered by each tendering stockholder. The depositary had informed the Company that the final proration factor for the tender offer is approximately 88.24% of the shares validly tendered and not validly withdrawn. AMSTOCK promptly issued payment for the 5,314,009 shares accepted pursuant to the tender offer and returned all other shares tendered and not purchased. The shares acquired represented approximately 44.7% of the total number of shares of the Company’s common stock issued and outstanding as of February 6, 2017. As a result of this tender offer the Company recorded an additional $54.2 million in treasury stock and an $0.8 million charge to general and administrative expense during the nine months ended June 30, 2017. Additionally, the Ricky Stern Family 2012 Trust (Gary Stern's permitted assignee) acquired 471,086 Shares under the Purchase Agreement with Mangrove and its affiliates on March 10, 2017 for $4.9 million.
Personal Injury Claims
On December 28, 2011, we formed a joint venture Pegasus. Pegasus purchases interests in personal injury claims from claimants who are a party to 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, with Asta Funding, Inc. receiving 80% and PLF receiving 20%.
On November 8, 2016, the Company entered into a binding Term Sheet (the “Term Sheet”) with Pegasus and PLF. The Company and PLF have decided not to renew the Pegasus joint venture that by its terms terminates on December 28, 2016. The Term Sheet amends certain provisions to Pegasus’ operating agreement dated as of December 28, 2011 (as amended, the “Operating Agreement”) and governs the terms relating to the collection of its existing Pegasus portfolio (the “Portfolio”).
Pursuant to the Term Sheet, the parties thereto have agreed that Pegasus will continue in existence in order to collect advances on its existing Portfolio. The Company will fund overhead expenses relating to the collection of the Portfolio based on a budget agreed upon by the Company and PLF. Any cash received by Pegasus will be distributed to its members in the order provided for in the Operating Agreement. The Company will be allocated an amount equal to 20% of all principal collected on each investment paid back beginning October 1, 2016 and continuing through the collection of the Portfolio, which will be applied against the outstanding balance of overhead expenses previously advanced by the Company to Pegasus. After January 2, 2017, additional overhead expenses advanced will be paid back monthly as incurred by the Company prior to the calculation and distribution of any profits.
In connection with the Term Sheet, the parties thereto have also entered into a customary mutual release and non-disparagement agreement as well as a release from the non-competition obligations under the Operating Agreement.
The Company filed for arbitration with the American Arbitration Association ("AAA") against Pegasus in April 2017 for breaches in the Operating and Liquidation Agreements. On April 18, 2017, the Company was granted an Emergent Award restraining the cash in Pegasus, until a formal arbitration panel is confirmed and can review the case. As of June 30, 2017 there was approximately $24.7 million in cash that was restrained under the Emergent Award, and is classified as restricted on the Company's consolidated balance sheet.
On July 17, 2017, an arbitration panel was confirmed, and a hearing date has been scheduled for August 25, 2017 on the Company's motion to have PLF removed from managing Pegasus and replacing them with Company designated representatives, and to permit disbursements to the Company in accordance with the Operating and Term Agreements. On November 11, 2016, the Company announced that it will continue its personal injury claims funding business through the formation of a wholly owned subsidiary, Simia.
On March 24, 2017, Simia purchased a portfolio of personal injury claims from a third party for approximately $3.0 million, The Company plans to grow the business organically, but may from time to time purchase portfolios of personal injury claims from third parties if the opportunity presented aligns with the Company's strategic growth plans.
Divorce Funding
On May 8, 2012, the Company formed EMIRIC, LLC, a wholly owned subsidiary of the Company. EMIRIC, LLC entered into a joint venture with California-based Balance Point Divorce Funding, LLC (“BP Divorce Funding”) to create BP Case Management, LLC (“BPCM”). BPCM is 60% owned by the Company and 40% owned by BP Divorce Funding. BPCM provides non-recourse funding to a spouse in a matrimonial action. The Company provides a $1.5 million revolving line of credit to partially fund BP Divorce Funding’s operations, with such loan bearing interest at the prevailing prime rate, with an initial term of twenty-four months. The term of the loan was to end in May 2014, but had been extended to August 2016. Effective August 14, 2016, the Company extended its revolving line of credit with Balance Point until March 31, 2017, at substantially the same terms as the September 14, 2014 amendment. The revolving line of credit is collateralized by BP Divorce Funding’s profit share in BPCM and other assets. On April 1, 2017, this loan was in default as BPCM failed to make the required payments due under the loan agreement. Accordingly, the loan balance of $1.5 million was deemed uncollectible and written off during the second quarter of fiscal 2017 with a charge to general and administrative expenses.
Structured Settlements
On December 31, 2013, the Company acquired 80% ownership of CBC and its affiliate, CBC Management Services, LLC for approximately $5.9 million. At the closing, the operating principals of CBC, namely William J. Skyrm, Esq. and James Goodman, were each issued a 10% interest in CBC. In addition, the Company agreed to provide financing to CBC of up to $5 million, amended to $7.5 million in March 2015. Through the transaction we acquired structured settlements valued at $30.4 million and debt that totaled $23.4 million, consisting of $9.6 million of a revolving line of credit with a financial institution and $13.8 million of non-recourse notes issued by CBC’s subsidiaries. On December 31, 2015, the Company acquired the remaining 20% ownership of CBC for $1,800,000, through the issuance of restricted stock valued at approximately $1,000,000 and $800,000 in cash. Each of the two original principals received 61,652 shares of restricted stock at fair market value of $7.95 per share and $400,000 in cash. An aggregate of 123,304 shares of restricted stock was issued. As of June 30, 2017, CBC had structured settlements valued at $89 million and debt of $76.4 million, consisting of a $4.3 million line of credit and an aggregate of $72.1million of non-recourse notes.
On April 28, 2017, CBC entered into an Assignment Agreement (the “Assignment Agreement”) by and among CBC and an unrelated third party (Assignee”). The Assignment Agreement provided for the sale of the Company’s entire life contingent asset portfolio included in the Company’s structured settlements to the Assignee for a purchase price of $7.7 million. The Company realized a loss from the sale of $5.3 million for the three months ended June 30, 2017.
Cash Flow
As of JuneAt March 31, 2019, our cash decreased $2.6 million to $3.7 million from $6.3 million at September 30, 2017, our2018. Our cash and cash equivalents, decreased $1.9available for sale securities and investments in equity securities in the aggregate increased $5.7 million to $16.6$50.0 million from $18.5at March 31, 2019, compared to $44.3 million at September 30, 2016. Additionally, the Company had $35.2 million in cash and cash equivalents that has been classified as restricted at June 30, 2017.2018.
Net cash used in operating activities was $6.6$0.9 million during the ninesix months ended June 30, 2017March 31, 2019, as compared to $2.3$0.3 million provided byused in operating activities for the six months ended March 31, 2018, primarily resulting from the net income of $3.0 million in the current period compared to a net loss of $1.6 million in the prior year period and increase in prepaid and income taxes receivable of $3.1 million. Net cash used in investing activities was $1.8 million during the ninesix months ended June 30, 2016. Net cashMarch 31, 2019, as compared to $43.4 million provided by investing activities was $75.9 million during the nine month periodsix months ended June 30, 2017 compared to $9.2 millionMarch 31, 2018. The change in cash used in investing activities during the nine months ended June 30, 2016. The increase wasis primarily attributeddue to the net purchase of available for sale debt securities and investments in equity securities of $8.0 million in the current period compared to proceeds realized from the sale of available for sale securitiesCBC of $62.4$4.5 million and collections onreceived in the prior period, decrease in equity method investment of $53.1 million partially offset by acquisition of personal injury claims portfolios of $35.4$14.6 million and investing activities of the discontinued operations of $1.5 million in the current year. Netprior period. There was no cash used inprovided by financing activities was $71.2 million during the ninesix months ended June 30, 2017,March 31, 2019, as compared to cash$33.6 million used in financing activities of $0.4 million during the nine months ended June 30, 2016. The increase in net cash in financing activities in the current period is primarilysame prior year period. The prior year use of cash was the result of treasury stock purchase in conjunction with the Company’s self-tenderspecial dividend paid to stockholders of $54.2 million, the reclassification of $10 million of cash collateral as restricted for the Company’s line of credit with Bank Hapoalim and $24.7 million in cash that was restrained under the Emergent Award against Pegasus partially offset by $9.6 million in borrowings from Bank Hapoalim.$35 million.
Our cash requirements have been and will continue to be significant and include external financing to operate our various lines of business. Significant requirements include investment in personal injury claims, investment in structured settlements, costs involved in the collections of consumer receivables, repayment of CBC debt and investment in consumer receivable portfolios.portfolios and investment in personal injury claims. In addition, dividends could be declared and paid if and when approved by the Board of Directors. Acquisitions recently have been financed through cash flows from operating activities. We believe we may securewill not be dependent on a credit facilities with financial institutions as we look to grow the Company, support current operations, and execute on our short and long term business initiatives. Infacility in the short-term, as our cash balances will be sufficient to invest in personal injury claims, purchase portfolios and finance the disability advocacy business. Structured settlements are financed through the use of a credit line, warehouse facility, and private placement financing.
We believe our available cash resources and expected cash flows from operations will be sufficient to fund operations for at least the next twelve months. We do not expect to incur any material capital expenditures during the next twelve months. The Company used a portion of its cash and cash equivalents on hand to fund the purchase of shares in the tender offer.
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. The outcome of any future transaction(s) is subject to market conditions. In addition, due to these opportunities, we continue tomay seek opportunities with banking organizations and others on a possible financing loan facility.
Off Balance Sheet Arrangements
As of June 30, 2017, we didWe do not have any relationships with unconsolidated entities or financial partners, established for the purpose of facilitating off-balanceoff 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.arrangements.
Additional Supplementary Information:
We do not anticipate collecting the majority of the purchased principal amounts of our various portfolios. Accordingly, the difference between the carrying value of the portfolios and the gross receivables is not indicative of future revenues from these accounts acquired for liquidation. Since we purchased these accounts at significant discounts, we anticipate collecting only a portion of the face amounts.
For additional information regarding our methods of accounting for our investment in finance receivables, the qualitative and quantitative factors we use to determine estimated cash flows, and our performance expectations of our portfolios, see “Item“Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies ” above.
Recent Accounting Pronouncements
In May 2014, theAdopted During The Six Months Ended March 31, 2019
On October 1, 2018, we adopted FASB issued an update to ASC 606, Revenue“Revenue from Contracts with Customers,” that will supersede virtually all existingrequires use of a single principles-based model for recognition of revenue guidance. Under this update, an entityfrom contracts with customers. The core principle of the model 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 updateWe adopted the new guidance using the modified retrospective approach which did not require the restatement of prior periods, and recognized a cumulative effect adjustment resulting in an increase in total assets and retained earnings of $173,000, net of taxes of $80,000.
The most significant impact of ASC 606 relates to our accounting for revenue associated with disability claimant's contracts. Previously we recognized disability fee income when the disability claimants’ cases closed with the social security administration and the applicable fees were collected. Under the new guidance we determined that the various advocacy services, performed on behalf of a claimant, constitute one performance obligation as they represent an integrated set of services designed to provide a claimant with a successful award. It was also determined that the benefit of these services is effectiveconveyed to the claimant at the point in time that the award is determined to be successful. In addition, we have made estimates of variable consideration under the expected value method. Therefore, for annual reporting periods beginning after December 15, 2017 including interim periods within that reporting period. Early applicationthese arrangements, we will recognize revenue when each case is permitted for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Basedclosed, when cash is received or when we receive a notice of award, stipulating our fees earned on each case directly from the Company’s evaluation,social security administration or Veterans Administration.
The primary impact of adopting the Company does not believe this new standard will impactresults in acceleration of revenues for the accountingaforementioned contractual arrangements, which relate to the social security disability advocacy segment. Disability fee income represents approximately 24.8% and 23.9% of total consolidated revenues for its revenues.the three and six months ended March 31, 2019.
The following line items in our consolidated statement of operations and comprehensive income for the current reporting period and condensed consolidated balance sheet as of March 31, 2019 have been provided to reflect both the adoption of ASC 606 as well as a comparative presentation in accordance with ASC 605 previously in effect:
Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) for the three months ended March 31, 2019: | As Reported (in accordance with ASC 606) | Balances Without Adoption of ASC 606 | Impact of Adoption Higher/(Lower) | |||||||||
Disability fee income | $ | 1,296,000 | $ | 1,290,000 | $ | 6,000 | ||||||
Income from continuing operations before income tax | $ | 2,411,000 | $ | 2,405,000 | $ | 6,000 | ||||||
Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) for the six months ended March 31, 2019: | As Reported (in accordance with ASC 606) | Balances Without Adoption of ASC 606 | Impact of Adoption Higher/(Lower) | |||||||||
Disability fee income | $ | 2,557,000 | $ | 2,428,000 | $ | 129,000 | ||||||
Income from continuing operations before income tax | $ | 4,157,000 | $ | 4,028,000 | $ | 129,000 | ||||||
As of March 31, 2019 | ||||||||||||
Condensed Consolidated Balance Sheet | As Reported (in accordance with ASC 606) | Balances Without Adoption of ASC 606 | Impact of Adoption Higher/(Lower) | |||||||||
Asset | ||||||||||||
Accounts receivable | $ | 382,000 | $ | - | $ | 382,000 | ||||||
Stockholders' equity | ||||||||||||
Retained earnings | $ | 85,652,000 | $ | 85,399,000 | $ | 253,000 | (1) | |||||
In January 2016,(1) Does not include the tax impact of $80,000
On October 1, 2018, we adopted FASB issued ASUUpdate No. 2016-01, Financial Instruments-Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities. The main objective in developing this update is enhancing the reporting model for financial instrumentsLiabilities, to provide users of financial statements with more decision-useful information. The amendments in this update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The effective datemain provision of this guidance requires certain equity investments to be measured at fair value with changes in fair value recognized in net earnings; separate presentation in other comprehensive income for changes in fair value of financial liabilities measured under the fair value option that are due to instrument-specific credit risk; and changes in disclosures associated with the fair value of financial instruments. Upon adoption of this update isASU, our investments in equity securities are no longer classified as available for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company is currently evaluating the impactsale, and changes in fair value are reflected in other income, net on our condensed consolidated statement of operations. In conjunction with this update will have on its consolidated financial statements.adoption we recorded a cumulative effect adjustment with a decrease to opening retained earnings of $10,000 and an increase to opening accumulated other comprehensive income of $10,000, net of tax benefit of $5,000.
In FebruaryAugust 2016 the FASB issued ASU No. 2016-02, Leases2016-15, "Statement of Cash Flows (Topic 842)230): Classification of Certain Cash Receipts and Cash Payments." This ASU made eight targeted changes to amend lease accounting requirementshow cash receipts and requires entities to generally recognize oncash payments are presented and classified in the balance sheet operating and financing lease liabilities and corresponding right-of-use assets.statement of cash flows. The new standard will require significant additional disclosures about the amount, timing and uncertainty of cash flows from leases. The standard update iswas effective for fiscal years beginning after December 15, 2018 and interim periods within those years and early2017. Early adoption iswas permitted. The new standard isrequired adoption on a retrospective basis unless it was impracticable to be applied usingapply, in which case the Company would have been required to apply the amendments prospectively as of the earliest date practicable. Our adoption of the ASU did not have a modified retrospective approach and includes a numbermaterial effect on the Company’s consolidated statements of optional practical expedients that entities may elect to apply. The Company is currently evaluating the impactcash flows.
In March 2016,January 2017, the FASB issued ASU No. 2016-09,2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.” The new rules provide for the application of a screen test to consider whether substantially all the fair value of the assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If the screen test determines this to be true, the set is not a business. The new standard was effective for the Company in the first quarter of 2019. The adoption of the new accounting rules did not have a material impact on the Company’s consolidated financial condition, results of operations or cash flows.
In March 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718) Improvements to Employee Share Based Payment Accounting, to simplify and improve areas of generally accepted accounting principles for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The effective date for this update is for annual reporting periods beginning after December 15, 2016,2017, including interim periods within that reporting period. The Companyadoption of this update did not have a material impact on our consolidated financial statements.
Recent Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) which requires lessees to recognize right-of-use assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. For a lease with a term of 12 months or less, a lessee is currently evaluatingpermitted to make an accounting policy election by class of underlying asset not to recognize a right-of-use asset and lease liability. Additionally, when measuring assets and liabilities arising from a lease, optional payments should be included only if the lessee is reasonably certain to exercise an option to extend the lease, exercise a purchase option or not exercise an option to terminate the lease. In January 2018, the FASB issued ASU No. 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to ASC 842. ASU No. 2018-01 was issued to address concerns about the cost and complexity of complying with the transition provisions of ASU No. 2018-01. Additionally, in July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements,” which provides an alternative transition method that permits an entity to use the effective date of ASU No. 2016-02 as the date of initial application through the recognition of a cumulative effect adjustment to the opening balance of retained earnings upon adoption. The standard becomes effective for fiscal years beginning after December 15, 2019 and interim periods within those years, and early adoption is permitted. We are is in the process of reviewing our existing leases, including service contracts for embedded leases to evaluate the impact of this update will havestandard on itsour consolidated financial statements. statements and the impact on regulatory capital.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For the Company, thisThis update will be effective for interim periods and annual periods beginning after December 15, 2019. Upon adoption, the Companywe expect that we will accelerate the recording of itsour credit losses in itsour financial statements.
In August 2016,January 2017, the FASB issued ASU 2016-15, StatementNo. 2017-04 Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The objective of Cash Flows (Topic 230): Classification this update is to simplify the subsequent measurement of goodwill, by eliminating step 2 from the goodwill impairment test. The amendments in this update are effective for annual periods beginning after December 15, 2019, and interim periods within those fiscal years. We do not believe this update will have a material impact on our condensed consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, Reclassificationof Certain Cash ReceiptsTax Effects from Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income (loss) to retained earnings for stranded tax effects resulting from the Tax Cuts and Cash Payments.Jobs Act enacted on December 22, 2017, and requires certain disclosures about stranded tax effects. ASU No. 2018-02 will be effective for the Company's fiscal year beginning October 1, 2019, with early adoption permitted, and should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Act is recognized. The adoption of this ASU is not expected to have a material impact on our condensed consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This ASU will make eight targetedmodifies the disclosure requirements on fair value measurements. The ASU removes the requirement to disclose: the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 3 fair value measurements. The ASU requires disclosure of changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to how cash receipts and cash payments are presented and classified in the statement of cash flows. The new standarddevelop Level 3 fair value measurements. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case the Company would be required to apply the amendments prospectively as of the earliest date practicable. The Company is in the process of2019. We are currently evaluating the provisionsimpact this guidance will have on our condensed consolidated financial statements.
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We are exposed to various types of market risk in the normal course of business, including the impact of interest rate changes and foreign exchange rates and changes in corporate tax rates. At June 30, 2017, the debt associated with our acquisition of CBC, had a balance of approximately $76.4 million, consisting of $4.3 million through a line of credit, at a rate of LIBOR plus 3%, with a floor of 4.1%, from a financial institution, and $72.1 million of notes at varying rates, from 4.85% to 8.75%, issued by CBC’s subsidiaries. At June 30, 2017, the LIBOR rate was 1.22389%. A 25 basis point change in the LIBOR rate would have had an immaterial impact on the CBC line of credit interest expense, while above the floor rate (4.22389 %) would have an effect less than a month. The same 25 basis point change in the LIBOR rate would have had approximately $2,000 impact on the Bank Hapoalim line of credit interest expense. We do not currently invest in derivative financial or commodity instruments.
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a. Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.
Our management, is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Under the supervision and with the participation of our management, including its principal executive officerChief Executive Officer and principal financial officer, we conducted an assessment ofChief Financial Officer, evaluated the effectiveness of its internal control over financial reporting. In making this assessment, we used the criteria set forth by the Committeedesign and operation of Sponsoring Organizationsour disclosure controls and procedures as of the Treadway Commission (“COSO 2013”) in Internal Control — Integrated Framework, issued in 2013.March 31, 2019. Based on management’s assessment,that evaluation, our Chief Executive Officer and based on the criteria in COSO 2013, weChief Financial Officer concluded that our disclosure controls and procedures were not effective as of June 30, 2017. The Company restated its results of operations forMarch 31, 2019 due to the quarter ended December 31, 2016 to reflect the quarterly increase in certain underlying benchmark interest rates used in determining fair valueexistence of the Company’s structured settlements. Additionally,material weaknesses in internal control over financial reporting described below (which we view as an integral part of June 30, 2017 theour disclosure controls and procedures).
1. The Company did not maintain effective internal controls over financial reporting disclosures specifically associated with concentrations, foreign transactions, significant entities and related party transactions. The material weaknesses related to financial reporting disclosures associated with significant and related party transactions at the subsidiary level. Aslevel, were first reported by the Company in its Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, which was filed with the SEC on August 9, 2017, and was also identified as a resultmaterial weakness in connection with the preparation of this report .
Planned Ongoing/Remedial Actions:
● | The Company is in the process of developing policies, procedures, and controls for the specific areas identified in this material weakness. The Company will also hire additional accounting and finance personnel with significant accounting and SEC reporting experience to join its finance team to ensure consistent application of these accounting principles and adherence to the Company’s newly adopted policies, procedures, and controls. The Company is reviewing the current financial controls to assess if additional management review controls are necessary and have begun working with all finance personnel to establish the appropriate documentation criteria for the existing controls including evidence of review, timeliness and variance thresholds. | |
● | The Company plans to have the Disclosure Committee, which now meets on a quarterly basis, meet more frequently throughout the year to assure that our SEC filings and other public disclosures are complete, accurate, and otherwise comply with applicable accounting principles and regulations. The Company’s Disclosure Committee reports to our Chief Executive Officer with oversight provided by our Audit Committee, and includes individuals knowledgeable about, among other things, SEC rules and regulations, financial reporting, and internal control matters. The Company will also document a formal disclosure policy and procedures to govern the work of the Disclosure Committee. | |
● | Since the original determination regarding the material weakness associated with significant and related party transactions at the subsidiary level, the Company has installed contract management software to manage all of its contracts and associated obligations under those contracts. Management from each department has been trained on the software, and all contracts now require approvals of designated managers and the accounting department prior to execution. All contracts are reviewed by accounting personnel with requisite experience in identifying complex accounting transactional and disclosure issues. |
2. The Company lacks a formal policy to assess the adequacy of the design and operating effectiveness of controls related to certain of the Company’s subsidiaries, third party service providers and third party advocates, which was first reported by the Company in its Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, which was filed with the SEC on August 9, 2017, and was also identified as a material weakness in connection with the preparation of this report.
Planned Ongoing/Remedial Actions:
The Company has increased the frequency of onsite inspections of third-party servicers over the last three months, utilizing existing accounting/finance personnel familiar with the specific accounting processes involved at each location. The Company has provided training to accounting personnel at subsidiary locations, and is developing detailed checklist and processes that can be used, and reviewed by management during period ends. Additionally, management will routinely visit subsidiary locations to ensure that the processes and guidelines developed are being strictly adhered to. |
3. The Company did not maintain effective internal controls over accounting for complex transactions specifically associated with equity method investment, which was first reported by the Company in its Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, which was filed with the SEC on August 9, 2017, and were also identified as a material weakness in connection with the preparation of this report .
Planned Ongoing/Remedial Actions:
The Company has developed policies, procedures, and controls to ensure the proper accounting for complex technical issues are identified, researched and brought to management's attention. The Company is in the process of training the appropriate personnel on new and existing accounting pronouncements, Company policies, procedures, and controls. |
4. The Company did not maintain effective internal controls over accounting for foreign transactions specifically associated with accounting for transaction and translation adjustments, unallocated payments and cutoff, which were first reported by the Company in its Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, which was filed with the SEC on August 9, 2017, and was also identified as a material weakness in connection with the preparation of this report.
Planned Ongoing/Remedial Actions:
● | The Company has developed and plans to implement improved policies, procedures, processes and controls, as well as conduct trainings to ensure the proper accounting for foreign currency matters in accordance with ASC 830, Foreign Currency Matters. |
● | The Company plans to utilize an accounting system to ensure that all transactions are systematically re-measured and translated at the applicable foreign currency exchange rate and the associated gain or loss is appropriately recognized in Accumulated Other Comprehensive Income ("AOCI") or earnings. |
● | The Company is currently reconciling the AOCI account in a timely manner. |
5. The Company’s social security disability advocacy segments controls lack the ability to ensure, in a timely manner, that they are legally entitled to the monies received; whether they have third-party documentation supporting the cash receipts; or whether a specific advocacy case is ongoing or closed. The aggregation of the impact of these misstatements and omitted disclosure,deficiencies rises to the Company concluded there were previously undetectedlevel of a material weaknessesweakness, being first identified as a material weakness in connection with the Company’s internal control over financial reporting.preparation of this report.
Planned Ongoing/Remedial Actions:
● | The Company plans to implement changes to the software that manages the social security disability business, to reconcile the amounts received by the Social Security Administration ("SSA") to SSA's notice of award. Additionally, applicable personnel will be trained on the new software modifications to ensure compliance in the input and maintenance of claimant's files. |
● | The Company plans to appropriately reconcile the amounts received from the SSA to the notice of awards, in a timely manner. |
b. Changes in Internal Controls over Financial Reporting.
There have been certain improvements inOur management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated our internal control over financial reporting to determine whether any changes occurring during the nine months ended June 30, 2017. Since the determination regarding the above material weaknesses, wesecond quarter of fiscal year 2019 that have devoted significant effort and resourcesmaterially affected, or are reasonably likely to remediation and improvement ofaffect, our internal control over financial reporting. Management will continuehas concluded that there have been no other changes, other than those discussed above, that occurred during such quarter that have materially affected, or are reasonably likely to review and make necessary changes to the overall design ofmaterially affect, our internal control.control over financial reporting.
Legal Proceedings |
In the ordinary course of our business, we are involved in numerous legal proceedings. We regularly initiate collection lawsuits, using third party law firms, against consumers. Also, consumers occasionally initiate litigation against us, in which they allege that we have violated a federal or state law in the process of collecting on their account. We do not believe that these ordinary course matters are material to our business and financial condition. As of the date of this report, we were not involved in any material litigation in which we were a defendant.
Originators, debt purchasers and third-party collection agencies and attorneys in the consumer credit industry are frequently subject to putative class action lawsuits and other litigation. Claims include failure to comply with applicable laws and regulations and improper or deceptive origination and servicing practices. Being a defendant in such class action lawsuits or other litigation could materially adversely affect our results
Legal proceedings are subject to substantial uncertainties concerning the outcome of material factual and legal issues relating to the litigation. Accordingly, we cannot currently predict the manner and timing of the resolution of some of these matters and may be unable to estimate a range of possible losses or any minimum loss from such matters.
Risk factors |
For a discussion of our potential risks and uncertainties, see the information previously disclosed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K, for the year ended September 30, 20162018 filed with the SEC on December 14, 2016.21, 2018. There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K.
Unregistered Sales of Equity Securities and Use of Proceeds |
None
Default Upon Senior Securities | |
None
Mine Safety Disclosures |
Not applicable
Other Information |
None
Exhibits |
(a) Exhibits.
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| Certificate of Elimination of the Series A Junior Preferred Stock of Asta Funding, Inc. (incorporated by reference to Exhibit 3.1 to Asta Funding, Inc.’s Current Report on Form 8-K filed on May 5, 2017). |
3.5 | Certificate of Designation of Series A Junior Participating Preferred Stock |
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101.INS | XBRL |
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101.SCH | XBRL Taxonomy Extension |
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101.DEF | XBRL Taxonomy Extension |
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** | This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (“Exchange Act”), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference |
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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) | |||||
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Date: | May 13, 2019 | By: | /s/ Gary Stern | |||
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Date: | May 13, 2019 | By: | /s/ Bruce R. Foster | |||
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EXHIBIT INDEX
Exhibit Number | Description | |
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2.1# | Membership Interest Purchase Agreement, dated December 31, 2013, by and among CBC Settlement Funding, LLC, CBC Management Services Group, LLC, Asta Funding, Inc. and the other parties thereto (incorporated by reference to Exhibit 10.1 to Asta Funding, Inc.’s Current Report on Form 8-K filed January 7, 2014). | |
2.2 | Securities Purchase Agreement, dated December 13, 2017, by and between Asta Funding, Inc., and CBC Holdings LLC (incorporated by reference to Exhibit 10.1 to Asta Funding, Inc.’s Current Report on Form 8-K filed December 19, 2017). | |
2.3# | Membership Interest Purchase Agreement, dated January 12, 2018, by and between ASFI Pegasus Holdings, LLC and Pegasus Legal Funding, LLC (incorporated by reference to Exhibit 10.1 to Asta Funding, Inc.’s Current Report on Form 8-K filed January 18, 2018). | |
2.4# | Term Sheet, dated November 8, 2016, by and among Asta Funding, Inc., ASFI Pegasus Holdings, LLC, Fund Pegasus, LLC, Pegasus Funding, LLC, Pegasus Legal Funding, LLC, Max Alperovich and Alexander Khanas (incorporated by reference to Exhibit 10.1 to Asta Funding, Inc.’s Current Report on Form 8-K filed November 15, 2016). | |
3.1 |
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3.2 | Certificate of Amendment to Certificate of | |
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| Certificate of Designation of Series A Junior Preferred Stock of Asta Funding, Inc. (incorporated by reference to Exhibit 3.1 to Asta Funding, Inc.’s Current Report on Form 8-K filed August 24, 2012). |
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3.7 | Amendment to Amended and Restated By-laws of Asta Funding, Inc. (incorporated by reference to Exhibit 3.1 to Asta Funding, Inc.’s Current Report on Form 8-K filed January 9, 2017). | |
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101.SCH | XBRL Taxonomy Extension Schema. | |
101.CAL | XBRL Taxonomy Extension Calculation. | |
101.DEF | XBRL Taxonomy Extension Definition. | |
101.LAB | XBRL Taxonomy Extension Labels. | |
101.PRE | XBRL Taxonomy Extension Presentation. |
* | Filed herewith. |
** | This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (“Exchange Act”), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended or the Exchange Act. |
# | Indicates schedules have been omitted pursuant to |
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