10-Q/A 1 asta20180827c_10qa.htm FORM 10-Q/A asta20180827c_10qa.htm
 

 

Table of Contents



 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

  

 

 


 

 

FORM 10-Q/A

 


 

 

 

 

Amendment #1

   

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

 

For the quarterly period ended June 30, 2017

 

OR

 

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

 

For the transition period from                     to                    

 

Commission file number: 001-35637

 


 

 

 

 

 

 

 

ASTA FUNDING, INC.

(Exact name of registrant as specified in its charter)

 

 


 

Delaware

 

22-3388607

(State or other jurisdiction

of incorporation or organization)

 

(IRS Employer

Identification No.)

 

 

210 Sylvan Ave., Englewood Cliffs, New Jersey

 

07632

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number: (201) 567-5648

 


 

 

 

Former name, former address and former fiscal year, if changed since last report: N/A

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ☐     No   ☒

 

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. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

 

  

Accelerated filer

 

             

Non-accelerated filer

 

☐    (Do not check if a smaller reporting company)

  

Smaller reporting company

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes   ☐     No   ☒

 

As of September 14, 2018, the registrant had 6,685,415 common shares outstanding.

 

 

 



 

 

 

EXPLANATORY NOTE

 

As previously disclosed in the Current Report on Form 8-K filed by Asta Funding, Inc. (“Asta” or the “Company”) with the Securities and Exchange Commission (the “SEC”) on January 18, 2018, the Board of Directors (the “Board”) of the Company, upon the recommendation of the Audit Committee of the Board (the “Audit Committee”), determined that the Company’s previously issued financial statements for each of the years ended September 30, 2016, 2015 and 2014, and the interim periods contained therein, as well as the Company’s unaudited consolidated financial statements for the quarters ended December 31, 2016, March 31, 2017 and June 30, 2017, could no longer be relied upon. 

 

On September 17, 2018, the Company filed an Annual Report on Form 10-K/A (the “Form 10-K/A”) to amend and restate the Company’s previously issued financial statements for each of the years ended September 30, 2016, 2015 and 2014, as well as the interim periods contained therein, and Quarterly Reports on Form 10-Q/A to amend and restate the Company’s previously issued financial statement for the quarters ended December 31, 2016 and March 31, 2017. The Company is filing this Amendment No. 1 on Form 10-Q/A (this “Amendment”) to amend and restate the Company’s previously issued financial statements contained in its Quarterly Report on Form 10-Q for the quarter ended June 30, 2017 (the “Non-Reliance Period”), which was originally filed with the SEC on August 9, 2017 (the “Original Form 10-Q”).

 

Prior period amounts have already been restated in the Company's Form 10-K/A and, accordingly have not been restated in this Amendment.

 

Restatement Background

 

On January 11, 2018, after discussions with the Audit Committee, management re-evaluated the Company's historical conclusion to consolidate Pegasus Funding, LLC (“Pegasus”). Management has determined that the Company lacked the requisite control to consolidate Pegasus in its historical periods in accordance with Accounting Standards Codification (“ASC”) 810 “Consolidation.” Management also determined that the Company's previous treatment for certain foreign currency matters under ASC 830 “Foreign Currency Matters” was not appropriate. As such, the Company has subsequently revised its investment in Pegasus to the equity method, including the underlying reserve methodology; and has adjusted its financial statements to reflect the proper accounting for certain foreign currency transactions. Additionally, the Company corrected the financial statements for additional known errors consisting of (i) the adjustment of various accruals, (ii) the fair value of structured settlements, (iii) accounting for unallocated payments, and (iv) the tax effects of the adjustments mentioned above.

 

The following errors were identified as part of the restatement. See Note 1 – Restatement of Financial Statements in the Company’s notes to financial statements for further detail.

 

  1. In connection with the Company determining it lacked the requisite control to consolidate Pegasus during the Non-Reliance Period, the Company has now accounted for its investment in Pegasus under the equity method in accordance with accounting principle generally accepted in the United States (“US GAAP”).
     
  2. The Company determined that it had not previously accounted for certain foreign currency gains/losses on intercompany balances and transactions in accordance with US GAAP. The Company improperly accounted for the foreign currency effect of certain transactions as if they were long-term investments by including the foreign currency effect in accumulated other comprehensive income instead of properly recording the effect as operating expenses as required under ASC 830.
     
 

3.

Prior to the sale of its structured settlement business, the Company purchased periodic payments under structured settlements and annuity policies from individuals in exchange for a lump sum payment. The Company did not reflect the quarterly increase in certain underlying benchmark interest rates used in determining fir value of the Company's structured settlements. The Company has elected to carry the structured settlements at fair value in accordance with the guidance of FASB ASC, Recognition and Measurement of Financial Assets and Financial Liabilities (ASC 822-10-50-28 through 50-22).

 

 

4.

The Company determined that it had not accounted for certain unallocated payments reported on its consolidated balance sheet properly.

     
  5. The Company discovered that it did not properly record an amortizable asset and related liability in conjunction with an asset purchase agreement entered into in June 2015 with a related party.
     
  6. The Company identified other transactions that had not been properly accounted for in the correct period and/or for improper amounts and/or improper accounts.
     
  7. The Company identified the personal injury claims asset balance of Pegasus was determined to be overstated.
     
  8. Some of the corrections noted above impacted earnings (loss) before taxes which, in turn, required a calculation of the tax impact.

 

 

Internal Control and Disclosure Controls Considerations

 

In connection with this restatement, our Chief Executive Officer and Chief Financial Officer determined that there were deficiencies in our internal control over financial reporting that constituted material weaknesses at March 31, 2017. Accordingly, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective at June 30, 2017, as discussed in Item 4 of this Amendment.

 

Items Amended in This Amendment

 

For the convenience of the reader, this Amendment sets forth the Original Form 10-Q in its entirety, as amended and restated by the Restated Form 10-Q/A, and as further modified and adjusted to reflect the restatement described above. In addition to such changes, this Amendment also includes: (i) revisions in presentation for the discontinued operations of the Company’s structured settlement business, which was sold on December 13, 2017; and (ii) updates to the Company’s subsequent events disclosure included in Note 20 to the Consolidated Financial Statements (collectively with (i) above, the “Subsequent Events”).

 

In accordance with applicable SEC rules, this Amendment also includes new certifications required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, as amended, from our Chief Executive Officer and Chief Financial Officer, dated as of the filing date of this Amendment. Aside from the foregoing items, this Amendment has not modified the Original Form 10-Q other than to correct immaterial items and certain errors in the exhibit index, and the disclosures contained in this Amendment have not been updated to reflect events occurring subsequent to the date of the Original Form 10-Q, August 9, 2017, except as noted above with respect to Subsequent Events.

 

Accordingly, this Amendment amends and restates the following items of the Orginal Form 10-Q:

 

 

Part I – Item 1. Financial Information

 

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

 

Part I – Item 3. Quantitative and Qualitative Disclosures About Market Risk

  Part I – Item 4. Controls and Procedures
  Part II – Item 1A. Risk Factors
  Part II – Item 6. Exhibits

 

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q/A

 

Part I-FINANCIAL   INFORMATION

5

 

 

Item 1. Financial Statements

5

 

 

Consolidated Balance Sheets as of June 30, 2017 (restated) (unaudited) and September 30, 2016

5

 

 

Consolidated Statements of Operations for the three and nine months ended June 30, 2017 (restated)(unaudited) and 2016 (unaudited)

6

 

 

Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended June 30, 2017 (restated)(unaudited) and 2016 (unaudited)

7

 

 

Consolidated Statements of Stockholders’ Equity for the nine months ending June 30, 2017 (restated)(unaudited) and 2016 (unaudited)

8

 

 

Consolidated Statements of Cash Flows for the nine months ended June 30, 2017 (restated)(unaudited) and 2016 (unaudited)

9

 

 

Notes to Consolidated Financial Statements (restated) (unaudited)

10

 

 

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

47

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk (restated)

60

 

 

Item 4. Controls and Procedures (restated)

60

 

 

Part II-OTHER INFORMATION

62

 

 

Item 1. Legal Proceedings

62

 

 

Item 1A. Risk Factors (restated)

62

 

 

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

62

 

 

Item 3. Defaults Upon Senior Securities

62

 

 

Item 4. Mine Safety Disclosures

62

 

 

Item 5. Other Information

62

 

 

Item 6. Exhibits (restated)

63

 

 

Signatures

64

 

 

PART I. FINANCIAL INFORMATION

 

Item  1. Financial Statements

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

 (rounded to the nearest thousands, except share data)

 

   

(Unaudited)

   

 

 
   

June 30,

2017 (restated)

   

September 30,

2016

 

ASSETS

               

Cash and cash equivalents

  $ 15,213,000     $ 6,282,000  

Restricted cash

    10,000,000       10,000,000  

Available for sale investments (at fair value)

    5,500,000       56,763,000  

Consumer receivables acquired for liquidation (at net realizable value)

    9,210,000       13,427,000  

Investment in personal injury claims

    3,351,000        

Other investments, net

          3,590,000  

Due from third party collection agencies and attorneys

    1,357,000       1,050,000  

Prepaid and income taxes receivable

    6,736,000       714,000  

Furniture and equipment, net

    141,000       196,000  

Equity method investment

    48,533,000       48,582,000  

Deferred income taxes

    14,120,000       14,903,000  

Goodwill

    1,410,000       1,410,000  

Other assets

    3,408,000       6,585,000  

Assets related to discontinued operations

    93,692,000       91,506,000  
                 

Total assets

  $ 212,671,000     $ 255,008,000  
                 

LIABILITIES

               

Line of credit

  $ 9,600,000     $  

Other liabilities

    5,249,000       3,987,000  

Liabilities related to discontinued operations

    78,629,000       69,238,000  
                 

Total liabilities

    93,478,000       73,225,000  
                 

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

    68,027,000       67,034,000  

Retained earnings

    117,949,000       126,738,000  

Accumulated other comprehensive income

    211,000       803,000  

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

)

                 

Total stockholders’ equity

    119,193,000       181,783,000  
                 

Total liabilities and stockholders’ equity

  $ 212,671,000     $ 255,008,000  

 

See accompanying notes to consolidated financial statements

 

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited)

(rounded to the nearest thousands, except share data)

 

   

Three Months

Ended

June 30, 2017

(restated)

   

Three Months

Ended

June 30, 2016

   

Nine Months

Ended

June 30, 2017

(restated)

   

Nine Months

Ended

June 30, 2016

 

Revenues:

                               

Finance income, net

  $ 3,993,000     $ 4,572,000     $ 12,018,000     $ 14,557,000  

Personal injury claims income

    241,000             251,000        

Disability fee income

    1,134,000       1,169,000       3,990,000       2,700,000  

Total revenues

    5,368,000       5,741,000       16,259,000       17,257,000  

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

    90,000       176,000       (126,000

)

    1,176,000  
      5,458,000       5,917,000       16,133,000       18,433,000  

Expenses:

                               

General and administrative

    6,066,000       7,069,000       25,611,000       23,020,000  

Interest

    164,000             197,000        

Impairment of consumer receivables

    148,000             148,000       124,000  

Earnings from equity method investment

    (2,710,000

)

    (6,193,000

)

    (2,759,000

)

    (8,020,000

)

      3,668,000       876,000       23,197,000       15,124,000  

Income (loss) from continuing operations before income tax

    1,790,000       5,041,000       (7,064,000

)

    3,309,000  

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

    219,000       1,752,000       (31,000

)

    1,114,000  

Net income (loss) from continuing operations

    1,571,000       3,289,000       (7,033,000

)

    2,195,000  

Net income (loss) from discontinued operations, net of income tax

    560,000       577,000       (1,756,000

)

    1,404,000  

Net income (loss)

  $ 2,131,000     $ 3,866,000     $ (8,789,000

)

  $ 3,599,000  

Net income (loss) per basic shares:

                               

Continuing operations

  $ 0.24     $ 0.27     $ (0.75

)

  $ 0.18  

Discontinued operations

    0.08       0.05       (0.19

)

  $ 0.12  
    $ 0.32     $ 0.32     $ (0.94

)

  $ 0.30  

Net income (loss) per diluted shares:

                               

Continuing operations

  $ 0.23     $ 0.26     $ (0.75

)

  $ 0.18  

Discontinued operations

    0.08       0.05       (0.19

)

  $ 0.11  
    $ 0.31     $ 0.31     $ (0.94

)

  $ 0.29  

Weighted average number of common shares outstanding:

                               

Basic

    6,577,784       11,897,139       9,389,864       12,023,156  

Diluted

    6,879,082       12,433,424       9,389,864       12,294,073  

 

See accompanying notes to consolidated financial statements

 

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss)

June 30, 2017 and 2016

(Unaudited)

(rounded to the nearest thousands)

 

 

   

Three Months

Ended

June 30, 2017 (restated)

   

Three Months

Ended

June 30, 2016

   

Nine Months

Ended

June 30, 2017 (restated)

   

Nine Months

Ended

June 30, 2016

 

Comprehensive income (loss) is as follows:

                               

Net income (loss)

  $ 2,131,000     $ 3,866,000     $ (8,789,000

)

  $ 3,599,000  

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 ($695,000) during the nine month periods ended June 30, 2017 and 2016, respectively.

    18,000       560,000       (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 ($23,000) and $15,000 during the three month periods ended June 30, 2017 and 2016, respectively, and ($21,000) and $25,000 during the nine month periods ended June 30, 2017 and 2016, respectively.

    35,000       (63,000

)

    32,000       (37,000

)

Other comprehensive income (loss)

    42,000       478,000       (592,000

)

    970,000  

Total comprehensive income (loss)

  $ 2,173,000     $ 4,344,000     $ (9,381,000

)

  $ 4,569,000  

 

See accompanying notes to consolidated financial statements

 

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

(Unaudited)

(rounded to the nearest thousands, except share data)

 

Nine months ended June 30, 2017 (restated):

 

   

Common Stock

   

Additional

           

Accumulated

Other

           

Non-

   

Total

 
   

Issued

Shares

   

Amount

   

Paid-in

Capital

   

Retained

Earnings

   

Comprehensive Income (Loss)

   

Treasury

Stock

   

Controlling

Interests

   

Stockholders’

Equity

 

Balance, September 30, 2016, as previously reported

    13,336,508       133,000       67,034,000       126,738,000       803,000       (12,925,000

)

          181,783,000  

Stock based compensation expense

                38,000                               38,000  

Net (loss) income

                      (8,789,000

)

                      (8,789,000

)

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

                            32,000                   32,000  

Forgiveness of debt

                    552,000                                       552,000  

Issuance of unrestricted stock

    61,600       1,000       403,000                               404,000  

Balance, June 30, 2017, restated

    13,398,108     $ 134,000     $ 68,027,000     $ 117,949,000     $ 211,000     $ (67,128,000

)

        $ 119,193,000  

  

Nine months ended June 30, 2016:

 

   

Common Stock

   

Additional

           

Accumulated

Other

           

Non-

   

Total

 
   

Issued

Shares

   

Amount

   

Paid-in

Capital

   

Retained

Earnings

   

Comprehensive

Income (Loss)

   

Treasury

Stock

   

Controlling

Interests

   

Stockholders’

Equity

 

Balance, September 30, 2015

    13,061,673     $ 131,000     $ 65,049,000     $ 119,165,000     $ 20,000     $ (1,751,000

)

  $ 793,000     $ 183,407,000  

Exercise of options

    107,531       1,000       870,000                                       871,000  

Stock based compensation expense

                567,000                               567,000  

Restricted stock

    5,000                                            

Net income

                      3,599,000                         3,599,000  

Unrealized gain on marketable securities, net

                            1,046,000                   1,046,000  

Amount reclassified from other comprehensive (loss) income

                            (39,000

)

                (39,000

)

Purchase of treasury stock

                                  (11,174,000

)

          (11,174,000

)

Foreign currency translation, net

                            (37,000

)

                (37,000

)

Purchase of subsidiary shares from non-controlling interest

                (903,000

)

                      (793,000

)

    (1,696,000

)

Issuance of restricted stock to purchase subsidiary shares from non-controlling interest

    123,304       1,000       999,000                               1,000,000  

Balance, June 30, 2016

    13,297,508     $ 133,000     $ 66,582,000     $ 122,764,000     $ 990,000     $ (12,925,000

)

  $     $ 177,544,000  

 

See accompanying notes to consolidated financial statements

 

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

(rounded to the nearest thousands)

 

   

Nine Months Ended

June 30, 2017 (restated)

   

Nine Months Ended

June 30, 2016

 

Cash flows from operating activities :

               

Net (loss) income from continuing operations

  $ (7,033,000

)

  $ 2,195,000  

Net (loss) income from discontinued operations

    (1,756,000

)

    1,404,000  

Net (loss) income

  $ (8,789,000

)

    3,599,000  

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:

               

Depreciation and amortization

    75,000       353,000  

Deferred income taxes

    1,199,000       (78,000

)

Impairment of consumer receivables acquired for liquidation

    148,000       124,000  

Stock based compensation

    81,000       567,000  

Loss on sale of available-for-sale securities

    1,011,000       63,000  

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        

Forgiveness of debt

    552,000        

Operating lease adjustment

          21,000  

Earnings from equity method investment

    (2,759,000

)

    (6,193,000

)

Changes in:

               

Prepaid and income taxes receivable

    (6,022,000

)

    2,512,000  

Due from third party collection agencies and attorneys

    (320,000

)

    376,000  

Other assets

    3,184,000       (2,444,000

)

Other liabilities

    1,294,000       1,911,000  

Net cash used in operating activities of discontinued operations

    (3,041,000

)

    (6,649,000

)

Net cash (used in) operating activities

    (9,797,000

)

    (5,025,000

)

Cash flows from investing activities:

            ,  

Purchase of consumer receivables acquired for liquidation

    (2,213,000

)

    (6,936,000

)

Principal collected on receivables acquired for liquidation

    6,324,000       7,384,000  

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

    (3,351,000

)

     

(Increase) decrease in equity method investment

    2,808,000       1,826,000  

Capital expenditures

    (19,000

)

    (120,000

)

Net cash provided by (used in) investing activities of discontinued operations

    1,548,000       (6,756,000

)

Net cash provided by/(used in) investing activities

    54,310,000       (804,000

)

Cash flows from financing activities:

               

Proceeds from exercise of stock options

          872,000  

Purchase of treasury stock

    (54,203,000

)

    (11,174,000

)

Borrowings from line of credit

    9,600,000        

Net cash provided by financing activities of discontinued operations

    9,000,000       11,056,000  

Net cash (used in) provided by financing activities

    (35,603,000

)

    754,000  

Foreign currency effect on cash

    (37,000

)

     

Net increase (decrease) in cash, cash equivalents and restricted cash including cash, cash equivalents classified

within assets related to discontinued operations

    8,873,000       (5,075,000

)

Less: net decrease in cash, cash equivalents and restricted cash classified within assets related to discontinued operations

    58,000       (283,000

)

Net increase (decrease) in cash, cash equivalents and restricted cash

    8,931,000       (5,358,000

)

Cash, cash equivalents and restricted cash at beginning of period

    16,282,000       19,947,000  

Cash, cash equivalents and restricted cash at end of period

  $ 25,213,000     $ 14,589,000  
                 

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 :

               
Continued operations:                
Issuance of restricted stock to purchase subsidiary shares from non-controlling interest   $     $ 1,000,000  

Discontinued operations:

               

Issuance of unrestricted stock

  $ 404,000        

 

See accompanying notes to consolidated financial statements

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) (Restated)

 

 

Note 1— Restatement of Financial Statements  

 

The following tables summarize the effects of the restatements on the specific items presented in the Company’s consolidated financial statements previously included in the Original Form 10-Q:

 

    Consolidated Balance Sheet  
   

June 30, 2017

 
   

As Reported

   

De-Consolidation of

Pegasus (1)

   

Adjustments

     

Restated

 

ASSETS

                                 

Cash and cash equivalents

  $ 15,315,000     $ (81,000

)

  $ (21,000

)

(2)   $ 15,213,000  

Restricted cash

    34,748,000       (24,748,000

)

            10,000,000  

Available for sale investments (at fair value)

    5,500,000                     5,500,000  

Consumer receivables acquired for liquidation (at net realizable value)

    9,118,000             92,000   (2)     9,210,000  

Investment in personal injury claims, net

    27,538,000       (24,187,000

)

            3,351,000  

Due from third party collection agencies and attorneys

    1,367,000             (10,000

)

(2)     1,357,000  

Prepaid and income taxes receivable

    4,836,000             1,900,000   (8)     6,736,000  

Furniture and equipment, net

    141,000                     141,000  

Equity method investment

          48,639,000       (106,000

)

(7)     48,533,000  

Deferred income taxes

    18,940,000             (4,820,000

)

(2)(8)     14,120,000  

Goodwill

    1,410,000                     1,410,000  

Other assets

    3,576,000       (109,000

)

    (59,000

)

(2)     3,408,000  

Assets related to discontinued operations

    93,723,000             (31,000

)

(5)(6)     93,692,000  

Total assets

  $ 216,212,000     $ (486,000

)

  $ (3,055,000

)

    $ 212,671,000  

LIABILITIES

                                 

Line of credit

    9,600,000                     9,600,000  

Other liabilities

    6,079,000       (755,000

)

    (75,000

)

(2)     5,249,000  

Liabilities related to discontinued operations

    78,628,000             1,000   (5)     78,629,000  

Total liabilities

    94,307,000       (755,000

)

    (74,000

)

      93,478,000  

Commitments and contingencies

                                 

STOCKHOLDERS’ EQUITY

                                 

Preferred stock

                         

Common stock

    134,000                     134,000  

Additional paid-in capital

    67,467,000             560,000   (5)(6)     68,027,000  

Retained earnings

    122,669,000             (4,720,000

)

(2)(3)(4)(5)(6)(7)(8)     117,949,000  

Accumulated other comprehensive income (loss)

    (968,000

)

          1,179,000   (2)     211,000  

Treasury stock (at cost)

    (67,128,000

)

                  (67,128,000

)

Non-controlling interest

    (269,000

)

    269,000                

Total stockholders’ equity

    121,905,000       269,000       (2,981,000

)

      119,193,000  
                                   

Total liabilities and stockholders’ equity

  $ 216,212 ,000     $ (486,000

)

  $ (3,055,000

)

    $ 212,671,000  

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) (Restated)

 

Note 1— Restatement of Financial Statements (continued)

 

   

Consolidated Statement of Operations

For the Three Months Ended June 30, 2017

 
   

 

As Reported

   

De-Consolidation of

Pegasus (1)

   

Adjustments

     

Restated

 

Revenues:

                                 

Finance income, net

  $ 3,980,000     $     $ 13,000   (2)   $ 3,993,000  

Personal injury claims income

    5,569,000       (5,328,000

)

            241,000  

Disability fee income

    1,134,000                     1,134,000  

Total revenues

    10,683,000       (5,328,000

)

    13,000         5,368,000  
                                   

Other income

    84,000             6,000   (2)     90,000  
      10,767,000       (5,328,000

)

    19,000         5,458,000  
                                   

General and administrative

    7,252,000       (1,679,000

)

    493,000   (2)(6)     6,066,000  

Interest

    133,000       (2,000

)

    33,000   (2)     164,000  

Impairment of consumer receivables

    148,000                     148,000  

Loss (earnings) from equity method investment

          (2,917,000

)

    207,000   (7)     (2,710,000

)

      7,533,000       (4,598,000

)

    733,000         3,668,000  

Income (loss) from continuing operations before income tax

    3,234,000       (730,000

)

    (714,000

)

      1,790,000  

Income tax (benefit)/expense

    1,198,000             (979,000

)

(8)     219,000  

Net income (loss) from continuing operations

    2,036,000       (730,000

)

    265,000         1,571,000  
                                   

Income (loss) from discontinued operations, net of income tax

    526,000             34,000   (5)     560,000  
                                   

Less: net income attributable to non-controlling interests

    730,000       (730,000

)

             

Net income attributable to Asta Funding, Inc.

  $ 1,832,000     $     $ 299,000       $ 2,131,000  
                                   

Net income (loss) per basic shares:

                                 

Continuing operations

  $ 0.20                       $ 0.24  

Discontinued operations

    0.08                         0.08  
    $ 0.28                       $ 0.32  

Net income (loss) per diluted shares:

                                 

Continuing operations

  $ 0.19                       $ 0.23  

Discontinued operations

    0.08                         0.08  
    $ 0.27                       $ 0.31  

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) (Restated)

 

Note 1— Restatement of Financial Statements (continued)

 

   

Consolidated Statement of Operations

For the Nine Months Ended June 30, 2017

 
   

 

As Reported

   

De-Consolidation of

Pegasus (1)

   

Adjustments

     

Restated

 

Revenues:

                                 

Finance income, net

  $ 11,999,000     $     $ 19,000   (2)   $ 12,018,000  

Personal injury claims income

    10,017,000       (9,766,000

)

            251,000  

Disability fee income

    3,990,000                     3,990,000  

Total revenues

    26,006,000       (9,766,000

)

    19,000         16,259,000  
                                   

Other income

    (74,000

)

          (52,000

)

(2)     (126,000

)

      25,932,000       (9,766,000

)

    (33,000

)

      16,133,000  
                                   

General and administrative

    31,354,000       (6,052,000

)

    309,000   (2)(6)     25,611,000  

Interest

    169,000       (6,000

)

    34,000   (2)     197,000  

Impairment of consumer receivables

    148,000                     148,000  

Loss (earnings) from equity method investment

          (2,966,000

)

    207,000   (7)     (2,759,000

)

      31,671,000       (9,024,000

)

    550,000         23,197,000  

(Loss) income from continuing operations before income tax

    (5,739,000

)

    (742,000

)

    (583,000

)

      (7,064,000

)

Income tax (benefit)/expense

    (2,170,000

)

          2,139,000   (8)     (31,000

)

Net loss from continuing operations

    (3,569,000

)

    (742,000

)

    (2,722,000

)

      (7,033,000

)

                                   

Loss from discontinued operations, net of income tax

    (1,083,000

)

          (673,000

)

(3)(5)(8)     (1,756,000

)

                                   

Less: net income attributable to non-controlling interests

    742,000       (742,000

)

             

Net loss attributable to Asta Funding, Inc.

  $ (5,394,000

)

  $     $ (3,395,000

)

    $ (8,789,000

)

                                   

Net income (loss) per basic shares:

                                 

Continuing operations

  $ (0.46

)

                    $ (0.75

)

Discontinued operations

    (0.11

)

                      (0.19

)

    $ (0.57

)

                    $ (0.94

)

Net income (loss) per diluted shares:

                                 

Continuing operations

  $ (0.46

)

                    $ (0.75

)

Discontinued operations

    (0.11

)

                      (0.19

)

    $ (0.57

)

                    $ (0.94

)

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) (Restated)

Note 1— Restatement of Financial Statements (continued) 

                                                               

    Consolidated Statement of Comprehensive Income  
   

For the Three Months Ended June 30, 2017

 
   

 

As Reported

   

De-Consolidation of

Pegasus (1)

   

Adjustments

     

Restated

 

Comprehensive income (loss) is as follows:

                                 

Net income

  $ 1,832,000     $     $ 299,000       $ 2,131,000  

Net unrealized securities (loss) gain, net of tax

    18,000                     18,000  

Reclassification adjustments for securities sold, net of tax

    (11,000

)

                  (11,000

)

Foreign currency translation, net of tax

    (249,000

)

          284,000   (2)     35,000  

Other comprehensive (loss) income

    (242,000

)

          284,000         42,000  

Total comprehensive income

  $ 1,590,000     $     $ 583,000       $ 2,173,000  

  

                                                             

    Consolidated Statement of Comprehensive Loss  
   

For the Nine Months Ended June 30, 2017

 
   

 

As Reported

   

De-Consolidation of

Pegasus (1)

   

Adjustments

     

Restated

 

Comprehensive (loss) income is as follows:

                                 

Net loss

  $ (5,394,000

)

  $     $ (3,395,000

)

    $ (8,789,000

)

Net unrealized securities (loss) gain, net of tax

    (17,000

)

                  (17,000

)

Reclassification adjustments for securities sold, net of tax

    (607,000

)

                  (607,000

)

Foreign currency translation, net of tax

    (430,000

)

          462,000   (2)(6)     32,000  

Other comprehensive (loss) income

    (1,054,000

)

            462,000         (592,000

)

Total comprehensive loss

  $ (6,448,000

)

  $       $ (2,933,000

)

    $ (9,381,000

)

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) (Restated)

 

Note 1— Restatement of Financial Statements (continued)

 

   

Consolidated Statement of Cash Flows

For the Nine Months Ended June 30, 2017

 
                     
   

As Reported

   

Adjustments

     

Restated

 

Cash flows from operating activities:

                         

Net loss from continuing operations

  $ (4,311,000

)

  $ (2,722,000

)

    $ (7,033,000

)

Net loss from discontinued operations

    (1,083,000

)

    (673,000

)

      (1,756,000

)

Net loss

    (5,394,000

)

    (3,395,000

)

      (8,789,000

)

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

                         

Depreciation and Amortization

    154,000       (79,000

)

      75,000  

Deferred income taxes

    (2,994,000

)

    4,193,000   (2)(8)     1,199,000  

Impairments of consumer receivables acquired for liquidation

    148,000               148,000  

Stock based compensation

    81,000               81,000  

Loss on sale of available-for-sale securities

    1,011,000               1,011,000  

Unrealized gain on other investments

    3,590,000

)

            3,590,000  

Earnings from equity method investment

          (2,759,000

)

(7)     (2,759,000

)

Forgiveness of debt

          552,000   (5)     552,000  

Changes in:

                         

Prepaid and income taxes receivable

    (3,956,000

)

    (2,066,000

)

(5)(8)     (6,022,000

)

Due from third party collection agencies and attorneys

    (362,000

)

    42,000   (2)     (320,000

)

Other assets

    3,050,000

)

    134,000   (2)     3,184,000  

Income tax payable

    (252,000

)

    252,000   (6)      

Other liabilities

    1,083,000       211,000   (2)     1,294,000  

Non-controlling interest

    742,000       (742,000

)

(1)      

Net cash (used in) provided by operating activities of discontinued operations

    (3,654,000

)

    613,000   (5)(6)     (3,041,000

)

Net cash (used in) provided by operating activities

    (6,753,000

)

    (3,044,000

)

      (9,797,000

)

Cash flows from investing activities:

                         

Purchase of consumer receivables acquired for liquidation

    (2,213,000

)

            (2,213,000

)

Principal collected on receivables acquired for liquidation

    6,618,000       (294,000

)

(2)     6,324,000  

Purchase of available-for-sale securities

    (13,193,000

)

            (13,193,000

)

Proceeds from sales of available-for-sale securities

    62,406,000               62,406,000  

Decrease in equity method investment

          2,808,000   (5)(6)     2,808,000  

Investments in personal injury claims — advances

    (14,624,000

)

    11,273,000   (1)     (3,351,000

)

Investments in personal injury claims — receipts

    35,375,000       (35,375,000

)

(1)      

Capital expenditures

    (19,000

)

            (19,000

)

Net cash provided by investing activities related to discontinued operations

    1,548,000               1,548,000  

Net cash provided by (used in) investing activities

    75,898,000       (21,588,000

)

      54,310,000  

Cash flows from financing activities:

                         

Purchase of treasury stock

    (54,203,000

)

            (54,203,000

)

Distributions to non-controlling interest

    (366,000

)

    366,000   (1)      

Borrowings from line of credit

    9,600,000               9,600,000  

Net cash provided by financing activities related to discontinued operations

    9,000,000               9,000,000  

Net cash (used in) provided by financing activities

    (35,969,000

)

    366,000         (35,603,000

)

                             

Foreign currency effect on cash

          (37,000

)

(2)     (37,000

)

Net increase in cash, cash equivalents and restricted cash including cash, cash equivalents classified within assets related to discontinued operations

    33,176,000       (24,303,000

)

      8,873,000  

Less: net decrease in cash, cash equivalents and restricted cash classified within assets related to discontinued operations

    58,000               58,000  

Net increase (decrease) in cash, cash equivalents and restricted cash

    33,234,000       (24,303,000

)

(1)(2)(4)(5)(6)(7)(8)     8,931,000  

Cash, cash equivalents and restricted cash at beginning of period

    16,829,000       (547,000

)

      16,282,000  

Cash, cash equivalents and restricted cash at end of period

  $ 50,063,000     $ (24,850,000

)

    $ 25,213,000  

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) (Restated)

 

Note 1— Restatement of Financial Statements (continued)

 

As previously disclosed in the Current Report on Form 8-K filed by Asta Funding, Inc. (“Asta” or the “Company”) with the Securities and Exchange Commission (the “SEC”) on January 18, 2018, the Board of Directors (the “Board”) of the Company, upon the recommendation of the Audit Committee of the Board (the “Audit Committee”), determined that the Company’s previously issued financial statements for each of the years ended September 30, 2016, 2015 and 2014, and the interim periods contained therein, as well as the Company’s unaudited consolidated financial statements for the quarters ended December 31, 2016, March 31, 2017 and June 30, 2017, could no longer be relied upon. 

 

On September 17, 2018, the Company filed an Annual Report on Form 10-K/A (the “Form 10-K/A”) to amend and restate the Company’s previously issued financial statements for each of the years ended September 30, 2016, 2015 and 2014, as well as the interim periods contained therein, and Quarterly Reports on Form 10-Q/A to amend and restate the Company’s previously issued financial statements for the quarters ended December 31, 2016 and March 31, 2017. The Company is filing this Amendment No. 1 on Form 10-Q/A (this “Amendment”) to amend and restate the Company’s previously issued financial statements contained in its Quarterly Report on Form 10-Q for the quarter ended June 30, 2017 (the “Non-Reliance Period”), which was originally filed with the SEC on August 9, 2017 (the “Original Form 10-Q”).

 

Prior period amounts have already been restated in the Company's Form 10-K/A and, accordingly have not been restated in this Amendment.

 

Restatement Background

 

On January 11, 2018, after discussions with the Audit Committee, management re-evaluated the Company's historical conclusion to consolidate Pegasus Funding, LLC (“Pegasus”). Management has determined that the Company lacked the requisite control to consolidate Pegasus in its historical periods in accordance with Accounting Standards Codification (“ASC”) 810 “Consolidation.” Management also determined that the Company's previous treatment for certain foreign currency matters under ASC 830 “Foreign Currency Matters” was not appropriate. As such, the Company has subsequently revised its investment in Pegasus to the equity method, including the underlying reserve methodology; and has adjusted its financial statements to reflect the proper accounting for certain foreign currency transactions. Additionally, the Company corrected the financial statements for additional known errors consisting of (i) the adjustment of various accruals, (ii) the fair value of structured settlements, (iii) accounting for unallocated payments, and (iv) the tax effects of the adjustments mentioned above.

 

The “As Reported” amounts in the tables above represent the amounts reported in the Restated Form 10-Q/A, adjusted in its presentation for the discontinued operations of the Company's wholly-owned subsidiary CBC Settlement Funding, LLC (“CBC”), which was sold on December 13, 2017 (see Note 8 – Discontinued Operations and Note 20 – Subsequent events).

 

 

 The following errors were identified as part of the restatement:

 

 

  1. In connection with the Company determining it lacked the requisite control to consolidate Pegasus during the Non-Reliance Period, the Company has now accounted for its investment in Pegasus under the equity method in accordance with US GAAP. On the Company’s June 30, 2017 consolidated balance sheet, this resulted in (i) a decrease in cash and restricted cash of $24,829,000; (ii) a decrease in the investment in personal injury claims of $24,187,000; (iii) a decrease in other assets of $109,000; (iv) a decrease in other liabilities of $755,000; and (v) a decrease in non-controlling interest of $269,000, offset by a corresponding increase in the equity method investment of $48,639,000.
     
    On the Company’s consolidated statement of operations, this resulted in (i) a decrease in total revenues of $5,328,000; (ii) a decrease in expenses of $1,681,000; (iii) a decrease in the income attributable to the non-controlling interest of $730,000; and (iv) a decrease in earnings from equity method investment of $2,917,000 the three months ended June 30, 2017. This change to the equity method of accounting had no effect on net (loss) income attributable to Asta Funding, Inc. during the Non-Reliance Period.
     
    On the Company’s consolidated statement of operations, this resulted in (i) a decrease in total revenues of $9,766,000; (ii) a decrease in expenses of $6,058,000; (iii) a decrease in the income attributable to the non-controlling interest of $742,000; and (iv) a decrease in earnings from equity method investment of $2,966,000 the nine months ended June 30, 2017. This change to the equity method of accounting had no effect on net (loss) income attributable to Asta Funding, Inc. during the Non-Reliance Period.
     
  2. The Company determined that it had not previously accounted for certain foreign currency gains/losses on intercompany balances and transactions in accordance with US GAAP. The Company improperly accounted for the foreign currency effect of certain transactions as if they were long-term investments by including the foreign currency effect in accumulated other comprehensive income instead of properly recording the effect as operating expenses as required under ASC 830.

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) (Restated)

 

Note 1— Restatement of Financial Statements (continued)

 

    The correction to properly apply U.S. GAAP to these foreign currency matters resulted in increased revenue of $13,000, an increase in other income of $6,000, an increase in general and administrative expenses of $493,000 and an increase in interest expense of $33,000 for the three months ended June 30, 2017.
     
    The correction to properly apply U.S. GAAP to these foreign currency matters resulted in increased revenue of $19,000, a decrease in other income of $52,000, and an increase in general and administrative expenses of $580,000, and an increase in interest expense of $34,000 for the nine months ended June 30, 2017.
     
    The correction of foreign currency transaction on the consolidated balance sheet are as follows:

 

Increase (decrease) in:

 

Impact from September

30, 2016 10K/A filing

   

Current period impact

   

Cumulative net impact

 

Cash and cash equivalents

    $3,000       $(24,000)       $(21,000)  

Consumer receivables acquired for liquidation

    (245,000)       337,000       92,000  

Due from third party collection agencies and attorneys

    45,000       (55,000)       (10,000)  

Deferred income taxes

    (722,000)       (472,000)       (1,194,000)  

Other assets

    (33,000)       (26,000)       (59,000)  

Other liabilities

    (18,000)       (57,000)       (75,000)  

Accumulated other comprehensive loss

    718,000       461,000       1,179,000  

Retained earnings

    (1,653,000)       (645,000)       (2,298,000)  

 

 

 

3.

Prior to the sale of its structured settlement business, the Company purchased periodic payments under structured settlements and annuity policies from individuals in exchange for a lump sum payment. The Company has elected to carry the structured settlements at fair value in accordance with the guidance of FASB ASC, Recognition and Measurement of Financial Assets and Financial Liabilities (ASC 822-10-50-28 through 50-22).

     
    As previously disclosed in the Restated Form 10-Q/A, the Company did not reflect the quarterly increase in certain underlying benchmark interest rates used in determining fair value of the Company’s structured settlements for the quarter ended December 31, 2016 which resulted in a decrease in the fair value of the Company's structured settlements of approximately $2.6 million (reflected in assets related to discontinued operations in this restated consolidated balance sheet) with an associated increase in prepaid income taxes and deferred tax assets of approximately $1.0 million (reflected in the loss from discontinued operations in this consolidated statement of operations).  
     
    In connection with the Company’s filing of the Form 10-K/A, the Company adjusted the fair value of its structured settlements to reflect the appropriate benchmark interest rates at September 30, 2016, which resulted in an decrease in net loss attributable to discontinued operations and an increase in assets related to discontinued operations of $727,000.  As this increase in fair value was originally recorded during the three month period ended December 31, 2016, this Amendment includes an increase in both the retained earnings and the net loss attributable to discontinued operations of $727,000 as of and for the nine months ended June 30, 2017.
     
  4. The Company determined that it had not accounted for certain unallocated payments reported on its consolidated balance sheet properly during the Non-Reliance Period. The correction of this error resulted in a decrease to consumer receivables acquired for liquidation of $648,000 and retained earnings of $648,000 as of September 30, 2016 and is therefore included in the net adjustment to retained earnings as of June 30, 2017.
     
  5. The Company discovered that it did not properly record an amortizable asset and related liability in conjunction with an asset purchase agreement entered into in June 2015 with a related party. The correction of this error resulted in a decrease in income from discontinued operations of $34,000 and $153,000 for the three and nine months ended June 30, 2017.

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) (Restated)

 

Note 1— Restatement of Financial Statements (continued)

 

 

The correction of these errors on the consolidated balance sheet are as follows:

 

 

Increase (decrease) in:

 

Impact from September

30, 2016 10K/A filing

   

Current period impact

   

Cumulative net impact

 

Assets related to discontinued operations

    $307,000       $(383,000)       $(76,000)  

Liabilities related to discontinued operations

    756,000       (755,000)       1,000  

Retained earnings

    (442,000)       (155,000)       (597,000)  

Additional paid in capital

    -       552,000       552,000  

 

 

  6. The Company identified other transactions that had not been properly accounted for in the correct period and/or for improper amounts and/or improper accounts. The adjustments of these errors were immaterial on an individual basis. The correction of these errors resulted in decreased general and administrative expense of $0 and $271,000 for the three and nine months ended June 30, 2017.
     
    The correction of these errors on the consolidated balance sheet are as follows:

 

Increase (decrease) in:

 

Impact from September

30, 2016 10K/A filing

   

Current period impact

   

Cumulative net impact

 
Other liabilities     $269,000       $(269,000)       $ —  

Retained earnings

    (137,000)       270,000       133,000  

Assets related to discontinued operations

    45,000       -       45,000  

Additional paid in capital

    8,000       -       8,000  

 

  7. The Company identified the personal injury claims asset balance of Pegasus was determined to be overstated at March 31, 2017 by $400,000. The correction of this error resulted in a decrease in earnings from the equity investment in Pegasus and income from continuing operations of $0 and $320,000 for the three and nine months ended June 30, 2017. Additionally, the equity investment was increased $101,000 to reflect the impact of the related accruals in the Form 10-K/A. During the three and nine months ended June 30, 2017, earnings from equity method investment decreased by $207,000 for a reduction in personal injury claims in Pegasus.
     
  8. Some of the corrections noted above impacted earnings (loss) before taxes which, in turn, required a calculation of the tax impact. The net impact to the Company’s consolidated balance sheet was an (i) increase to prepaid and income taxes receivable of $1,900,000; and (ii) decrease to deferred tax assets of $3,627,000.
     
    On the Company’s consolidated statement of operations, there was (i) a net (decrease) to income tax expense of $979,000; and (ii) a decrease to income tax benefit from discontinued operations of $93,000 for the three months ended June 30, 2017.
     
    On the Company’s consolidated statement of operations, there was (i) a net increase to income tax expense of $2,139,000; and (ii) an increase to income tax benefit from discontinued operations of $207,000 for the nine months ended June 30, 2017.

 

 

All of the following notes to consolidated financial statements have been revised to reflect the effects of the above mentioned restatements.

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) (Restated)

 

 

Note 2—Business and Basis of Presentation

 

Business 

 

Asta Funding, Inc., together with its wholly owned significant operating subsidiaries Palisades Collection, LLC, Palisades Acquisition XVI, LLC (“Palisades XVI”), Palisades Acquisition XIX, LLC (“Palisades XIX”), Palisades Acquisition XXIII, LLC (“Palisades XIX”), VATIV Recovery Solutions LLC (“VATIV”), ASFI Pegasus Holdings, LLC (“APH”), EMIRIC, LLC (“EMIRIC”), Fund Pegasus, LLC (“Fund Pegasus”), GAR Disability Advocates, LLC (“GAR Disability Advocates”), Five Star Veterans Disability, LLC (“Five Star”), Simia Capital, LLC (“Simia”) 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 funding of personal injury claims, through our 80% owned, 50% controlled equity investment in Pegasus Funding, LLC (“Pegasus”) and our wholly owned subsidiary Simia, social security and disability advocacy through our wholly owned subsidiaries GAR Disability Advocates and Five Star and the business of purchasing, managing for its own account and servicing distressed consumer receivables, including charged off receivables, and semi-performing receivables. 

 

Consumer receivables 

 

The Company started out in the consumer receivable business in 1994. Recently, our effort has been in the international areas (mainly South America), as we have curtailed our active purchasing of consumer receivables in the United States. We define consumer receivables as primary charged-off, semi-performing and distressed depending on their collectability. 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

   

Simia and our equity method investment in Pegasus conducts their business solely in the United States. These companies obtain their business from external brokers and internal sales professionals soliciting individuals with personal injury claims. Business is also obtained from their websites and through attorneys.

 

Social security benefit advocacy

 

GAR Disability Advocates provides its disability advocacy services throughout the United States. It relies upon search engine optimization (“SEO”) to bring awareness to its intended market.

 

Discontinued Operations

 

US GAAP requires the results of operations of a component of an equity that either has been disposed of or is classified as held for sale to be reported as discontinued operations in the consolidated financial statements if the sale or disposition represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.

 

On December 13, 2017, the Company sold all of the issued and outstanding equity capital of CBC, its wholly owned subsidiary engaging in structured settlements. As a result of this sale all prior periods presented in the Company’s consolidated financial statements will account for CBC as a discontinued operation. This determination resulted in the reclassification of the assets and liabilities comprising the structured settlement business to assets and liabilities related to discontinued operations in the consolidated balance sheets, and a corresponding adjustment to our consolidated statements of operations to reflect discontinued operations for all periods presented. See Note 8 - Discontinued operations in the Company’s notes to the consolidated financial statements.

 

Basis of Presentation 

 

The consolidated balance sheet as of June 30, 2017, the consolidated statements of operations for the three and nine month periods ended June 30, 2017 and 2016, the consolidated statements of comprehensive (loss) income for the three and nine month periods ended June 30, 2017 and 2016, the consolidated statements of stockholders’ equity as of and for the nine months ended June 30, 2017 and 2016, and the consolidated statements of cash flows for the nine month periods ended June 30, 2017 and 2016, are unaudited. The September 30, 2016 financial information included in this Amendment was derived from our audited financial statements included in our Form 10-K/A. In the opinion of management, all adjustments necessary to present fairly our financial position at June 30, 2017, the results of operations for the three and nine month periods ended June 30, 2017 and 2016 and cash flows for the nine month periods ended June 30, 2017 and 2016 have been made. The results of operations for the three and nine month periods ended June 30, 2017 and 2016 are not necessarily indicative of the operating results for any other interim period or the full fiscal year. 

 

The accompanying unaudited 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 Form 10-K/A filed with the Securities and Exchange Commission.

 

The consolidated financial statements are prepared in accordance with US GAAP and industry practices.

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) (Restated)

 

 Note 2—Business and Basis of Presentation (continued)

 

The preparation of financial statements in conformity with 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.

 

Principles of Consolidation  

 

The consolidated financial statements include the accounts of Asta Funding, Inc. and its wholly owned and majority owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

 

Concentration of Credit Risk – Cash and Restricted Cash

 

The Company considers all highly liquid investments with a maturity date of three months or less at the date of purchase to be cash equivalents.  

 

Cash balances are maintained at various depository institutions and are insured by the Federal Deposit Insurance Corporation (“FDIC”). The Company had cash balances with eleven banks at June 30, 2017 that exceeded the balance insured by the FDIC by approximately $9.8 million. Additionally, three foreign banks with an aggregate $2.2 million balances are not FDIC insured. There is a $10.0 million aggregate balance in a domestic bank that is also not FDIC insured and has been reclassified to restricted cash in the balance sheet since these assets serve as collateral for the line of credit (see Note 7 – Non-Recourse Debt). The Company has an additional $0.5 million in restricted cash that is included in assets related to discontinued operations. The Company does not believe it is exposed to any significant credit risk due to concentration of cash.

 

Equity method investment

 

Investee companies that are not consolidated, but over which the Company exercises significant influence, are accounted for under the equity method of accounting. Whether or not the Company exercises significant influence with respect to an investee depends on an evaluation of several factors including, among others, representation on the investee company's board of directors and ownership level, which is generally a 20% to 50% interest in voting securities of the investee company. Under the equity method of accounting, an investee company's accounts are not reflected within the Company's consolidated balance sheets and statements of operations, however, the Company's share of the earnings of the investee company is reflected as earnings and loss from equity method investment in the Company's consolidated statement of operations. The Company's carrying value in an equity method investee company is reflected on the Company's consolidated balance sheet, as equity method investment.

 

Pegasus is the Company's 50% controlled equity investment with Pegasus Legal Funding (“PLF”). Under the operating agreement, the Company and PLF, each maintain 50% voting rights of the entity, and the Company is 80% owned by Asta. Based on these shared voting rights with PLF, the Company lacks requisite control of Pegasus, and therefore accounts for its investment in Pegasus under the equity method of accounting.

 

Serlefin BPO&O Peru S.A.C. (“Serlefin Peru”) is the Company's 49% owned joint venture. The other 51% is owned by three individuals who share common ownership with Serlefin BPO&O Serlefin S.A. (“Serlefin”). Each owner maintains voting rights equivalent to their share ownership, and the 51% shareholders collectively manage the operations of the business. Based on the Company's ownership and voting rights, the Company lacks requisite control of Serlefin Peru, and therefore accounts for its investment in Serlefin Peru under the equity method of accounting.

 

Additionally, the Company and Serlefin jointly purchase international consumer debt portfolios under a purchase agreement. The Company and Serlefin purchase the portfolios on a pro-rata basis of 80% and 20%, respectively. The purchased portfolios are transferred to an administrative and payment trust, where the Company and Serlefin are trustees. Serlefin provides collection services to the trust, and receives a performance fee determined by the parties for each loan portfolio acquired. Serlefin received approximately $115,000 and $94,000 and $0.4 million and $0.2 million in performance fees for the three and nine months ended June 30, 2017 and 2016, respectively.

 

The carrying value of the investment in Serlefin Peru was $0.2 million as of June 30, 2017 and September 30, 2016. The Company has included the carrying value of this investment in other assets on its consolidated balance sheets. The cumulative net loss from our investment in Serlefin Peru through June, 2017 was approximately $0.1 million, and was not significant to the Company's consolidated statement of operations.

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) (Restated)

 

Note 2—Business and Basis of Presentation (continued)

 

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 nine month periods ended June 30, 2017 and 2016.

 

Personal Injury Claim Advances 

 

Management assesses the quality of the personal injury claims portfolio through an analysis of the underlying personal injury fundings on a case by case basis. Cases are reviewed through periodic updates with attorneys handling the cases, as well as with third party research tools which monitor public filings, such as motions or judgments rendered on specific cases. The Company specifically reserves for those fundings where the underlying cases are identified as uncollectible, due to anticipated non-favorable verdicts and/or settlements at levels where recovery of the advance outstanding is unlikely. For cases that have not exhibited any specific negative collection indicators, the Company establishes reserves based on the historical collection rates of the Company’s fundings. Fee income on advances is reserved for on all cases where a specific reserve is established on the initially funded amount. In addition, management also monitors its historical collection rates on fee income and establishes reserves on fee income consistent with the historically experienced collection rates. Management regularly analyzes and updates the historical collection rates of its initially funded cases as well as its fee income.

 

Goodwill

 

Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in a business combination, and is accounted for under ASC 350. Goodwill has an indefinite useful life and is evaluated for impairment at the reporting-unit level on an annual basis during the fourth quarter or more frequently if events or changes in circumstances indicate potential impairment between annual measurement dates. The Company has the option of performing a qualitative assessment of impairment to determine whether any further quantitative testing for impairment is necessary. The initial qualitative approach assesses whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company determines it is more likely than not that the fair value is less than carrying value, a two step quantitative impairment test is performed. A step 1 analysis involves calculating the fair value of the associated reporting unit and comparing it to the reporting unit’s carrying value. If the fair value of the reporting unit exceeds the carrying value of the reporting unit including goodwill and the carrying value of the reporting unit is positive, goodwill is considered not to be impaired and no further analysis is required. If the fair value of the reporting unit is less than its carrying value, step 2 of the impairment test must be performed. Step 2 involves calculating and comparing the implied fair value of the reporting unit’s goodwill with its carrying value. Impairment is recognized if the estimated fair value of the reporting unit is less than its net book value. Such loss is calculated as the difference between the estimated impaired fair value of goodwill and its carrying amount. The goodwill of the Company consists of $1.4 million from the purchase of VATIV. Additionally, the Company has goodwill of $1.4 million from the purchase of CBC, which is included under assets related to discontinued operations on the consolidated balance sheet.

 

Reclassifications

 

Certain prior period amounts in the accompanying consolidated financial statements have been reclassified to conform to the current year presentation. These reclassifications had no effect on previously reported net loss or shareholders’ equity.

 

Recent Accounting Pronouncements  

 

In May 2014, the FASB issued an update to ASC 606, Revenue from Contracts with Customers that will supersede virtually all existing revenue guidance. Under this update, an entity is required to recognize revenue upon transfer of promised goods or services to customers, in an amount that reflects the entitled consideration received in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from the customer contracts. This update is effective for annual reporting periods beginning after December 15, 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. Given the changes in the Company's business management is continuing to assess this new standard and the impact it will have on accounting for its revenues.  

 

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The main objective in developing this update is enhancing the reporting model for financial instruments to provide users of financial statements with more decision-useful information. The amendments in this update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The effective date for this update is for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company is currently evaluating the impact this update will have on its consolidated financial statements.  

 

In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842) to amend lease accounting requirements and requires entities to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets. The new standard will require significant additional disclosures about the amount, timing and uncertainty of cash flows from leases. The standard update is effective for fiscal years beginning after December 15, 2018 and interim periods within those years and early adoption is permitted. The standard is to be applied using a modified retrospective approach and includes a number of optional practical expedients that entities may elect to apply. The Company is currently evaluating the impact of adopting this update on its consolidated financial statements and expects that most of its operating leases will be subject to the accounting standard update and will recognize as operating lease liabilities and right-of-use assets upon adoption. 

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) (Restated)

 

Note 2—Business and Basis of Presentation (continued)

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share Based Payment Accounting, to simplify and improve areas of generally accepted accounting principles for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The effective date for this update is for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is currently evaluating the impact this update will have on its consolidated financial statements.  

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.  The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.  For the Company, this update will be effective for interim periods and annual periods beginning after December 15, 2019. Upon adoption, the Company will accelerate the recording of its credit losses in its financial statements. 

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.  This ASU will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The new standard is effective for fiscal years beginning after December 15, 2017. Early adoption is permitted. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case the Company would be required to apply the amendments prospectively as of the earliest date practicable. The Company is in the process of evaluating the provisions of the ASU, but does not expect it to have a material effect on the Company’s consolidated statements of cash flows. 

 

In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash ("ASU 2016-18"), to require that restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total cash amounts shown on the statement of cash flows. Consequently, transfers between cash and restricted cash will not be presented as a separate line item in the operating, investing or financing sections of the cash flow statement. ASU 2016-18 does not provide a definition of restricted cash or restricted cash equivalents. The new guidance will only be applicable to amounts described by the Company as restricted cash. We adopted ASU 2016-18 on October 1, 2016, the effect of which was a change in presentation on our consolidated statement of cash flows, but not on our consolidated financial results.

 

In January 2017, the FASB issued ASU 2017-04 Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The objective of this update is to simplify the subsequent measurement of goodwill, by eliminating step 2 from the goodwill impairment test. The amendments in this 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.

 

 

 

Note 3—Available-for-Sale Investments

 

Investments classified as available-for-sale at June 30, 2017 and September 30, 2016, consist of the following: