10-Q 1 asta20181114_10q.htm FORM 10-Q asta20181114_10q.htm
 

 

Table of Contents



 

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, 2018

 

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 every Interactive Data File required to be submitted 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 such files).    Yes   ☐     No   ☒

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth 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

 

☒   

  

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 November 12, 2018, the registrant had 6,685,415 common shares outstanding.

 



 

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

 

   

Part I-FINANCIAL INFORMATION

3

   

Item 1. Financial Statements

3

   

Consolidated Balance Sheets as of June 30, 2018 (unaudited) and September 30, 2017 

3

   

Consolidated Statements of Operations for the three and nine months ended June 30, 2018 (unaudited) and 2017 (unaudited)

4

   

Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended June 30, 2018 (unaudited) and 2017 (unaudited)

5

   

Consolidated Statements of Stockholders’ Equity for the nine months ending June 30, 2018 (unaudited) and 2017 (unaudited)

6

   

Consolidated Statements of Cash Flows for the nine months ended June 30, 2018 (unaudited) and 2017 (unaudited)

7

   

Notes to Consolidated Financial Statements (unaudited)

8

   

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

34

   

Item 3. Quantitative and Qualitative Disclosures about Market Risk 

45

   

Item 4. Controls and Procedures 

46

   

Part II-OTHER INFORMATION

47

   

Item 1. Legal Proceedings

47

   

Item 1A. Risk Factors 

47

   

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

47

   

Item 3. Defaults Upon Senior Securities

47

   

Item 4. Mine Safety Disclosures

47

   

Item 5. Other Information

47

   

Item 6. Exhibits 

48

   

Signatures

50

 

 

 

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,
2018

   

September 30,
2017

 

ASSETS

               

Cash and cash equivalents

  $ 30,319,000     $ 17,591,000  

Available for sale investments (at fair value)

    8,576,000       5,511,000  

Consumer receivables acquired for liquidation (at cost)

    4,620,000       6,841,000  

Investment in personal injury claims, net

    13,793,000       3,704,000  

Due from third party collection agencies and attorneys

    776,000       819,000  

Prepaid and income taxes receivable

    7,039,000       9,090,000  

Furniture and equipment, net

    104,000       124,000  

Equity method investment

          50,474,000  

Notes receivable

    4,792,000        

Deferred income taxes

    9,185,000       12,696,000  

Goodwill

    1,410,000       1,410,000  

Other assets

    1,423,000       1,043,000  

Assets related to discontinued operations

          92,235,000  
                 

Total assets

  $ 82,037,000     $ 201,538,000  
                 

LIABILITIES

               

Other liabilities

  $ 1,752,000     $ 4,980,000  

Liabilities related to discontinued operations

          81,751,000  
                 

Total liabilities

    1,752,000       86,731,000  
                 

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 June 30, 2018 and 13,398,108 at September 30, 2017; and outstanding 6,685,415 at June 30, 2018 and 6,623,815 at September 30, 2017

    135,000       134,000  

Additional paid-in capital

    68,543,000       68,047,000  

Retained earnings

    78,692,000       113,736,000  

Accumulated other comprehensive income

    43,000       18,000  

Treasury stock (at cost) 6,774,293 shares at June 30, 2018 and at September 30, 2017

    (67,128,000

)

    (67,128,000

)

                 

Total stockholders’ equity

    80,285,000       114,807,000  
                 

Total liabilities and stockholders’ equity

  $ 82,037,000     $ 201,538,000  

 

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

   

Three Months

   

Nine Months

   

Nine Months

 
   

Ended

   

Ended

   

Ended

   

Ended

 
   

June 30, 2018

   

June 30, 2017

   

June 30, 2018

   

June 30, 2017

 

Revenues:

                               

Finance income, net

  $ 4,509,000     $ 3,993,000     $ 12,795,000     $ 12,018,000  

Personal injury claims income

    1,557,000       241,000       2,167,000       251,000  

Disability fee income

    1,188,000       1,134,000       3,248,000       3,990,000  
                                 

Total revenues

    7,254,000       5,368,000       18,210,000       16,259,000  

Other income (loss), net - includes $0 and ($18,000) during the three months ended June 30, 2018 and 2017, and $0 and ($1,011,000) during the nine months ended June 30, 2018 and 2017, respectively, of accumulated other comprehensive loss reclassification for securities sold.

    76,000       90,000       179,000       (126,000

)

                                 
      7,330,000       5,458,000       18,389,000       16,133,000  
                                 

Expenses:

                               

General and administrative

    4,201,000       6,066,000       11,712,000       25,611,000  

Loss on acquisition of minority interest

                1,420,000        

Interest

    17,000       164,000       19,000       197,000  

Impairment

    100,000       148,000       100,000       148,000  

Earnings from equity method investment

          (2,710,000

)

    (845,000

)

    (2,759,000

)

                                 
      4,318,000       3,668,000       12,406,000       23,197,000  
                                 

Income (loss) from continuing operations before income tax

    3,012,000       1,790,000       5,983,000       (7,064,000

)

                                 

Income tax expense/(benefit) - includes tax benefit of $0 and $7,000 during the three months ended June 30, 2018 and 2017 and $0 and $404,000 during the nine months ended June 30, 2018 and 2017, respectively, of accumulated other comprehensive income reclassifications for unrealized net gains / (losses) on available for sale securities

    1,055,000       219,000       5,595,000       (31,000

)

                                 

Net income (loss) from continuing operations

    1,957,000       1,571,000       388,000       (7,033,000

)

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

          560,000       (80,000

)

    (1,756,000

)

                                 

Net income (loss)

  $ 1,957,000     $ 2,131,000     $ 308,000     $ (8,789,000

)

                                 

Net earnings (loss) per share:

                               

Basic earnings (loss) per share from continuing operations

  $ 0.29     $ 0.24     $ 0.06     $ (0.75

)

Basic earnings (loss) per share from discontinued operations

          0.08       (0.01

)

    (0.19

)

Basic earnings (loss) per share

  $ 0.29     $ 0.32     $ 0.05     $ (0.94

)

                                 

Diluted earnings (loss) per share from continuing operations

  $ 0.29     $ 0.23     $ 0.06     $ (0.75

)

Diluted earnings (loss) per share from discontinued operations

          0.08       (0.01

)

    (0.19

)

Diluted earnings (loss) per share

  $ 0.29     $ 0.31     $ 0.05     $ (0.94

)

                                 

Weighted average number of common shares outstanding:

                               

Basic

    6,685,415       6,577,784       6,654,911       9,389,864  

Diluted

    6,685,628       6,879,082       6,657,840       9,389,864  

 

See accompanying notes to consolidated financial statements

 

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss)

June 30, 2018 and 2017

(Unaudited)

(rounded to the nearest thousands)

 

 

   

Three Months
Ended

June 30, 2018

   

Three Months
Ended

June 30, 2017

   

Nine Months
Ended

June 30, 2018

   

Nine Months
Ended

June 30, 2017

 

Comprehensive income (loss) is as follows:

                               

Net income (loss)

  $ 1,957,000     $ 2,131,000     $ 308,000     $ (8,789,000

)

                                 

Net unrealized securities gain (loss), net of tax expense/(benefit) of $4,000 and ($12,000) during the three month periods ended June 30, 2018 and 2017, respectively, and ($2,000) and $11,000 during the nine month periods ended June 30, 2018 and 2017, respectively.

    9,000       18,000       (2,000

)

    (17,000

)

Reclassification adjustments for securities sold, net of tax benefit of $0 and $7,000 during the three month periods ended June 30, 2018 and 2017, and $0 and $404,000 during the nine month periods ended June 30, 2018 and 2017, respectively.

          (11,000

)

          (607,000

)

Foreign currency translation, net of tax expense/(benefit) of $27,000 and ($23,000) during the three month periods ended June 30, 2018 and 2017, respectively, and $13,000 and ($21,000) during the nine month periods ended June 30, 2018 and 2017, respectively.

    50,000       35,000       27,000       32,000  
                                 

Other comprehensive income (loss)

    59,000       42,000       25,000       (592,000

)

                                 

Total comprehensive income (loss)

  $ 2,016,000     $ 2,173,000     $ 333,000     $ (9,381,000

)

 

See accompanying notes to consolidated financial statements

 

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity

(Unaudited)

(rounded to the nearest thousands, except share data)

 

 

   

Common Stock

   

Additional

           

Accumulated
Other

           

Total

 
   

Issued
Shares

   

Amount

   

Paid-in
Capital

   

Retained
Earnings

   

Comprehensive Income (Loss)

   

Treasury
Stock

   

Stockholders’
Equity

 

Balance, September 30, 2017

    13,398,108     $ 134,000     $ 68,047,000     $ 113,736,000     $ 18,000     $ (67,128,000

)

  $ 114,807,000  

Exercise of options

    61,600       1,000       398,000                         399,000  

Stock based compensation expense

                98,000                         98,000  

Net income

                      308,000                   308,000  

Unrealized loss on marketable securities, net

                            (2,000

)

          (2,000

)

Foreign currency translation, net

                            27,000             27,000  

Dividends paid

                      (35,352,000

)

                (35,352,000

)

Balance, June 30, 2018

    13,459,708     $ 135,000     $ 68,543,000     $ 78,692,000     $ 43,000     $ (67,128,000

)

  $ 80,285,000  

 

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, 2018

   

Nine Months

Ended
June 30, 2017

 

Cash flows from operating activities:

               

Net income (loss) from continuing operations

  $ 388,000     $ (7,033,000

)

Net loss from discontinued operations

    (80,000

)

    (1,756,000

)

Net income (loss)

    308,000       (8,789,000

)

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

               

Depreciation and amortization

    46,000       75,000  

Deferred income taxes

    3,513,000       1,199,000  

Impairment of consumer receivables acquired for liquidation

    100,000       148,000  

Stock based compensation

    98,000       81,000  

Loss on sale of available-for-sale securities

          1,011,000  

Provision for bad debts – personal injury claims

    837,000        

Loss on other investments

          3,590,000  

Forgiveness of debt

          552,000  

Earnings from equity method investment

    (845,000

)

    (2,759,000

)

Changes in:

               

Prepaid and income taxes receivable

    2,051,000       (6,022,000

)

Due from third party collection agencies and attorneys

    34,000       (320,000

)

Other assets

    (380,000

)

    3,184,000  

Other liabilities

    (3,201,000

)

    1,294,000  

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

    710,000       (3,041,000

)

Net cash provided by (used in) operating activities

    3,271,000       (9,797,000

)

Cash flows from investing activities:

               

Purchase of consumer receivables acquired for liquidation

          (2,213,000

)

Principal collected on receivables acquired for liquidation

    2,069,000       6,324,000  

Principal collected on consumer receivable accounts represented by account sales

    3,000        

Purchase of available-for-sale securities

    (3,069,000

)

    (13,193,000

)

Proceeds from sale of available-for-sale securities

          62,406,000  

Purchase of non-controlling interest

    (1,800,000

)

     

Proceeds from sale of CBC

    4,491,000        

Proceeds from notes receivable

    958,000        

Acquisition of personal injury claims portfolios

    (14,571,000

)

     

Personal injury claims - advances

    (60,000

)

    (3,351,000

)

Personal injury claims - receipts

    3,705,000        

Change in equity method investment

    53,119,000       2,808,000  

Capital expenditures

    (26,000

)

    (19,000

)

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

    (1,538,000

)

    1,548,000  

Net cash provided by investing activities

    43,281,000       54,310,000  

Cash flows from financing activities:

               

Proceeds from exercise of stock options

    399,000        

Purchase of treasury stock

          (54,203,000

)

Borrowings from line of credit

          9,600,000  

Dividends paid

    (35,352,000

)

     

Net cash provided by financing activities of discontinued operations

    1,387,000       9,000,000  

Net cash used in financing activities

    (33,566,000

)

    (35,603,000

)

Foreign currency effect on cash

    58,000       (37,000

)

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

    13,044,000       8,873,000  

Less: net (decrease) increase in cash and cash equivalents classified within assets related to discontinued operations

    (316,000

)

    58,000  

Net increase in cash and cash equivalents

    12,728,000       8,931,000  

Cash and cash equivalents at beginning of period

    17,591,000       16,282,000  

Cash and cash equivalents at end of period

  $ 30,319,000     $ 25,213,000  
                 

Supplemental disclosure of cash flow information :

               

Continuing operations:

               

Cash paid for: Interest

  $ 19,000     $ 90,000  

Cash paid for: Income taxes

  $     $ 6,046,000  

Discontinued operations:

               

Cash paid for: Interest

  $ 824,000     $ 2,891,000  

Supplemental disclosure of non-cash flow investing activities:

               

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)

 

 

Note 1 —Business and Basis of Presentation

 

Business 

 Asta Funding, Inc., together with its wholly owned significant operating subsidiaries Palisades Collection, LLC, Palisades Acquisition XVI, LLC (“Palisades XVI”), Palisades Acquisition XIX, LLC (“Palisades XIX”), Palisades Acquisition XXIII, LLC (“Palisades XXIII”), VATIV Recovery Solutions LLC (“VATIV”), ASFI Pegasus Holdings, LLC (“APH”), Fund Pegasus, LLC (“Fund Pegasus”), GAR Disability Advocates, LLC (“GAR Disability Advocates”), Five Star Veterans Disability, LLC (“Five Star”), EMIRIC, LLC (“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 funding of personal injury claims, through our wholly owned subsidiaries Sylvave, Simia and Practical Funding, 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. 

 

For the current year period from October 1, 2017 to January 12, 2018, Pegasus was 80% owned, and accounted for under the equity method. On January 12, 2018, the Company acquired the remaining 20% minority shareholder's interest in Pegasus, and now currently owns 100% of Pegasus. 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, GAR disability advocates 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 prior periods presented in the Company's consolidated financial statements 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 7 - Discontinued Operations in the Company's notes to the consolidated financial statements.

 

Consumer receivables

 

The Company started out in the consumer receivable business in 1995. 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 commenced operations in January 2017, and conducts its business solely in the United States. Simia obtains its business from external brokers and internal sales professionals soliciting individuals with personal injury claims. Business is also obtained from its website and through attorneys. The Company accounted for its investment in Sylvave under the equity method of accounting through January 12, 2018, for subsequent periods the Company will include the financial results of Sylvave in its consolidated statement of operations. The Company formed a new entity Practical Funding on March 16, 2018 to continue in the personal injury claims funding business.

 

 Social security benefit advocacy

 

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

 

Basis of Presentation

 

The consolidated balance sheet as of June 30, 2018, the consolidated statements of operations for the three and nine month periods ended June 30, 2018 and 2017, the consolidated statements of comprehensive income (loss) for the three and nine month periods ended June 30, 2018 and 2017, the consolidated statements of stockholders’ equity as of and for the nine months ended June 30, 2018, and the consolidated statements of cash flows for the nine month periods ended June 30, 2018 and 2017, are unaudited. The September 30, 2017 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, 2017. In the opinion of management, all adjustments necessary to present fairly our financial position at June 30, 2018, the results of operations for the three and nine month periods ended June 30, 2018 and 2017 and cash flows for the nine month periods ended June 30, 2018 and 2017 have been made. The results of operations for the three and nine month periods ended June 30, 2018 and 2017 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)

 

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 Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2017 filed with the Securities and Exchange Commission.

 

The consolidated financial statements are prepared in accordance with accounting principle generally accepted in the United States (“US GAAP”) and industry practices.

 

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.  

 

The 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.

 

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 11 banks at June 30, 2018 that exceeded the balance insured by the FDIC by approximately $24.3 million. Additionally, two foreign banks with an aggregate $2.0 million balances are not FDIC insured. The Company does not believe it is exposed to any significant credit risk due to concentration of cash.

 

As of September 30, 2017 there was $0.5 million of cash in a domestic bank that is classified as restricted. This amount is included in net assets related to discontinued operations on the Company's consolidated balance sheets. 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 was the Company's 50% controlled equity investment with Pegasus Legal Funding. Effective January 12, 2018, the Company entered into a Membership Interest Purchase Agreement (the “Purchase Agreement) with PLF to acquire 100% ownership of the entity for an aggregate purchase price of $1.8 million, upon closing Pegasus changed its name to Sylvave. See Note 4 - Litigation Funding. Prior to the date of acquisition, based on equally shared voting rights with PLF, the Company lacked requisite control of Pegasus, and therefore accounted for its investment in Pegasus under the equity method of accounting. Accordingly, based on the purchase of PLF's interest, the Company now has full voting control of the entity. Therefore, commencing on January 12, 2018, the Company will no longer account for this entity under the equity method, but instead will consolidate the entity into its financial statements. 

 

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 $0.1 million and $0.1 million and $0.3 million and $0.4 million in performance fees for the three and nine months ended June 30, 2018 and 2017, respectively. 

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 Note 1—Business and Basis of Presentation (continued)

 

The carrying value of the investment in Serlefin Peru was $0.2 million as of June 30, 2018 and September 30, 2017. 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 30, 2018 was approximately $0.1 million, and was not significant to the Company's consolidated statement of operations.

 

When the Company's carrying value in an equity method investee company is reduced to zero, no further losses are recorded in the Company's consolidated financial statements unless the Company guaranteed obligations of the investee company or has committed additional funding. When the investee company subsequently reports income, the Company will not record its share of such income until it equals the amount of its share of losses not previously recognized. There were no impairment losses recorded on the equity method investment for the three and nine months ended June 30, 2018 and 2017.

 

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.

 

Income Recognition   

 

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 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 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. 

 

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

 

 The Company recognizes revenue for GAR Disability Advocates and Five Star Veterans when disability claimant's cases close with the social security administration and the applicable 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.

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1—Business and Basis of Presentation (continued)

 

 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 2017, the Company recorded an impairment loss on this investment of $3.4 million, which was included in general and administrative expenses in the consolidated statements of operations. The full value of this investment was written off as of September 30, 2017. As of June 30, 2018, no amounts have been recovered on this investment.

 

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.

 

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, 2018, 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. 

 

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.

 

Discontinued Operations 

 

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

 

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.

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1—Business and Basis of Presentation (continued)

 

The Company has completed its initial assessment of the new standard, including a detailed review of the Company’s revenue streams to identify potential differences in accounting as a result of the new standard, and selected the modified retrospective method. Based on the Company’s initial assessment, we do not believe that the adoption of the standard and related amendments will have a significant impact on our revenue recognition patterns, assuming that our revenue streams will be similar to those currently in place are in effect at the time of our adoption. Through the date of adoption, we will continue to evaluate the impacts of the standard to ensure that our preliminary conclusions continue to remain accurate. Additionally, we will continue our assessment of the impact of the standard on our financial statement disclosures which are expected to be more extensive based on the requirements of the new standard.

 

In January 2016, the FASB issued Update No. 2016-01, 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. Upon adoption of this ASU, the Company's investments will no longer be classified as available for sale, and any changes in fair value will be reflected in the Company's consolidated statement of operations.

 

In February 2016, the FASB issued ASU 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 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 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842. ASU 2018-01 was issued to address concerns about the cost and complexity of complying with the transition provisions of ASU 2018-01. 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 in the process of reviewing its existing leases, including service contracts for embedded leases to evaluate the impact of this standard on its consolidated financial statements and the impact on regulatory capital.

 

In March 2016, the FASB issued ASU No. 2016-07, Simplifying the Transition to the Equity Method of Accounting, which eliminates the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains significant influence over a previously held investment. The amendments in ASU 2016-07 are effective for public companies for fiscal years beginning after December 15, 2016 including interim periods therein. Early adoption is permitted. The new standard should be applied prospectively for investments that qualify for the equity method of accounting after the effective date. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.

 

In March 2016, the FASB issued Update No. 2016-09, 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 adoption of this update did not have a material impact on the Company's 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 expects that it 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 January 2017, the FASB issued ASU No. 2017-01, 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 adoption of this update will not have a material impact on the Company’s consolidated financial statements.

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 Note 1—Business and Basis of Presentation (continued)

 

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.

 

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, 2017, including interim periods within that reporting period. The adoption of this update will not have a material impact on the Company's consolidated financial statements.

 

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax 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 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 modifies 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 develop Level 3 fair value measurements. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.

 

 

Note 2—Available-for-Sale Investments

 

Investments classified as available-for-sale at June 30, 2018 and September 30, 2017, consist of the following:

 

   

Amortized
Cost

   

Unrealized
Gains

   

Unrealized
Losses

   

Fair Value

 

June 30, 2018

  $ 8,568,000     $ 8,000     $     $ 8,576,000  

September 30, 2017

  $ 5,500,000     $ 11,000     $     $ 5,511,000  

 

The available-for-sale investments do not have any contractual maturities. The Company did not sell any investments during the three and nine months ended June 30, 2018. The Company sold six investments during the nine months ended June 30, 2017, with a realized loss of $1,011,000. The Company sold three investments during the three months ended June 30, 2017, with a realized loss of $18,000. The Company did not receive any capital gain distributions during the nine months ended June 30, 2018. The Company received $177,000 in capital gains distributions during the nine months ended June 30, 2017. The Company did not record any aggregate realized gains (losses) related to its available-for-sale securities for the three and nine months ended June 30, 2018. 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.

 

Unrealized holding gains and losses on available-for-sale securities are included in other comprehensive income (loss) within stockholders’ equity. Realized gains (losses) on available-for-sale securities are included in other income (loss) and, when applicable, are reported as a reclassification adjustment in other comprehensive income (loss).

 

 

Note 3—Consumer Receivables Acquired for Liquidation

 

Accounts acquired for liquidation are stated at cost and consist primarily of defaulted consumer loans to 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. 

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 3—Consumer Receivables Acquired for Liquidation (continued)

 

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 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. During the three and nine months ended June 30, 2018 the Company impaired one domestic portfolio which resulted in a charge to expense of $100,000.

 

The following tables summarize the changes in the balance sheet account of consumer receivables acquired for liquidation during the following periods:

 

   

For the Three Months Ended June 30,

 
   

2018

   

2017

 

Balance, beginning of period

  $ 5,525,000     $ 11,590,000  

Acquisitions of receivable portfolio

           

Net cash collections from collection of consumer receivables acquired for liquidation

    (5,146,000

)

    (6,061,000

)

Net cash collections represented by account sales of consumer receivables acquired for liquidation

    (1,000

)

    (1,000

)

Impairment

    (100,000

)

    (148,000

)

Effect of foreign currency translation

    (167,000

)

    (163,000

)

Finance income recognized

    4,509,000       3,993,000  
                 

Balance, end of period

  $ 4,620,000     $ 9,210,000  
                 

Finance income as a percentage of collections

    87.6

%

    65.9

%

 

   

For the Nine Months Ended June 30,

 
   

2018

   

2017

 

Balance, beginning of period

  $ 6,841,000     $ 13,427,000  

Acquisitions of receivable portfolio

          2,213,000  

Net cash collections from collection of consumer receivables acquired for liquidation

    (14,844,000

)

    (18,148,000

)

Net cash collections represented by account sales of consumer receivables acquired for liquidation

    (3,000

)

    (191,000

)

Impairment

    (100,000

)

    (148,000

)

Effect of foreign currency translation

    (69,000

)

    39,000  

Finance income recognized

    12,795,000       12,018,000  
                 

Balance, end of period

  $ 4,620,000     $ 9,210,000  
                 

Finance income as a percentage of collections

    86.2

%

    65.5

%

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 3—Consumer Receivables Acquired for Liquidation (continued)

 

During the three and nine months ended June 30, 2018, the Company did not purchase any portfolios. During the three and nine months ended June 30, 2017, the Company purchased $0.0 million and $35.0 million, respectively, of face value portfolios at a cost of $0.0 million and $2.2 million, respectively.

 

As of June 30, 2018, the Company held consumer receivables acquired for liquidation from Peru and Colombia of $2.5 million and $1.7 million, respectively. The total amount of foreign consumer receivables acquired for liquidation was $4.2 million, or 90.0 % of the total consumer receivables held of $4.6 million at June 30, 2018.

 

As of September 30, 2017, the Company held consumer receivables acquired for liquidation from Peru and Colombia of $3.3 million and $2.9 million, respectively. The total amount of foreign consumer receivables acquired for liquidation was $6.2 million, or 89.9% of the total consumer receivables held of $6.8 million at September 30, 2017.

 

As of June 30, 2018 and September 30, 2017, 8.2% and 5.0% of the Company's total assets were related to its international operations, respectively. For the three and nine months ended June 30, 2018 and 2017, 3.1% and 2.2%, respectively, 2.8% and 3.2%, respectively, of the Company's total revenue related to its international operation.

 

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 periods ended June 30, 2018 and 2017, respectively.

 

   

For the Three Months Ended June 30,

   

For the Nine Months Ended June 30,

 
   

2018

   

2017

   

2018

   

2017

 

Gross collections (1)

  $ 9,551,000     $ 10,659,000     $ 27,134,000     $ 32,641,000  

Commissions and fees (2)

    (4,404,000

)

    (4,597,000

)

    (12,287,000

)

    (14,302,000

)

Net collections

  $ 5,147,000     $ 6,062,000     $ 14,847,000     $ 18,339,000  

 

(1)

Gross collections include: collections from third-party collection agencies and attorneys, collections from in-house efforts, and collections represented by account sales.

(2)

Commissions are earned by third party collection agencies and attorneys, and include direct costs associated with the collection effort, generally court costs. In December 2007 an arrangement was consummated with one servicer who also received a 3% fee on gross collections received by the Company in connection with the related portfolio purchase. The fee is charged for asset location, skip tracing and ultimately suing debtors in connection with this portfolio purchase.

 

 

Note 4—Litigation Funding  

 

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. 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 claims. Pegasus while accounted for as an equity method investment, earned $5.1 million in interest and fees for the three months ended June 30, 2017, and earned $0.8 million and $9.8 million in interest and fees for the period from October 1, 2017 to January 12, 2018, compared to the nine months ended June 30, 2017, respectively. The Company had a net equity method investment in personal injury claims of $50.5 million on September 30, 2017 and $52.7 million immediately prior to acquisition, which included loans due to Asta of $32.7 million and $31.7 million, respectively, settled in conjunction with the acquisition. 

 

 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. The Company and PLF decided not to renew the Pegasus joint venture that, by its terms, was scheduled to terminate on December 28, 2016. The Term Sheet amended certain provisions to Pegasus’ operating agreement dated as of December 28, 2011 (as amended, the “Operating Agreement”) and governed the terms relating to the collection of its existing Pegasus portfolio (the “Portfolio”).

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 4—Litigation Funding (continued)  

 

Equity Method Investment (continued)

 

Pursuant to the Term Sheet, the parties thereto have agreed that Pegasus would continue in existence in order to collect advances on its existing Portfolio. The Company would fund overhead expenses relating to the collection of its Portfolio based on a budget agreed upon by the Company and PLF. Any cash received by Pegasus would be distributed to its members in the order provided for in the Operating Agreement. The Company would 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 would be applied against the outstanding balance of overhead expenses previously advanced by the Company to Pegasus. After January 2, 2017, additional overhead expenses advanced would 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 Term Sheet. On April 18, 2017, the Company was granted an Emergent Award restraining the cash in Pegasus, until a formal arbitration panel was confirmed and could review the case.

 

On July 17, 2017, an arbitration panel was confirmed, and a hearing date was scheduled for August 25, 2017 on the Company's motion to have PLF removed from managing Pegasus and replacing them with Company designated representatives, and to permit disbursements to the Company in accordance with the Operating and Liquidation Agreements.

 

On January 12, 2018, the Company, ASFI and Fund Pegasus entered into a Settlement Agreement and Release (the “Settlement Agreement”) by and among the Company, ASFI, Fund Pegasus, Pegasus, the Seller, Max Alperovich, Alexander Khanas, Larry Stoddard, III, Louis Piccolo and A.L. Piccolo & Co., Inc., a New York corporation. The Settlement Agreement releases certain claims in exchange for, among other things, the parties' entry into the Purchase Agreement.

 

Additionally, on January 12, 2018, ASFI Pegasus Holdings, LLC (“ASFI”), a Delaware limited liability company and a subsidiary of Asta Funding, Inc. (the “Company” or “Asta”), a Delaware corporation, entered into a Membership Interest Purchase Agreement (the “Purchase Agreement) with Pegasus Legal Funding, LLC, a Delaware limited liability company (the “Seller”). Under the Purchase Agreement, ASFI bought the Seller’s ownership interests of Pegasus Funding, LLC (“Pegasus”), which was 20% of the issued and outstanding limited liability company interests of Pegasus, for an aggregate purchase price of $1.8 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.

 

Acquisition of Equity Method Investment (continued)

 

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  

 

As a result of the purchase of the Seller’s 20% interest in Pegasus on January 12, 2018 under the Purchase Agreement, beginning on January 13, 2018, the Company will consolidate the financial statements of Sylvave.

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 4—Litigation Funding (continued)

 

Acquisition of Equity Method Investment (continued)

 

The results of operations and financial position of the Company’s historical equity investment in Pegasus are summarized below:

 

   

Condensed Statement of Operations Information

 

 
   

 

Three months ended

 
   

June 30, 2018

   

June 30, 2017

 

Personal injury claims income

  $     $ 5,068,000  

Operating expenses

          1,680,000  

Income from operations

  $     $ 3,388,000  
                 

Earnings from equity method investment

  $     $ 2,710,000  

 

             
   

Period from

October 1, 2017 to

January 12, 2018

   

 

Nine Months Ended

June 30, 2017

 

Personal injury claims income

  $ 671,000     $ 9,507,000  

Operating expenses

    (386,000

)

    6,058,000  

Income from operations

  $ 1,057,000     $ 3,449,000  
                 

Earnings from equity method investment

  $ 845,000     $ 2,759,000  

 

 

   

Condensed Balance Sheet Information

 

 

Current assets

 

June 30, 2018

   

September 30, 2017

 

Cash

  $     $ 35,631,000  (1)

Investment in personal injury claims

          16,855,000  

Other assets

          109,000  

Total Assets

  $     $ 52,595,000  
                 

Current liabilities

  $     $ 31,677,000  

Non-current liabilities

          1,952,000  

Equity

          18,966,000  

Total Liabilities and Equity

  $     $ 52,595,000  

 

(1) Included in cash is $35.4 million in restricted cash as of September 30, 2017. The restriction was put in place during the Company’s arbitration with PLF.

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 4—Litigation Funding (continued)

 

Personal Injury Claims Funding

 

The following tables summarize the changes in the balance sheet account of personal injury claim portfolios held by Simia and Sylvave for the following periods: 

 

 

   

For the Three Months Ended June 30,

 
   

2018

   

2017

 

Balance, beginning of period

  $ 15,994,000     $ 3,177,000  

Acquisition of personal injury funding portfolio (1)

           

Personal claim advances

          296,000  

Provision for losses

    (6,000

)

    (7,000

)

(Write offs) recoveries

    (407,000

)

     

Personal injury claims income

    1,557,000       241,000  

Personal injury claims receipts

    (3,344,000

)

    (356,000

)

                 

Balance, end of period

  $ 13,793,000     $ 3,351,000  

 

 

   

For the Nine Months Ended June 30,

 
   

2018

   

2017

 

Balance, beginning of period

  $ 3,704,000     $  

Acquisition of personal injury funding portfolio (1)

    14,571,000        

Personal claim advances

    60,000       3,518,000  

Provision for losses

    (465,000

)

    (7,000

)

(Write offs) recoveries

    (371,000

)

     

Personal injury claims income

    2,167,000       251,000  

Personal injury claims receipts

    (5,872,000

)

    (411,000

)

                 

Balance, end of period

  $ 13,793,000     $ 3,351,000  

 

(1) Fully acquired through the acquisition of Pegasus.

 

The Company recognized personal injury claims income of $1.6 million and $2.2 million for the three and nine months ended June 30, 2018 and $241,000 and $251,000 for the three and nine months ended June 30, 2017, respectively.

 

Matrimonial Claims (included in Other Assets)

 

On May 8, 2012, EMIRIC entered into a joint venture with California-based Balance Point Divorce Funding, LLC (“BP Divorce Funding”) to create the operating subsidiary BP Case Management, LLC (“BPCM”). BPCM is 60% owned by the Company and 40% owned by BP Divorce Funding. BPCM provides non-recourse funding to a spouse in a matrimonial action. The Company provided a $1.0 million revolving line of credit to partially fund BPCM’s operations, with such loan bearing interest at the prevailing prime rate, with an initial term of twenty-four months. In September 2014, the agreement was revised to extend the term of the loan to August 2016, increase the credit line to $1.5 million and include a personal guarantee of the principal of BP Divorce Funding. Effective August 14, 2016, the Company extended its revolving line of credit with BP Divorce Funding until March 31, 2017, at substantially the same terms as the September 2014 amendment. On April 1, 2017, BP Divorce Funding defaulted on this agreement, and as such, the loan balance of approximately $1.5 million was deemed uncollectible and was written off to general and administrative expenses on the consolidated statement of operations during the year ended September 30, 2017.

 

As of June 30, 2018 and September 30, 2017, BPCM had fully reserved against its invested cases managed by the venture of approximately $2.5 million. There was no income recognized in the three and nine months ended June 30, 2018 and 2017.

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 5—Furniture & Equipment

 

Furniture and equipment consist of the following:

 

   

June 30,

   

September 30,

 
   

2018

   

2017

 

Furniture

  $ 273,000     $ 273,000  

Equipment

    241,000       241,000  

Software

    1,395,000       1,369,000  
                 
      1,909,000       1,883,000  

Less accumulated depreciation and amortization

    1,805,000       1,759,000  
                 

Balance, end of period

  $ 104,000     $ 124,000  

 

Depreciation expense for the three and nine months ended June 30, 2018 and 2017, was $14,000 and $46,000 respectively, and $24,000 and $75,000, respectively

 

 

Note 6—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 $2.9 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. 

 

During the month of June 2016, the Company received the balance of the $16.9 million, and, as of June 30, 2018 and September 30, 2017, the Company recorded a liability to BMO of approximately $157,000 and $148,000, respectively, which has been recorded in other liabilities in the Company’s consolidated balance sheet. The funds outstanding on June 30, 2018 were subsequently remitted to BMO on July 10, 2018. 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, with property of the Borrowers serving as collateral. On March 30, 2016, the Company signed the First Amendment to the Loan Agreement (the “First Amendment”) with Bank Hapoalim which amended certain terms of their banking arrangement. The First Amendment includes (a) the reduction of the interest rate to LIBOR plus 225 basis points; (b) a decrease in the minimum net worth requirement by $50 million, to $100 million and (c) modifies the Net Loss requirement from a quarterly to an annual basis. All other terms of the original agreement remain in effect. The Company borrowed $9.6 million in February 2017 against the facility. There was a $10.0 million aggregate balance on deposit at Bank Hapoalim which served 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. On August 2, 2017, the $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. As of June 30, 2018, there was no outstanding facility.

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

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, through the issuance of restricted stock valued at approximately $1,000,000 and $800,000 in cash. Each of the two original principals received 61,652 shares of restricted stock at a fair market value of $7.95 per share and $400,000 in cash. An aggregate of 123,304 shares of restricted stock were issued as part of the transaction.  

 

On January 1, 2016, the Company renewed the expiring two-year employment agreements of the two CBC principals for one year terms. The employment contracts of the original two principals expired at the end of December 2016. The Company did not renew those contracts. Ryan Silverman was appointed CEO/General Counsel effective January 1, 2017.

 

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 “Purchase Agreement) with CBC Holdings LLC, a Delaware limited liability company (the “Buyer”). Under the Purchase Agreement, the Company sold all of the issued and outstanding equity capital of CBC for an aggregate purchase price of approximately $10.3 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 June 30, 2018, the components of the Company designated as discontinued operations had no assets or liabilities. As of September 30, 2017, the components of the Company designated as discontinued operations had assets and liabilities of $92.2 million and $81.8 million, respectively. For the three months ended June 30, 2018 and 2017, the components of the Company designated as discontinued operations reported a (loss) profit, net of income taxes of $0.0 million and $0.6 million, respectively. For the nine months ended June 30, 2018 and 2017, the components of the Company designated as discontinued operations reported a (loss) profit, net of income taxes of ($0.1) million and ($1.8) million, respectively.

 

The major components of assets and liabilities related to discontinued operations are summarized below:

 

   

June 30, 2018

 

   

September 30, 2017

 

   

Cash and cash equivalents

  $     $ 1,617,000  

(1)

Restricted cash

          499,000    

Structured settlements

          86,971,000    

Furniture and equipment, net

          34,000    

Goodwill

             

Other assets

          3,114,000    

Total assets related to discontinued operations

  $     $ 92,235,000    
                   

Other debt - CBC

          78,935,000    

Other liabilities

          2,816,000    

Total liabilities related to discontinued operations

  $     $ 81,751,000    

 

(1) Cash balance with one bank at September 30, 2017 that exceeded the balance insured by the FDIC by approximately $0.5 million.

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 7—Discontinued Operations (continued)

 

The following table presents the operating results, for the three and nine months ended June 30, 2018 and 2017, for the components of the Company designated as discontinued operations:

 

 

   

Three months ended

 
   

 

June 30, 2018

   

 

June 30, 2017

 

Revenues:

               

Unrealized gain on structured settlements

  $     $ 7,531,000  

Interest income on structured settlements

          1,923,000  

Loss on sale of structured settlements

          (5,353,000

)

Total revenues

          4,101,000  

Other income

          14,000  
                 
            4,115,000  
                 

Expenses:

               

General and administrative expenses

          2,156,000  

Interest expense

          990,000  
                 
            3,146,000  
                 

Income from discontinued operations before income taxes

          969,000  

Income tax expense from discontinued operations

          409,000  

Income from discontinued operations, net of taxes

  $     $ 560,000  

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) 

 

Note 7—Discontinued Operations (continued) 

 

   

Nine months ended

 
   

June 30, 2018

   

June 30, 2017

 

Revenues:

               

Unrealized gain on structured settlements

  $ 244,000     $ 4,511,000  

Interest income on structured settlements

    2,005,000       5,765,000  

Loss on sale of structured settlements

          (5,353,000

)

Total revenues

    2,249,000       4,923,000  

Other income

    11,000       44,000  
                 
      2,260,000       4,967,000  
                 

Expenses:

               

General and administrative expenses

    1,560,000       5,152,000  

Interest expense

    824,000       2,871,000  
                 
      2,384,000       8,023,000  
                 

Loss from discontinued operations before income taxes

    (124,000

)

    (3,056,000

)

Income tax benefit from discontinued operations

    (44,000

)

    (1,300,000

)

Loss from discontinued operations, net of taxes

  $ (80,000

)

  $ (1,756,000

)

 

Prior to its sale, 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 $0.2 million of unrealized gains recognized in the nine months ended June 30, 2018, approximately $0.2 million is due to day one gains on new structured settlements financed during the period. There were no other changes in assumptions during the period. Of the $7.5 million and $4.5 million of unrealized gains recognized in the three and nine months ended June 30, 2017, approximately $1.6 million and $5.9 million, respectively, was due to day one gains on new structured settlements financed during the period, offset by a decrease of ($5.4) million and $1.5 million, respectively, in realized (losses)gains recognized as realized loss on sale and interest income on structured settlements, $0.5 million and $0.1 million gain due to a change in the discount rate, and a reduction in fair value of $3.0 million and $0.0 million, respectively, during the period.

 

The Company elected the fair value treatment under ASC 825-10-50-28 through 50-32 to be transparent to the user regarding the underlying fair value of the structured settlement which collateralizes the debt of CBC. The Company believes any change in fair value is driven by market risk as opposed to credit risk associated with the underlying structured settlement annuity issuer. 

 

The purchased personal injury structured settlements result in payments over time through an annuity policy. Most of the annuities acquired involve guaranteed payments with specific defined ending dates. CBC also 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 were not a material portion of assets at September 30, 2017.

 

CBC purchased structured settlement and annuity policies through privately negotiated direct consumer purchases and brokered transactions across the United States. CBC funded the purchases primarily from cash, its revolving line of credit, and its securitized debt, issued through its Blue Bell Receivables (“BBR”) subsidiaries. 

 

On April 7, 2017, CBC, through its subsidiary BBRVII, LLC, issued approximately $18.3 million of fixed rate asset backed notes with a yield of 5.0% and a stated maturity date of January 15, 2069. 

 

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 $5.4 million for the year ended September 30, 2017.

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) 

Note 7—Discontinued Operations (continued) 

 

On April 28, 2017, CBC entered into the Tenth Amendment, extending the line of credit to June 30, 2017. Other terms and conditions of the Ninth Amendment, in effect as of March 31, 2017, remains unchanged. 

 

Structured settlements consist of the following as of June 30, 2018 and September 30, 2017: 

 

   

June 30, 2018

   

September 30, 2017

 

Maturity (1) (2)

  $     $ 139,107,000  

Unearned income

          (52,136,000

)

                 

Structured settlements, net

  $     $ 86,971,000  

 

(1)

The maturity value represents the aggregate unpaid principal balance at June 30, 2018 and September 30, 2017.

(2)

There is approximately $0.3 million of structured settlements that are past due, or in non-accrual status at September 30, 2017.

 

Encumbrances on structured settlements as of June 30, 2018 and September 30, 2017 are as follows: 

 

   

Interest Rate

   

June 30, 2018

   

September 30, 2017

 

Notes payable secured by settlement receivables with principal and interest outstanding payable until June 2025

    8.75

%

  $     $ 1,607,000  

Notes payable secured by settlement receivables with principal and interest outstanding payable until August 2026

    7.25

%

          3,612,000  

Notes payable secured by settlement receivables with principal and interest outstanding payable until April 2032

    7.125

%

          3,891,000  

Notes payable secured by settlement receivables with principal and interest outstanding payable until February 2037

    5.39

%

          17,390,000  

Notes payable secured by settlement receivables with principal and interest outstanding payable until March 2034

    5.07

%

          13,389,000  

Notes payable secured by settlement receivables with principal and interest outstanding payable until February 2043

    4.85

%

          13,001,000  

Notes payable secured by settlement receivables with principal and interest outstanding payable until January 2069

    5.00

%

          17,456,000  

$25,000,000 revolving line of credit

    4.25

%

          8,589,000  
                         

Encumbered structured settlements

                  78,935,000  

Structured settlements not encumbered

                  8,036,000  
                         

Total structured settlements

          $     $ 86,971,000  

 

The Company assumed $25.9 million of debt related to the CBC acquisition on December 31, 2013, including a $12.5 million line of credit with an interest rate floor of 5.5%. 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.

 

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 settlements 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 issued approximately $18.3 million of fixed rate asset-backed notes with a yield of 5.0%.

 

As of September 30, 2017, the remaining debt amounted to $78.9 million, which consisted of $8.6 million drawdown from a line of credit from an institutional source and $70.3 million notes issued by entities 100%-owned and consolidated by CBC. These entities are bankruptcy-remote entities created to issue notes secured by structured settlements. During December 2017, the other debt associated with CBC was sold along with CBC's other assets and liabilities. 

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 8 Note Receivable 

 

Pursuant to Purchase Agreement, dated as of December 13, 2017, between the Purchaser and CBC, CBC sold to the Purchaser all of the issued and outstanding equity capital of CBC for $10.3 million. In conjunction with this sale the Company received $4.5 million in cash, and a Promissory Note (the “Note”) for $5.8 million from the Purchaser. The Note bears interest at 7% per annum, payable in quarterly installments of principle and interest through December 13, 2020, and is secured pursuant to a Service Agreement (the “Service Agreement”) with an affiliate of the Purchaser. Under the Service Agreement the Company has a first priority security interest and lien on all servicing fees received by the affiliate. As of June 30, 2018, the Purchaser is current on all its obligations under the Note, and the principle amount outstanding on this Note is $4.8 million. See Note 7 - Discontinued Operations.

 

 

Note 9 — Other Liabilities 

 

Other liabilities as of June 30, 2018 and September 30, 2017 are as follows:

 

   

June 30,

2018

   

September 30,

2017

 

Accounts payable and accrued expenses

  $ 1,752,000     $ 1,835,000  
                 

Lawsuit reserve (see Note 10 – Commitments and Contingencies – Legal Matters)

          3,145,000  
                 

Total other liabilities

  $ 1,752,000     $ 4,980,000  

 

 

Note 10—Commitments and Contingencies

 

Employment Agreement

 

The employment contracts of the original two CBC principals expired at the end of December 2016. The Company did not renew those contracts. Ryan Silverman was appointed CEO/General Counsel, effective January 1, 2017. The Company is no longer contractually obligated on any CBC employment agreements, as they were sold with the entity.  

 

Effective November 11, 2016, the Company entered into a five year employment agreement with Mr. Preece that could be terminated with or without “cause” (as defined in the Employment Agreement) and could resign with or without “good reason” (as defined in the Employment Agreement). If Mr. Preece was terminated without “cause” or resigned for “good reason” he would have received severance equal to two years of his base salary.

 

As of July 17, 2017, Mr. Preece was no longer employed as Chief Executive Officer of Simia. On an interim basis Gary Stern, Chairman, Chief Executive Officer and President of the Company, assumed the responsibilities of Simia’s Chief Executive Officer. No amounts were paid for any severance or bonus under his contract. 

 

Leases

 

The Company leases its facilities in Englewood Cliffs, NJ, Houston, TX, and Louisville, KY. The Conshohocken, PA leased facility was transferred to the buyer of CBC in December 2017, and the Company was released of all future obligations under the lease.   

 

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, 2017, which was included in general and administrative expenses in the Company's consolidated statement of operations.

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) 

 

Note 10—Commitments and Contingencies (continued) 

 

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. On January 23, 2018, the Company paid $2.3 million as a global settlement in conjunction with the putative class action complaint filed against the Company, and one of its third-party law firm servicers. This payment represented the Company's portion of the total settlement of $4.6 million, which was split with the third-party law firm.

 

The Company was 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. On November 24, 2017, the Company paid $0.8 million as a settlement in conjunction with the lawsuit filed against the Company in Montana state court alleging, fraud and abuse of process arising from the Company's business relationship with an entity that finances divorce proceedings.

 

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.  See Note 19 - Subsequent Events.

 

In the ordinary course of our business, we are involved in numerous legal proceedings. We regularly initiate collection lawsuits, using our network of third party law firms, against consumers. Also, consumers occasionally initiate litigation against us, in which they allege that we have violated a federal or state law in the process of collecting their account. We do not believe that these ordinary course matters are material to our business and financial condition. As of the date of this Form 10-Q, we are not involved in any other material litigation in which we are a defendant.

 

 

Note 11—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 both the three and nine months ended June 30, 2018 was 35.0%, compared to 12.2% and 0.4% for the three and nine months ended June 30, 2017, respectively. The effective rate for fiscal 2017 was comparable to the U.S. federal statutory rate of 35%. The effective rate for fiscal 2017 differed from the U.S. federal statutory rate of 35% primarily due to state income taxes and other permanent differences.

 

On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law. Among other provisions, the Act reduces the Federal statutory corporate income tax rate from 35% to 21%. Given the tax rate reduction, the Company remeasured its U.S. federal and state deferred tax assets and liabilities, which resulted in decreasing the Company’s net deferred tax assets by approximately $3.5 million. This adjustment is recorded as a one-time charge to income taxes for the three and nine months ended June 30, 2018.

 

 The Company files income tax returns in the U.S federal jurisdiction, various state jurisdictions, and various foreign countries. The Company does not have any uncertain tax positions. The Company's federal returns for the years September 30, 2014 and 2015, are currently being audited by the Internal Revenue Service. The tax returns for the years ended September 30, 2016 and 2017 are subject to examination. The Company does not have any uncertain tax positions.

 

 

Note 12—Net Income (Loss) per Share

 

Basic per share data is calculated by dividing net income (loss) by the weighted average shares outstanding during the period. Diluted earnings per share is calculated similarly, except that it includes the dilutive effect of the assumed exercise of securities, including the effect of shares issuable under the Company’s stock based compensation plans. With respect to the assumed proceeds from the exercise of dilutive options, the treasury stock method is calculated using the average market price for the period.

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) 

Note 12—Net Income (Loss) per Share (continued) 

 

The following table presents the computation of basic and diluted per share data for the three months ended June 30, 2018 and 2017:

 

   

Three Months Ended

June 30, 2018

   

 

Three Months Ended

June 30, 2017

 

Income from continuing operations

  $ 1,957,000     $ 1,571,000  
                 

Income from discontinued operations

          560,000  
                 

Net income

  $ 1,957,000     $ 2,131,000  
                 

Basic earnings per common share from continuing operations

  $ 0.29     $ 0.24  

Basic earnings per common share from discontinued operations

          0.08  

Basic earnings per share

  $ 0.29     $ 0.32  
                 
                 
                 

Diluted earnings per common share from continuing operations

  $ 0.29     $ 0.23  

Diluted earnings per common share from discontinuing operations

          0.08  

Diluted earnings per share

  $ 0.29     $ 0.31  
                 

Weighted average number of common shares outstanding:

               

Basic

    6,685,415       6,577,784  

Dilutive effect of stock options

    213       301,298  

Diluted

    6,685,628       6,879,082  

 

The following table presents the computation of basic and diluted per share data for the nine months ended June 30, 2018 and 2017:

 

   

Nine Months Ended

June 30, 2018

   

Nine Months Ended

June 30, 2017

 

Income (loss) from continuing operations

  $ 388,000     $ (7,033,000

)

                 

Loss from discontinued operations

    (80,000 )     (1,756,000 )
                 

Net income (loss)

  $ 308,000     $ (8,789,000 )
                 

Basic earnings (loss) per common share from continuing operations

  $ 0.06     $ (0.75 )

Basic loss per common share from discontinued operations

    (0.01

)

    (0.19 )

Basic earnings (loss) per share

  $ 0.05     $ (0.94 )
                 
                 
                 

Diluted earnings (loss) per common share from continuing operations

  $ 0.06     $ (0.75 )

Diluted loss per common share from discontinued operations

    (0.01

)

    (0.19 )

Diluted earnings (loss) per share

  $ 0.05     $ (0.94 )
                 

Weighted average number of common shares outstanding:

               

Basic

    6,654,911       9,389,864  

Dilutive effect of stock options

    2,929        

Diluted

    6,657,840       9,389,864  

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) 

 

Note 13—Stock Option Plans

 

2012 Stock Option and Performance Award Plan

 

On February 7, 2012, the Board adopted the Company’s 2012 Stock Option and Performance Award Plan (the “2012 Plan”), which was approved by the stockholders of the Company on March 21, 2012. The 2012 Plan replaces the Equity Compensation Plan (as defined below).

 

The 2012 Plan provides the Company with flexibility with respect to equity awards by providing for grants of stock awards (i.e. restricted or unrestricted), stock purchase rights and stock appreciation rights, in addition to the granting of stock options.

 

The Company authorized 2,000,000 shares of Common Stock for issuance under the 2012 Plan. Under the 2012 Plan, the Company has granted options to purchase an aggregate of 540,800 shares, an award of 245,625 shares of restricted stock, and has cancelled 102,068 options, leaving 1,315,643 shares available as of June 30, 2018. As of June 30, 2018, approximately 60 of the Company’s employees were able to participate in the 2012 Plan.

 

Equity Compensation Plan

 

On December 1, 2005, the Board adopted the Company’s Equity Compensation Plan (the “Equity Compensation Plan”), which was approved by the stockholders of the Company on March 1, 2006. The Equity Compensation Plan was adopted to supplement the Company’s 2002 Stock Option Plan (as defined below).

 

In addition to permitting the grant of stock options as are permitted under the 2002 Stock Option Plan, the Equity Compensation Plan allows the Company flexibility with respect to equity awards by also providing for grants of stock awards (i.e. restricted or unrestricted), stock purchase rights and stock appreciation rights.

 

The Company authorized 1,000,000 shares of Common Stock for issuance under the Equity Compensation Plan. As of March 21, 2012, no more awards could be issued under this plan.

 

2002 Stock Option Plan

 

On March 5, 2002, the Board 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 authorizes the granting of incentive stock options (as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”)) and non-qualified stock options to eligible employees of the Company, including officers and directors of the Company (whether or not employees) and consultants of the Company.

 

The Company authorized 1,000,000 shares of Common Stock authorized for issuance under the 2002 Plan. As of March 5, 2012, no more awards could be issued under this plan.

 

Stock Based Compensation 

 

The Company accounts for stock-based employee compensation under ASC 718, Compensation — Stock Compensation (“ASC 718”). ASC 718 requires that compensation expense associated with stock options and other stock based awards be recognized in the statement of operations, rather than a disclosure in the notes to the Company’s consolidated financial statements.

 

On June 8, 2017, the Compensation Committee granted 56,600 stock options to an officer and employees of the Company, with a grant date fair value of $6.55, 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:

 

 

Risk-free interest rate

    1.86

%

Expected term (years)

    5.97  

Expected volatility

    26.27

%

Forfeiture rate

    3.49

%

Dividend yield

    0.00

%

 

 

Summary of the Plans

 

Compensation expense for stock options and restricted stock is recognized over the vesting period. Compensation expense for restricted stock is based upon the market price of the shares underlying the awards on the grant date.

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 13—Stock Option Plans (Continued)

 

The following table summarizes stock option transactions under the 2012 Plan, the 2002 Plan, and the Equity Compensation Plan (the “Plans”):

 

   

Nine Months Ended June 30,

 
   

2018

   

2017

 
   

Number
Of
Shares

   

Weighted
Average
Exercise
Price

   

Number
of
Shares

   

Weighted
Average
Exercise
Price

 

Outstanding options at the beginning of period

    880,567     $ 8.05       949,667     $ 8.47  

Options granted

                56,600       6.55  

Options exercised

    (61,600

)

    6.48              

Options forfeited/cancelled

    (22,400

)

    8.39       (53,800

)

    14.01  

Outstanding options at the end of period

    796,567     $ 8.16       952,467     $ 8.05  
                                 

Exercisable options at the end of period

    778,394     $ 8.16       867,195     $ 8.13  

 

   

Three Months Ended June 30,

 
   

2018

   

2017

 
   

Number
Of
Shares

   

Weighted
Average
Exercise
Price

   

Number
of
Shares

   

Weighted
Average
Exercise
Price

 

Outstanding options at the beginning of period

    796,767     $ 8.16       896,867     $ 8.14  

Options granted

                56,600       6.55  

Options exercised

                       

Options forfeited/cancelled

    (200

)

    7.93       (1,000

)

    7.93  
                                 

Outstanding options at the end of period

    796,567     $ 8.16       952,467     $ 8.05  
                                 

Exercisable options at the end of period

    778,394     $ 8.16       867,195     $ 8.13  

 

The following table summarizes information about the Plans outstanding options as of June 30, 2018:

 

       

Options Outstanding

   

Options Exercisable

 

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

 

$2.8751

$5.7500     1,200       0.8     $ 2.95       1,200     $ 2.95  

$5.7501

$8.6250     678,367       3.8       7.96       660,194       7.96  

$8.6251

$11.5000     117,000       4.6       9.39       117,000       9.39  
                                             
          796,567       3.9     $ 8.16       778,394     $ 8.16  

 

The Company recognized $98,000 and $9,000 of compensation expense related to the stock option grants during the nine and three month periods ended June 30, 2018, respectively. The Company recognized $38,000 and $30,000 of compensation expense related to the stock option grants during the nine and three month periods ended June 30, 2017, respectively. As of June 30, 2018, there was $16,000 of unrecognized compensation cost related to stock option awards. The weighted average period over which such costs are expected to be recognized is 0.5 years.

 

The intrinsic value of the outstanding and exercisable options as of June 30, 2018 was $540 and $540, respectively. The weighted average remaining contractual life of exercisable options is 3.8 years. No options were exercised during the three months ended June 30, 2018. There were 61,600 options exercised during the nine months ended June 30, 2018 for $399,000. The fair value of the stock options that vested during the nine and three month periods ended June 30, 2018 was approximately $222,000 and $0, respectively. The fair value of the stock options that vested during the nine and three month periods ended June 30, 2017 was approximately $734,000 and $81,000, respectively. There were no options granted during the nine and three month periods ended June 30, 2018.

 

The Company did not grant any restricted stock during the three and nine months ended June 30, 2018 and 2017, respectively. As of June 30, 2018, there was no unrecognized compensation cost related to restricted stock awards.

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 14—Stockholders’ Equity

 

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, 2018, there were no such restrictions.

 

On February 5, 2018, the Board of Directors of the Company declared a special cash dividend in the amount of $5.30 per share with respect to its Common Stock, payable on February 28, 2018 to holders of record of the Company’s Common Stock at the close of business on February 16, 2018, with an ex-dividend date of March 1, 2018. The aggregate payment to shareholders was approximately $35 million.

 

Stockholder Rights Agreement

 

On May 5, 2017, the Board of the Company adopted a stockholder rights plan (the “Rights Agreement”), pursuant to which the Company declared a dividend of one right (a “Right”) for each of the Company’s issued and outstanding shares of common stock. The dividend was declared to the stockholders of record at the close of business on May 15, 2017. Each Right entitled the holder, subject to the terms of the Rights Agreement, to purchase from the Company one one-thousandth of a share of the Company’s Series A Junior Participating Preferred Stock (the “Preferred Stock”) at a price of $28.60, subject to certain adjustments. 

 

The Rights generally became 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 were 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 would be made so that each holder of a Right will thereafter have had 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 had the right to 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 became an Acquiring Person, the Company could 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 was set to expire on June 1, 2018, or such later date as may have been established by the Board as long as any such extension is approved by a vote of the stockholders of the Company by June 1, 2018. The Company concluded any value associated with the Right given to shareholders as a dividend was deemed de minim us.

 

The Rights and Rights Agreement expired on June 1, 2018.

 

 

Note 15—Fair Value of Financial Instruments

 

The estimated fair value of the Company’s financial instruments is summarized as follows:

 

   

June 30, 2018

   

September 30, 2017

 
   

Carrying
Amount

   

Fair
Value

   

Carrying
Amount

   

Fair
Value

 

Financial assets

                               

Cash equivalents (Level 1)

  $ 4,485,000     $ 4,485,000     $ 68,000     $ 68,000  

Available-for-sale investments (Level 1)

    8,576,000       8,576,000       5,511,000       5,511,000  

Consumer receivables acquired for liquidation (Level 3)

    4,620,000       33,940,000       6,841,000       32,603,000  

 

The following assets have been reclassified to discontinued operations as of September 30, 2017:

 

   

September 30, 2017

 
   

Carrying
Amount

   

Fair
Value

 

Financial assets

               

Structured settlements (Level 3)

  $ 86,971,000     $ 86,971,000  

 

Disclosure of the estimated fair values of financial instruments often requires the use of estimates. The Company uses the following methods and assumptions to estimate the fair value of financial instruments:

 

Cash equivalents – The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. The carrying amount of cash equivalents approximates fair value. 

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 15—Fair Value of Financial Instruments (continued)

 

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

 

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 any transfers into (out of) Level 1 investments during the nine months ended June 30, 2018. The Company had no Level 2 or Level 3 available-for-sale investments during the nine months ended June 30, 2018.

 

Consumer receivables acquired for liquidation – The Company computed the fair value of the consumer receivables acquired for liquidation using its proprietary forecasting model. The Company’s forecasting model utilizes a discounted cash flow analysis. The Company’s cash flows are an estimate of collections for consumer receivables based on variables fully described in Note 4 - Consumer Receivables Acquired for Liquidation. These cash flows are discounted to determine the fair value.

 

Structured settlements – The Company determined the fair value based on the discounted forecasted future collections of the structured settlements. 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. The $0.2 million of unrealized gains recognized for the nine months ended June 30, 2018, is due to day one gains on new structured settlements financed during the period.

 

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.

 

The changes in financial instruments at fair value using significant unobservable inputs (Level 3) during the nine months ended June 30, 2018 were as follows:

 

   

Carrying
Amount

 

Balance at September 30, 2017

  $ 86,971,000  

Structured settlements sold in conjunction with sale of CBC on December 13, 2017

    (86,971,000

)

Structured Settlements as of June 30, 2018

  $  

 

Realized and unrealized gains and losses included in earnings in the accompanying consolidated statements of operations for the nine months ended June 30, 2018 are reported in the following revenue categories:

 

 

Total gains included in the nine months ended June 30, 2018   $ 244,000  
         

Change in unrealized gains (losses) relating to assets still held at June 30, 2018

  $  

 

 

Note 16—Segment Reporting

 

The Company operates through strategic business units that are aggregated into three reportable segments: Consumer receivables, personal injury claims and Social Security benefits. The three reportable segments consist of the following:

 

Consumer receivables - This segment is engaged in the business of purchasing, managing for its own account and servicing distressed consumer receivables, including judgment receivables, charged off receivables and semi-performing receivables.  Judgment receivables are accounts where outside attorneys have secured judgments directly against the consumer. Primary charged-off receivables are accounts that have been written-off by the originators and may have been previously serviced by collection agencies. Semi-performing receivables are accounts where the debtor is currently making partial or irregular monthly payments, but the accounts may have been written-off by the originators. Distressed consumer receivables are the unpaid debts of individuals to banks, finance companies and other credit providers. A large portion of our distressed consumer receivables are MasterCard ® , Visa ® and other credit card accounts which were charged-off by the issuers or providers for non-payment. We acquire these and other consumer receivable portfolios at substantial discounts to their face values. The discounts are based on the characteristics (issuer, account size, debtor location and age of debt) of the underlying accounts of each portfolio.  The business conducts its activities primarily under the name Palisades Collection, LLC.

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) 

 

Note 16—Segment Reporting (continued)

 

Personal injury claims – This segment is comprised of purchased interests in personal injury claims from claimants who were a party to personal injury litigation. 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.  Simia commenced funding personal injury settlement claims in January 2017 and ceased funding claims in June 2017, while Sylvave was acquired on January 12, 2018 and will not fund any new advances. The Company is continuing its personal injury claims business in a new entity Practical Funding, which was formed on March 16, 2018.

   

Social Security benefit advocacy – GAR Disability and Five Star are advocacy groups representing individuals nationwide in their claims for social security disability and supplemental social security income benefits from the Social Security and Veterans Administration.

 

Certain non-allocated administrative costs, interest income, interest expense and various other non-operating income and expenses are reflected in Corporate. Corporate assets include cash and cash equivalents, restricted cash, available-for-sale securities, property and equipment, goodwill, deferred taxes and other assets.

 

The following table shows results by reporting segment for the three and nine month period ended June 30, 2018 and 2017.

 

(Dollars in millions)

 

Consumer
Receivables

   

Social

Security

Benefit

Advocacy

   

 

Personal Injury

Claims (2)

   

 

Corporate (3)

   

 

Total

 
                               

Three Months Ended June 30,

                                       

2018:

                                       

Revenues

  $ 4.5     $ 1.1     $ 1.6     $     $ 7.2  

Other income

                      0.1       0.1  

Segment profit (loss)

    3.6       0.3       1.1       (2.0 )     3.0  

2017:

                                       

Revenues

    4.0       1.1       0.3             5.4  

Other income

                      0.1       0.1  

Segment profit (loss)

    2.9       0.0       2.6       (3.7 )     1.8  

Nine Months Ended June 30,

                                       

2018:

                                       

Revenues

    12.8       3.2       2.2             18.2  

Other income

                      0.2       0.2  

Segment profit (loss)

    11.4       0.5       1.9       (7.8 )     6.0  

Segment Assets(1)

    27.1       3.2       20.6       31.1       82.0  

2017:

                                       

Revenues

    12.0       4.0       0.3             16.3  

Other income

                      (0.2 )     (0.2 )

Segment profit (loss)

    9.7       (1.4 )     2.3       (17.7 )     (7.1 )

Segment Assets(1) (4)

 

19.6

      3.3       52.9       136.9       212.7  

 

The Company does not have any intersegment revenue transactions.

  

(1)

Includes other amounts in other line items on the consolidated balance sheet.

(2)

 

The Company 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.

(4)

Included in Corporate are approximately $93.7 million of assets related to discontinued operations as of June 30, 2017.

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 17 - Accumulated Other Comprehensive (Loss) Income

 

Accumulated other comprehensive (loss) income consists of:

 

   

Nine Months Ended June 30, 2018

   

Year Ended September 30, 2017

 
   

Unrealized

gain (loss) on

marketable

securities

   

Foreign

currency

translation, net

   

Total

   

Unrealized

gain (loss)

on marketable

securities

   

Foreign

currency

translation, net

   

Total