10-K 1 asta20190930_10k.htm FORM 10-K asta20190930_10k.htm
 

 

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

Form 10-K

 

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

 

For the fiscal year ended September 30, 2019

 

OR

 

☐ 

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

 

For the transition period from                     to                      

 

Commission file number: 001-35637

ASTA FUNDING, INC.

 

(Exact Name of Registrant as Specified in its Charter)

 

Delaware

 

22-3388607

(State or Other Jurisdiction of Incorporation or Organization)

 

(I.R.S. Employer Identification No.)

 

 

 

     

 

 

 

210 Sylvan Avenue, Englewood

Cliffs, NJ

 

07632

(Zip Code)

(Address of Principal Executive Offices)

 

  

 

Registrant's telephone number, including area code: (201) 567-5648

 

Securities registered pursuant to Section 12(b) of the Exchange Act:

 

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, par value $.01 per share

ASFI

NASDAQ Global Select Market

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act

  Yes   ☐          No   ☑

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act  

  Yes   ☐         No     ☑

 

☐     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 for 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     ☑

 

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:

 

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   ☑

 

The aggregate market value of voting and nonvoting common equity held by non-affiliates of the registrant was approximately $12,168,319 as of the last business day of the registrant’s most recently completed second fiscal quarter in 2019.

 

As of December 16, 2019, the registrant had 6,567,765 shares of Common Stock issued and outstanding.

  

 

 

 

 

DOCUMENTS INCORPORATED BY REFERENCE

 

In accordance with General Instruction G (3) of Form 10-K, certain information required by Part III hereof are incorporated into this Form 10-K by reference to the registrant’s definitive proxy statement for registrant’s 2019 Annual Meeting of Stockholders.

 

 

 

FORM 10-K

 

TABLE OF CONTENTS

 

 

 

Page

PART I

Item 1.

Business

3

Item 1A.

Risk Factors

11

Item 2.

Properties

21

Item 3.

Legal Proceedings

21

Item 4.

Mine Safety Disclosures

21

 

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

22

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

Item 8.

Financial Statements and Supplementary Data

32

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

32

Item 9A

Controls and Procedures

32

Item 9B.

Other Information

34

 

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

35

Item 11.

Executive Compensation

35

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

35

Item 13.

Certain Relationships and Related Transactions, and Director Independence

35

Item 14.

Principal Accounting Fees and Services

35

 

PART IV

Item 15.

Exhibits and Financial Statement Schedules

36

  

 

 

Caution Regarding Forward Looking Statements

 

 This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts included or incorporated by reference in this Annual Report on Form 10-K, including without limitation, statements regarding our future financial position, business strategy, budgets, projected revenues, projected costs and plans and objectives of management for future operations, are forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expects,” “intends,” “plans,” “projects,” “estimates,” “anticipates,” or “believes” or the negative thereof or any variation there on or similar terminology or expressions.

 

We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are not guarantees and are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Important factors which could materially affect our results and our future performance include, without limitation, the identified material weaknesses in our internal control over financial reporting and our ability to remediate those material weaknesses, our ability to purchase defaulted consumer receivables at appropriate prices, changes in government regulations that affect our ability to collect sufficient amounts on our defaulted consumer receivables, our ability to employ and retain qualified employees, changes in the credit or capital markets, changes in interest rates, deterioration in economic conditions, negative press regarding the debt collection industry which may have a negative impact on a debtor’s willingness to pay the debt we acquire, and statements of assumption underlying any of the foregoing, as well as other factors set forth under “Item 1A. Risk Factors” and “Item 7–Management’s Discussions and Analysis of Financial Condition and Results of Operation” below.

 

All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the foregoing. Except as required by law, we assume no duty to update or revise any forward-looking statements.

 

 

Part I

 

Item 1.

Business. 

 

Overview

 

Asta Funding, Inc. (“Asta”), a Delaware Corporation, together with its wholly owned significant operating subsidiaries Palisades Collection, LLC, Palisades Acquisition XVI, LLC (“Palisades XVI”), Palisades Acquisition XIX, LLC (“Palisades XIX”), Palisades Acquisition XXIII, LLC (“Palisades XXIII”), VATIV Recovery Solutions LLC (“VATIV”), ASFI Pegasus Holdings, LLC (“ASFI”), 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”)), Arthur Funding LLC (“Arthur Funding”) (formerly known as 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 servicing of personal injury claims, through the Company's wholly owned subsidiaries Sylvave, Simia and Arthur Funding, social security disability advocacy through the Company's wholly owned subsidiaries GAR Disability Advocates and Five Star and the business of purchasing, managing for its own account and servicing distressed charged off consumer receivables, including charged off receivables, and semi-performing receivables. We were incorporated in the State of Delaware on August 2, 1995.

  

Financial Information about Operating Segments

 

The Company operates through strategic business units principally in the United States that are aggregated into three reportable segments: consumer receivables, social security disability advocacy and personal injury claims. 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 charged off receivables, including charged off consumer receivables, and semi-performing receivables. 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 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

   

This segment conducts its business solely in the United States and is comprised of purchased interests in personal injury claims from claimants who are a party to a personal injury claim. The Company advances to each claimant funds on a non-recourse basis at an agreed upon fee, in anticipation of a future settlement. The fee in each claim purchased consist of the right to receive, from such claimant, part of the proceeds or recoveries which such claimant receives by reason of a settlement, judgment or award with respect to such claimant’s claim. The Company historically funded personal injury claims in Simia and Sylvave. Simia commenced operations in January 2017 and ceased funding new advances in June 2017. Simia and Sylvave are not funding any new advances, but continue to collect on outstanding personal claim advances in the ordinary course. The Company formed a new wholly owned subsidiary, Practical Funding on March 16, 2018, to continue in the personal injury claims funding business. On April 8, 2019, Practical Funding changed its name to Arthur Funding, LLC. Arthur Funding began funding advances on personal injury claims in May 2019.

 

 Social Security Disability Advocacy

 

This segment consists of advocacy groups representing individuals throughout the United States in their claims for social security disability and supplemental social security income benefits from the Social Security Administration and Department of Veterans Affairs.

  

 

The following table summarizes the net revenues by percentage from the three lines of business for the fiscal years 2019 and 2018:

 

   

Year Ended September 30,

 
   

2019

   

2018

 

Finance income (consumer receivables)

    66.6

%

    73.6

%

Personal injury claims income

    10.4       5.0  

Disability fee income

    23.0       21.4  
                 

Total revenues

    100.0

%

    100.0

%

  

Information about the results of each of the Company’s reportable segments for the last two fiscal years and total assets as of the end of the last two fiscal years, reconciled to the consolidated results, is set forth below. Separate segment Management Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is not provided, as segment revenue corresponds to the revenue presented in the Company's consolidated statement of operations, and material expense items are not allocable to any specific segment.

 

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

 

(Dollars in millions)

 

Consumer

Receivables

   

Social

Security

Disability

Advocacy

   

Personal

Injury

Claims (2)

   

Corporate (3)

   

Total

 

Fiscal Year Ended September 30,

                                       

2019:

                                       

Revenues

  $ 14.0     $ 4.9     $ 2.2     $     $ 21.1  

Other income (4)

    0.8                   1.5       2.3  

Segment profit (loss)

    12.4       1.5       2.2       (6.3

)

    9.8  

Segment Assets (1)

    8.9       0.7       5.6       75.5       90.7  

2018:

                                       

Revenues

    15.9       4.6       1.1       -       21.6  

Other income (4)

    4.0       -       -       0.5       4.5  

Segment profit (loss)

    17.8       1.1       1.1       (10.4

)

    9.6  

Segment Assets (1)

    12.4       1.0       11.9       59.4       84.7  

 

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 other income is approximately $0.6 million and $4.0 million, respectively, in gain on settlements for the year ended September 30, 2019 and 2018.

  

Principal Markets and Methods of Distribution

 

All of the Company’s lines of business are principally conducted in the United States, with approximately $1.4 million of the consumer receivables as of September 30, 2019, and $1.0 million of finance income for fiscal 2019 originating and being serviced overseas.

 

 

Consumer Receivables

 

Prior to purchasing a portfolio, we perform a qualitative and quantitative analysis of the underlying receivables and calculate the purchase price which is intended to offer us an adequate return on our investment after servicing expenses. After purchasing a portfolio, we actively monitor performance and review and adjust our collection and servicing strategies accordingly.

 

We purchase receivables from credit grantors and others through privately negotiated direct sales. We fund portfolios through internally generated cash flow.

 

Our objective is to maximize our return on investment in acquired consumer receivable portfolios. As a result, before acquiring a portfolio, we analyze the portfolio to determine how to best maximize collections in a cost-efficient manner.

 

The consumer receivable portfolios generally consist of one or more of the following types of consumer receivables: 

 

 

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

 

 

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

 

When we outsource the servicing of receivables, our management typically determines the appropriate third-party collection agencies and attorneys based on the type of receivables purchased. Once a group of receivables is sent to third-party collection agencies and attorneys, our management actively monitors and reviews the third-party collection agencies’ and attorneys’ performance on an ongoing basis. Based on portfolio performance considerations, our management may move certain receivables from one third-party collection agency or attorney to another. Our internal collection unit, which currently employs collection-related staff and senior management, assists us in benchmarking our third-party collection agencies and attorneys, and provides us with flexibility for servicing a portion of our consumer receivable portfolios in-house.

 

Personal Injury Claims

 

Simia and Sylvave are not funding any new advances, but remain in business to liquidate their existing personal injury claim advance portfolios. Arthur Funding relies on generating business from attorneys.

  

Social Security Disability Advocacy

 

GAR Disability Advocates and Five Star provide their social security disability advocacy services throughout the United States. GAR Disability Advocates relies upon search engine optimization (“SEO”) to bring awareness to it’s intended market.

 

Industry Overview

 

Consumer Receivables

 

The purchasing, servicing and collection of distressed charged-off consumer receivables is an industry that is driven by:

 

 

increasing levels of consumer debt;

 

increasing defaults of the underlying receivables; and

 

increasing utilization of third-party providers to collect such receivables.

  

Personal Injury Claims

 

The funding of non-recourse personal injury claims is driven by the growth of the market for financing personal injury claims. Individuals with personal injury claims incur current cash obligations which will not be recouped until insurance settlements are paid, or adjudicated in favor of the plaintiff, if at all. These funding contracts require a lien on the proceeds of either the settlement or the favorable resolution. The demand for providing financing to individuals in need of short-term funds pending insurance settlements of their personal injury claims is driven by the long periods of time taken by the insurance industry to settle and pay such claims, primarily due to lengthy litigation and the court process.

   

 

Social Security Disability Advocacy 

 

The social security disability advocacy industry is driven by the increasing number of social security and disability applicants who find it difficult to obtain such benefits without the aid of third party assistance.

 

Strategy 

 

Consumer Receivables

 

Our primary objective both domestically and internationally is to utilize our management’s experience and expertise by identifying, evaluating, pricing and acquiring consumer receivable portfolios and maximizing collections of such receivables in a cost efficient manner. Our strategies include:

 

 

managing the collection and servicing of our consumer receivable portfolios, including outsourcing those activities to maintain low fixed overhead by partnering with experienced collection and debt buying firms;

 

 

selling accounts on an opportunistic basis; and

 

 

capitalizing on our strategic relationships to identify and acquire consumer receivable portfolios as pricing, financing and conditions permit.

 

Personal Injury Claims

 

Arthur Funding relies on developing new and existing relationships with attorneys.   

 

Social Security Disability Advocacy 

 

In fiscal year 2019, GAR Disability Advocates and Five Star continue to assist claimants in securing disability benefits from the Social Security Administration and Department of Veterans Affairs.

  

Operations

 

Consumer Receivables

 

      The Operations Servicing Division of consumer receivables consists of the Collection Department, which handles disputes and correspondence, and the Accounting and Finance Department.

 

Collection Department

 

The Collection Department is responsible for making contact with and receiving calls from consumers for the purpose of collecting upon the accounts contained in our consumer receivables portfolios. The Collection Department uses a friendly, customer service approach to collect receivables and utilizes collection software, a dialer and telephone system to accomplish this goal. Each collector is responsible for:

 

Initiating outbound collection calls and handling incoming calls from the consumer;

 

Identifying the debt and iterating the benefits of paying the obligation;

 

Working with the customer to develop acceptable means of satisfying the obligation; and

 

Offering (if necessary, and based upon the individual situation) an obligor a discount on the overall obligation.

  

Accounting and Finance Department

 

In addition to customary accounting activities, the Accounting and Finance Department is responsible for:

  

Making daily deposits of customer payments;

 

Posting payments to customers accounts; and

 

Providing senior management with daily, weekly and monthly receivable activity and performance reports.

 

Additionally, the Accounting Department and management review the results of the collection of consumer receivable portfolios that are being serviced by third-party collection agencies and attorneys. The Accounting and Finance Department also participates in the internal auditing and consolidation of all business segments.

   

 

Personal Injury Claims

 

The operations of the personal injury claims unit includes:

 

Sales/Underwriting/Collections - The underwriting group is responsible for analyzing the merits of the personal injury claims, collections of the portfolio and for business development and sales.

 

Accounting - The Accounting Group is responsible for the reporting of all the financial operations of the personal injury claims unit. 

 

 Social Security Disability Advocacy

  

GAR Disability Advocates and Five Star consist of the following departments:

 

Sales/Marketing - The Sales Group is responsible for the sales strategy and advertising campaigns.

 

Intake - The Intake Department is responsible for client development, including screening leads and developing information on individual cases.

 

Case Management - The Case Management Department oversees client claims, in an attempt to obtain social security disability benefits. 

 

Accounting - The Accounting Group is responsible for the reporting of all the financial operations of the social security disability segment.

 

Marketing

 

Consumer Receivables

 

The Company did not make any consumer debt purchases in fiscal year 2019. We have expanded relationships with credit providers internationally. We are working to expand our name recognition internationally by attending international conferences, utilizing email solicitations and attending face-to-face bank meetings.

 

Personal Injury Claims

 

Arthur Funding relies on internal sales, underwriting and attorneys to enhance our presence in the market.

  

Social Security Disability Advocacy

 

Security Disability Advocacy utilizes SEO to bring more awareness to prospective clients.  

 

 

Competition

 

Consumer Receivables

 

With the competitive nature of the domestic market, there are strategic advantages of acquiring portfolios internationally in countries such as Colombia and Peru. We cannot assure that the international competition will not increase in the future, affecting our consumer receivables financial performance.

 

We compete with:

 

 

other purchasers of consumer receivables, including third-party collection companies; and

 

 

other financial services companies who purchase consumer receivables.

 

Some of our competitors are larger and more established and may have substantially greater financial, technological, personnel and other resources than we have, including greater access to the credit and capital markets.

      

 

We compete in the marketplace for consumer receivable portfolios based on many factors, including:

 

 

purchase price;

 

 

representations, warranties and indemnities requested;

 

 

timeliness of purchase decisions; and

 

 

reputation.

 

We cannot assure that we will be able to compete successfully against current or future competitors or that competition will not increase in the future. 

 

Personal Injury Claims

 

The litigation funding business is highly competitive and fragmented, and we expect that competition from new and existing companies will continue. We compete in the litigation funding marketplace based on many factors, including:

 

cost of funds advanced;

       

reputation; and

 

marketing costs.

 

We believe that our personal injury claims funding management team has expertise and experience in identifying, evaluating, pricing, and managing the funding of personal injury claim cases. However, we cannot assure that our litigation funding businesses will be able to compete against current or future competitors or that competition will not increase in the future.

   

 Social Security Disability Advocacy

 

The social security disability advocacy environment is competitive. We believe that the management of GAR Disability Advocates and Five Star have the knowledge to compete in this environment. Nevertheless, we can offer no assurance that the business will remain competitive against current and future competitors.

 

 Seasonality and Trends

 

Consumer Receivables

 

Our management believes that our operations may, to some extent, be affected by high delinquency rates and by lower recoveries on consumer receivables acquired for liquidation during or shortly following certain holiday periods.

 

Personal Injury Claims

 

There are no discernible trends to indicate seasonality in the personal injury claims business.

  

Social Security Disability Advocacy 

 

There is no indication that seasonality has any noticeable impact on the social security disability process.

     

Technology

 

Consumer Receivables

 

We believe that a high degree of automation is necessary to enable us to grow and successfully compete with other companies in our business sector. Accordingly, we continually look to upgrade our technology systems to support the servicing and recovery of consumer receivables acquired for liquidation. Our telecommunications and technology systems allow us to quickly and accurately process large amounts of data necessary to purchase and service consumer receivable portfolios. In addition, we rely on the information technology of our third-party collection agencies and attorneys and periodically review their systems to ensure that they can adequately service the consumer receivable portfolios outsourced to them.

 

Due to our desire to increase productivity through automation, we periodically review our systems for possible upgrades and enhancements. We are continually working to enhance our international systems capabilities enabling us to effectively compete in the international marketplace.

 

 

Personal Injury Claims

 

Arthur Funding will be dependent on its website to maintain and increase its business and, therefore, must remain current in its technology.

  

Social Security Disability Advocacy 

 

GAR Disability and Five Star rely on substantial use of SEO and, therefore, endeavor to remain current technologically.

 

Government Regulation

 

Consumer Receivables

 

Our businesses are subject to extensive federal and state regulations. The relationship of a consumer and a creditor is extensively regulated by federal, state and local laws, rules, regulations and ordinances. These laws include, but are not limited to, the following federal statutes and regulations: the Federal Truth-In-Lending Act, the Fair Credit Billing Act (“FCBA”), the Equal Credit Opportunity Act and the Fair Credit Reporting Act (“FCRA”), as well as comparable statutes in states where consumers reside and/or where creditors are located. Among other things, the laws and regulations applicable to various creditors impose disclosure requirements regarding the advertisement, application, establishment and operation of credit card accounts or other types of credit programs. Federal law requires a creditor to disclose to consumers, among other things, the interest rates, fees, grace periods and balance calculation methods associated with their accounts. In addition, consumers are entitled to have payments and credits applied to their accounts promptly, to receive prescribed notices and to request that billing errors be resolved promptly. Moreover, some laws prohibit certain discriminatory practices in connection with the extension of credit. Further, state laws may limit the interest rate and the fees that a creditor may impose on consumers. Failure by creditors to comply with applicable laws could create claims and rights of offset by consumers that would reduce or eliminate their obligations, which could have a material adverse effect on our operations. Pursuant to agreements under which we purchase receivables, we are typically indemnified against losses resulting from the failure of the creditor to have complied with applicable laws relating to the receivables prior to our purchase of such receivables.

 

Certain laws, including the laws described above, may limit our ability to collect amounts owing with respect to the receivables regardless of any act or omission on our part. For example, under the FCBA, a credit card issuer may be subject to certain claims and defenses arising out of certain transactions in which a credit card is used if the consumer has made a good faith attempt to obtain satisfactory resolution of a problem relative to the transaction and, except in cases where there is a specified relationship between the person honoring the card and the credit card issuer, the amount of the initial transaction exceeds $50 and the place where the initial transaction occurred was in the same state as the consumer’s billing address or within 100 miles of that address. Accordingly, as a purchaser of defaulted receivables, we may purchase receivables subject to valid defenses on the part of the consumer. Other laws provide that, in certain instances, consumers cannot be held liable for, or their liability is limited to $50 with respect to, charges to the credit card credit account that were a result of an unauthorized use of the credit card account. No assurances can be given that certain of the receivables were not established as a result of unauthorized use of a credit card account, and, accordingly, the amount of such receivables may not be collectible by us. 

 

Several federal, state and local laws, rules, regulations and ordinances, including, but not limited to, the Fair Debt Collection Practices Act (“FDCPA”) and the Federal Trade Commission Act and comparable state statutes, regulate consumer debt collection activity. Although, for a variety of reasons, we may not be specifically subject to the FDCPA or certain state statutes that govern third-party debt collectors, it is our policy to comply with laws in our collection activities. Additionally, our third-party collection agencies and attorneys may be subject to these laws. To the extent that some or all of these laws apply to our collection activities or our third-party collection agencies’ and attorneys’ collection activities, failure to comply with such laws could have a material adverse effect on the business, results of operations, cash flows or financial condition.

 

In order to comply with the foregoing laws and regulations, we provide a comprehensive development training program for our new collection/dispute department representatives and on-going training for all collection/dispute department associates. All collection and dispute representatives are tested annually on their knowledge of the FDCPA and other applicable laws. Account representatives not achieving our minimum standards are required to complete a FDCPA review session and are then retested. In addition, annual supplemental instruction in the FDCPA and collection techniques is provided to all our account representatives.

 

There are significant corporate governance and executive compensation-related provisions in the Dodd Frank Wall Street Reform and Provision Act (“Dodd-Frank Act”) that required the Securities and Exchange Commission (“SEC”) to adopt additional rules and regulations in areas such as corporate governance, and executive compensation. Our efforts to comply with these requirements have resulted in an increase in expenses and a diversion of management’s time from other business activities. We are subject to changing rules and regulations of federal and state governments, the Public Company Accounting Oversight Board (“PCAOB”), the Financial Industry Regulatory Authority, Inc. (“FINRA”) and the NASDAQ Global Market, all of which have issued a significant number of new and increasingly complex requirements and regulations over the course of the last several years and continue to develop additional regulations and requirements in response to laws enacted by Congress.

 

 

The Dodd-Frank Act subjects us to substantial additional federal regulation, and we cannot predict the effect of such regulation on our business, results of operations, cash flows or financial condition. Through the Dodd-Frank Act, Congress established the Consumer Financial Protection Bureau (the “CFPB”), which has regulatory, supervisory and enforcement authority over entities involved in consumer financial markets. The CFPB has the authority to conduct periodic examinations of “larger participants” in each market, and we believe it is likely that we will be subject to an examination.

 

The CFPB published a final rule that allows the agency to federally supervise the larger consumer debt collectors. The CFPB also released the field guide that examiners will use to ensure that companies and banks engaging in debt collection are following the law.

 

The consumer debt collection market covered by the rule includes three main types of debt collectors: first, firms that may buy defaulted debt and collect the proceeds for themselves; second, firms that may collect defaulted debt owned by another company in return for a fee; and third, debt collection attorneys that collect through litigation. A single company may be involved in any or all of these activities.

  

The CFPB’s supervisory authority over these entities began when the rule took effect on January 2, 2013. Under the rule, any firm that has more than $10 million in annual receipts from consumer debt collection activities will be subject to the CFPB’s supervisory authority. This authority will extend to about 175 debt collectors, which, according to the CFPB, account for over 60 percent of the industry’s annual receipts in the consumer debt collection market.

 

Pursuant to the CFPB’s supervisory authority, examiners assess potential risks to consumers and whether debt collectors are complying with requirements of federal consumer financial law. Among other things, examiners evaluate whether debt collectors provide required disclosures; use accurate information; maintain a consumer complaint and dispute resolution process; and communicate with consumers in the manner required by law.

 

The CFPB’s general Supervision and Examination Manual, as well as its examination manual specific to the debt collection market, provide guidance on how the bureau conducts its monitoring of debt collection activities. Examiners will evaluate the quality of the regulated entity’s compliance management systems, review practices to ensure they comply with federal consumer financial law, and identify risks to consumers throughout the debt collection process. The CFPB can seek relief that includes: rescission or reformation of contracts, restitution, disgorgement of profits, payment of damages, limits on activities and civil money penalties of up to $1 million per day for knowing violations.

 

As a company that engages in debt collection, we need to understand the oversight that the CFPB brings. Preparing for a CFPB audit will cost time and money. Additionally, the CFPB has the power to bring an enforcement action or cause a required settlement. In addition, the amount of privileged and confidential information the CFPB could release, can lead to private lawsuits, including class actions, as well as other state and federal agency oversight. 

 

The CFPB is expressly charged with prohibiting unfair, deceptive or abusive acts or practices. Through its broad powers to regulate and enforce federal consumer financial laws, the CFPB could place restrictions on our business, the businesses of our customers and the business of our affiliates, if the CFPB were to determine through rulemaking, supervisory or enforcement actions, for example, that particular acts or practices were unfair, deceptive or abusive to consumers.

 

The CFPB thus exercises supervisory authority over us. At this time, it is not possible or practical to attempt to provide a comprehensive analysis of how these laws and regulations may impact debt collectors.

 

Additionally, the Dodd-Frank Act empowers state attorneys general (or the equivalent thereof) to bring civil actions in federal district court (or a state court that is located in that state and that has jurisdiction over the defendant), to enforce Title X of the Act or regulations issued by the CFPB thereunder. Therefore, we could also be the subject of investigations and enforcement actions by the Federal Trade Commission or by state agencies (e.g., state attorneys general) with powers to enforce CFPB regulations and the FCRA. Additional laws or amendments to existing laws, may be enacted that could impose additional restrictions on the servicing and collection of receivables. Such new laws or amendments may adversely affect our ability to collect the receivables.

 

The Dodd-Frank Act authorized the CFPB to prescribe rules interpreting the FDCPA. On November 12, 2013, the CFPB signaled its intention to promulgate substantive rules under the FDCPA by publishing an Advance Notice of Proposed Rulemaking (ANPR) with regard to debt collection practices. The ANPR requested comments with regard to a wide array of issues relating to debt collection. On May 7, 2019, the CFPB published its proposed rule. The CFPB Director described the rule as an effort to “modernize the legal regime for debt collection” and ensure “clear rules of the road where consumers know their rights and debt collectors know their limitations.” Among other things, the proposed rule would:

 

 

limit debt collectors to no more than seven attempts by telephone per week to reach a consumer about a specific debt;

 

 

 

require debt collectors to send consumers a disclosure with certain information about the debt and related consumer protections within five days of the initial communication, including an itemization of the debt and plain-language information about how a consumer may respond to a collection attempt along with a “tear-off” that consumers could use to respond to the collection attempt;

 

 

prohibit debt collectors from suing or threatening to sue a consumer to collect a time-barred debt;

 

 

clarify how debt collectors may use technologies (developed after the FDCPA’s enactment in 1977), such as voicemail, email and text messages, to communicate with consumers; and

 

 

prohibit debt collectors from furnishing information about a debt to a consumer reporting agency unless the debt collector has communicated with the consumer about the debt.

 

The comment period on the proposed rule ended on September 18, 2019.    

 

The Company has and will continue to have a substantive compliance program and maintain procedures to ensure that the law is followed and that consumer complaints are dealt with in an appropriate fashion.

 

We currently hold a number of licenses issued under applicable consumer credit laws or other licensing statutes or regulations. Certain of our current licenses, and any licenses that we may be required to obtain in the future, may be subject to periodic renewal provisions and/or other requirements. Our inability to renew licenses or to take any other required action with respect to such licenses could have a material adverse effect upon our results of operation and financial condition.

 

Personal Injury Claims 

 

Numerous states have recently introduced legislation with respect to the litigation funding business, which, up to now, has been largely unregulated.  Recently proposed laws, while varying from state to state, generally would establish requirements for contracts relating to litigation funding, including setting maximum amounts of interest, fees and other charges that may be imposed.

  

Social Security Disability Advocacy 

 

The availability of funds to pay Social Security disability and Veteran's benefits, are dependent on governmental regulation and budgetary constraints, which could have a material impact on the GAR Disability Advocates and Five Star business.

 

Employees

 

As of September 30, 2019, we had a total of 56 full-time employees. We are not a party to any collective bargaining agreements.

  

Additional Information

 

Our web address is http://www.astafunding.com. Copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements, amendments thereto, and other SEC reports are available on our website as soon as reasonably practical after filing electronically with the SEC. No part of our website is incorporated by reference into this report.

 

Item 1A. 

Risk Factors. 

 

Note Regarding Risk Factors

 

You should carefully consider the risk factors below as well as risks identified throughout this Annual Report on Form 10-K and our other filings with the SEC in evaluating us. In addition to the following identified risks, there may also be risks that we do not yet know of or that we currently think are immaterial that may also impair our business operations. If any of the following risks occur, or if risks that we do not yet know or that we currently think are minor occur, our business, results of operations, cash flows or financial condition could be adversely affected, the trading price of our common stock could decline and stockholders might lose all or part of their investment. The risk factors presented below are those which we currently consider material. However, they are not the only risks facing our company. Additional risks not presently known to us, or which we currently consider immaterial, may also adversely affect us. There may be risks that a particular investor views differently from us, and our analysis might be wrong. If any of the risks that we face actually occur, our business, financial condition, cash flows and operating results could be materially adversely affected and could differ materially from any possible results suggested by any forward-looking statements that we have made or might make. In such case, the trading price of our common stock could decline, and you could lose part or all of your investment. Except as required by law, we expressly disclaim any obligation to update or revise any forward-looking statements.

 

 

We have concluded that there are material weaknesses in our internal control over financial reporting, which if not remediated, could materially adversely affected our ability to timely and accurately report our results of operations and financial condition. These material weaknesses have not been fully remediated as of the filing date of this Form 10-K and we cannot assure you that other material weaknesses will not be identified in the future. If we fail to maintain an effective system of internal controls, the accuracy and timing of our financial reporting may be adversely affected.

 

As described in “Part II, Item 9A - Controls and Procedures,” of this Form 10-K we have concluded that there are material weaknesses in our internal control over financial reporting and that our disclosure controls and procedures are ineffective as of September 30, 2019. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.  It is necessary for us to maintain effective internal control over financial reporting to prevent fraud and errors and to maintain effective disclosure controls and procedures so that we can provide timely and reliable financial and other information.

 

As further described in Part II, Item 9A in this Annual Report on Form 10-K, we are taking specific steps to remediate the material weaknesses that we identified by implementing and enhancing our control procedures. These material weaknesses will not be remediated until all necessary internal controls have been implemented, tested and determined to be operating effectively. In addition, we may need to take additional measures to address the material weaknesses or modify the planned remediation steps, and we cannot be certain that the measures we have taken, and expect to take, to improve our internal controls will be sufficient to address the issues identified, to ensure that our internal controls are effective or to ensure that the identified material weaknesses will not result in a material misstatement of our consolidated financial statements.

 

Moreover, other material weaknesses or deficiencies may develop or be identified in the future. If we are unable to correct material weaknesses or deficiencies in internal controls in a timely manner, our ability to record, process, summarize and report financial information accurately and within the time periods specified in the rules and forms of the U.S. Securities and Exchange Commission, will be adversely affected. This failure could negatively affect the market price and trading liquidity of our common stock, cause investors to lose confidence in our reported financial information, subject us to civil and criminal investigations and penalties, and otherwise materially and adversely impact our business and financial condition.

 

Government regulations may limit our ability to recover and enforce the collection of our receivables.

 

Federal, state and local laws, rules, regulations and ordinances may limit our ability to recover and enforce our rights with respect to the receivables acquired by us. These laws include, but are not limited to, the following federal statutes and regulations promulgated thereunder and comparable statutes in states and foreign jurisdictions, such as Colombia and Peru, where consumers reside and/or where creditors are located:

 

 

The Fair Debt Collection Practices Act;

 

 

The Federal Trade Commission Act;

 

 

The Truth-In-Lending Act;

 

 

The Fair Credit Billing Act;

 

 

The Equal Credit Opportunity Act;

 

 

The Fair Credit Reporting Act;

 

 

The Financial Privacy Rule;

 

 

The Safeguards Rule;

 

 

Telephone Consumer Protection Act;

 

 

Health Insurance Portability and Accountability Act (“HIPAA”)/Health Information Technology for Economical and Clinical Health Act (“HITECH”);

 

 

U.S. Bankruptcy Code; and

 

 

Credit Card Accountability Responsibility and Disclosure Act of 2009.

 

      We may be precluded from collecting receivables we purchase where the creditor or other previous owner or third-party collection agency or attorney failed to comply with applicable law in originating or servicing such acquired receivables. Laws relating to the collection of consumer debt also directly apply to our business. Our failure to comply with any laws applicable to us, including state licensing laws, could limit our ability to recover on receivables and could subject us to fines and penalties, which could reduce our earnings and result in a default under our loan arrangements. In addition, our third-party collection agencies and attorneys may be subject to these and other laws and their failure to comply with such laws could also materially adversely affect our finance income and earnings.

 

 

Additional laws or amendments to existing laws may be enacted that could impose additional restrictions on the servicing and collection of receivables. Such new laws or amendments may adversely affect the ability to collect on our receivables, which could also adversely affect our finance income and earnings.

 

Because our receivables are generally originated and serviced pursuant to a variety of federal, state and/or local laws by a variety of entities and may involve consumers in all 50 states, the District of Columbia, Puerto Rico and South America, there can be no assurance that all originating and servicing entities have, at all times, been in substantial compliance with applicable law. Additionally, there can be no assurance that we or our third-party collection agencies and attorneys have been or will continue to be at all times in substantial compliance with applicable law. Failure to comply with applicable law could materially adversely affect our ability to collect our receivables and could subject us to increased costs, fines and penalties.

 

We are subject to changing rules and regulations of federal and state government as well as the stock exchange on which our common stock is listed. These entities, including PCAOB, the SEC and the NASDAQ Global Market, have issued a significant number of new and increasingly complex requirements and regulations over the course of the last several years and continue to develop additional regulations and requirements in response to laws enacted by Congress.

 

  Changes in laws and governmental regulations could increase our costs and liabilities or impact our operations.

 

Title X of the Dodd-Frank Act (also referred to as the Consumer Financial Protection Act) created a new independent regulator, CFPB. The CFPB has rulemaking, supervisory, and enforcement and other authorities relating to consumer financial products and services, including debt collection, provided by covered persons. We are subject to the CFPB's supervisory and enforcement authority.

 

The relationship between consumers, lenders and credit card issuers is extensively regulated by consumer protection and related laws and regulations. Changes in laws and regulations or the manner in which they are interpreted or applied may alter our business environment. This could affect our results of operations or increase our liabilities. These negative impacts could result from changes in collection laws, laws related to credit reporting, statutes of limitation, laws related to consumer bankruptcy or insolvency, privacy protection, accounting standards, taxation requirements, employment laws and communications laws, among others.

 

The CFPB also accepts debt collection consumer complaints and has provided form letters for consumers to use in their correspondences with debt collectors. The CFPB makes publicly available its data on consumer complaints, and consumer complaints against us could result in reputational damage to us. The Dodd-Frank Act also mandates the submission of multiple studies and reports to Congress by the CFPB, and CFPB staff is regularly making speeches on topics related to credit and debt. All of these activities could trigger additional legislative or regulatory action.

 

The CFPB has rulemaking authority with respect to significant federal statutes that impact the debt collection industry, including the Federal Debt Collection Practices Act ("FDCPA"), the Fair Credit Reporting Act ("FCRA"), and Section 5 of the Federal Trade Commission ("FTC Act"), which prohibits unfair or deceptive acts or practices. As a result, the CFPB has the authority to adopt regulations that interpret the FDCPA, and the FTC Act, potentially describing specified acts and practices as being "unfair," "deceptive" or "abusive," impacting the manner in which we conduct our debt collection business.

 

The CFPB has the authority to conduct hearings and adjudication proceedings, impose monetary penalties for violations of applicable federal consumer financial laws (including Title X of the Dodd-Frank Act, FDCPA, and FCRA, among other consumer protection statutes) which may require remediation of practices and include enforcement actions. The CFPB also has the authority to obtain cease and desist orders (which can include orders for restitution or rescission of contracts, as well as other kinds of affirmative relief), costs, and monetary penalties. In addition, where a company has violated Title X of the Dodd-Frank Act or CFPB regulations implemented thereunder, the Dodd-Frank Act empowers state Attorneys General and other state regulators to bring civil actions to remedy violations under state law. The CFPB has been active in its supervision, examination and enforcement of financial services companies, most notably bringing enforcement actions imposing fines and mandating large refunds to customers of several financial institutions for practices relating to the extension and collection of consumer credit. If the CFPB, the FTC, acting under the FTC Act or other applicable statute such as the FDCPA, or one or more state Attorneys General or other state regulators make findings that we have violated any of the applicable laws or regulations, they could exercise their enforcement powers in ways that could have an adverse effect on our business, results of operations, cash flows, or financial condition.

 

We may become subject to additional costs or liabilities in the future resulting from our own or our vendors' supervision or examination by the CFPB, or by changes in, or additions to, laws and regulations that could adversely affect our results of operations and financial condition. Further, we cannot definitively predict the scope and substance of any such laws or regulations ultimately adopted by the CFPB related to our activities and the exact efforts required by us to comply therewith, nor can we have any way to know with certainty the ultimate impact on our business, results of operations, cash flows, and financial condition that such regulations may have.

 

 

Investigations or enforcement actions by governmental authorities may result in changes to our business practices; negatively impact our receivables portfolio purchasing volume; make collection of receivables more difficult or expose us to the risk of fines, penalties, restitution payments and litigation .

 

Our business practices are subject to review from time to time by various governmental authorities and regulators, including the Consumer Financial Protection Bureau ("CFPB"), which may commence investigations or enforcement actions or reviews targeted at businesses in the financial services industry. These reviews may involve governmental authority consideration of individual consumer complaints, or could involve a broader review of our debt collection policies and practices. Such investigations could lead to assertions by governmental authorities that we are not complying with applicable laws or regulations. In such circumstances, authorities may request or seek to impose a range of remedies that could involve potential compensatory or punitive damage claims, fines, restitution payments, sanctions or injunctive relief, that if agreed to or granted, could require us to make payments or incur other expenditures that could have an adverse effect on our financial position. Government authorities could also request or seek to require us to cease certain of our practices or institute new practices.

   

We may also elect to change practices that we believe are compliant with applicable law and regulations in order to respond to the concerns of governmental authorities. In addition, we may become required to make changes to our internal policies and procedures in order to comply with new statutory and regulatory requirements under the Dodd-Frank Act or other applicable laws. Such changes in practices or procedures could negatively impact our results of operations. Negative publicity relating to investigations or proceedings brought by governmental authorities could have an adverse impact on our reputation, could harm our ability to conduct business with industry participants, and could result in financial institutions reducing or eliminating sales of receivables portfolios to us which would harm our business and negatively impact our financial results. Moreover, changing or modifying our internal policies or procedures, responding to governmental inquiries and investigations and defending lawsuits or other proceedings could require significant efforts on the part of management and result in increased costs to our business. In addition, such efforts could divert management's full attention from our business operations. All of these factors could have an adverse effect on our business, results of operations, and financial condition.

  

We may not be able to purchase consumer receivable portfolios domestically and internationally at favorable prices or on sufficiently favorable terms if at all.

 

Our success in the consumer receivables business segment depends upon the continued availability of consumer receivable portfolios that meet our purchasing criteria and our ability to identify and finance the purchases of such portfolios. The availability of consumer receivable portfolios at favorable prices and on terms acceptable to us, if at all, depends on a number of factors outside of our control, including:

 

 

the growth in consumer debt;

 

 

the volume of consumer receivable portfolios available for sale;

   

 

availability of financing to fund purchases;

 

 

competitive factors affecting potential purchasers and sellers of consumer receivable portfolios; 

 

 

possible future changes in the bankruptcy laws, state laws and homestead acts which could make it more difficult for us to collect, and

 

 

The foreign exchange rate changes of the countries in which we do business.

 

There is no assurance that we will realize the full value of the deferred tax asset.

 

As of September 30, 2019, we had a net deferred tax asset of $9.6 million. Our ability to use our deferred tax asset is dependent on our ability to generate future earnings within the operating loss carry-forward periods, which are generally 20 years. Some or all of our deferred tax asset could expire unused if we are unable to generate taxable income in the future sufficient to utilize the deferred tax asset, or we enter into transactions that limit our right to use it. If a material portion of our deferred tax asset expires unused, it could have a material adverse effect on our future business, results of operations, financial condition and the value of our common stock. Our ability to realize the deferred tax asset is periodically reviewed and any necessary valuation allowance is adjusted accordingly.

 

Additionally, on December 22, 2017 the Tax Cuts and Jobs Act (the “Act”) was signed into law. Among other provisions, the Act reduces the Federal statutory corporate income tax rate from 35% to 21%. This rate reduction had a significant impact on our provisions for income taxes for periods beginning after September 30, 2017, including a one-time impact resulting from the revaluation of our deferred tax assets and liabilities to reflect the new lower rate. Our assessment of the Act resulted in a one-time charge to income taxes of approximately $3.7 million for the year ended September 30, 2018.

 

 

We may not be able to collect sufficient amounts on our consumer receivable portfolios to recover the costs associated with the purchase of those portfolios and to fund our operations.

 

We acquire and collect on consumer receivable portfolios that contain charged-off receivables. In order to operate profitably over the long term, we must continually purchase and collect on a sufficient volume of receivables to generate revenue that exceeds our purchase costs. For accounts that are charged-off or semi-performing, the originators or interim owners of the receivables generally have:

 

 

made numerous attempts to collect on these obligations, often using both their in-house collection staff and third-party collection agencies; and/or

 

 

subsequently deemed these obligations to be uncollectible.

 

These receivable portfolios are purchased at significant discounts to the amount the consumers owe. These receivables are difficult to collect and actual recoveries may be less than the amount expected. In addition, our collections may worsen in a weak economic cycle. We may not recover amounts in excess of our acquisition and servicing costs.

 

Our ability to recover the purchase costs on our portfolios and produce sufficient returns can be negatively impacted by the quality of the purchased receivables. In the normal course of our portfolio acquisitions, some receivables may be included in the portfolios that fail to conform to certain terms of the purchase agreements and we may seek to return these receivables to the seller for payment or replacement receivables. However, we cannot guarantee that any of such sellers will be able to meet their payment obligations to us. Accounts that we are unable to return to sellers may yield no return. If cash flows from operations are less than anticipated as a result of our inability to collect sufficient amounts on our receivables, our ability to satisfy our debt obligations, purchase new portfolios, and achieve future growth and profitability may be materially adversely affected.

 

We may be subject to competition for the purchase of international consumer receivable portfolios which may result in an increase in prices of such portfolios.

 

We compete with other purchasers of consumer receivable portfolios, with third-party collection agencies and with financial services companies that manage their own consumer receivable portfolios. We compete on the basis of price, reputation, industry experience and performance. Some of our competitors have greater capital, personnel and other resources than we have. The possible entry of new competitors, including competitors that historically have focused on the acquisition of different asset types, and the expected increase in competition from current market participants may reduce our access to consumer receivable portfolios. Aggressive pricing by our competitors has raised the price of consumer receivable portfolios above levels that we are willing to pay, which could reduce the number of consumer receivable portfolios suitable for us to purchase or if purchased by us, reduce the profits, if any, generated by such portfolios. If we are unable to purchase receivable portfolios at favorable prices or at all, our finance income and earnings could be materially reduced.

 

We depend upon third parties to service a significant portion of our domestic and international consumer receivable portfolios. The loss of certain servicers could have an adverse effect on our financial position and results of operation.

 

At September 30, 2019, approximately 28% of our portfolio face value, which represents approximately 86% of our portfolio face value at all third-party collection agencies and attorneys, is serviced by four organizations domestically and one organization internationally. We are dependent upon the efforts of these collection agencies and attorneys to service and collect our consumer receivables. Any failure by our third-party collection agencies and attorneys to adequately perform collection services for us or remit such collections to us could materially reduce our finance income and our profitability. In addition, our finance income and profitability could be materially adversely affected if we are not able to secure replacement third party collection agencies and attorneys and redirect payments from the customers to our new third party collection agencies and attorneys promptly in the event our agreements with our third-party collection agencies and attorneys are terminated, our third-party collection agencies and attorneys fail to adequately perform their obligations or if our relationships with such third-party collection agencies and attorneys adversely change.

  

We may rely on third parties to locate, identify and evaluate consumer receivable portfolios available for purchase.

 

We may rely on third parties, including brokers and third-party collection agencies and attorneys, to identify consumer receivable portfolios and, in some instances, to assist us in our evaluation and purchase of these portfolios. As a result, if such third parties fail to identify receivable portfolios or if our relationships with such third parties are not maintained, our ability to identify and purchase additional receivable portfolios could be materially adversely affected. In addition, if we, or such parties, fail to correctly or adequately evaluate the value or collectability of these consumer receivable portfolios, we may pay too much for such portfolios and suffer an impairment, which would negatively impact our earnings.

 

 

We rely on our third-party collectors to comply with all rules and regulations and maintain proper internal controls over their accounting and operations.

 

Because the receivables were originated and serviced pursuant to a variety of federal and/or state laws by a variety of entities and involved consumers in all 50 states, the District of Columbia, Puerto Rico, Columbia and Peru, there can be no assurance that all original servicing entities have, at all times, been in substantial compliance with applicable laws. Additionally, there can be no assurance that we or our third-party collection agencies and attorneys have been or will continue to be at all times in substantial compliance with applicable laws. The failure to comply with applicable laws and not maintain proper controls in accounting and operations could materially adversely affect our ability to collect our receivables and could subject us to increased costs, fines and penalties.

 

Our collections may decrease if bankruptcy filings increase.

 

During times of economic uncertainty, the amount of defaulted consumer receivables generally increases, which contributes to an increase in the amount of personal bankruptcy filings. Under certain bankruptcy filings, a debtor’s assets are sold to repay credit originators, but since the defaulted consumer receivables we purchase are generally unsecured, we may not be able to collect on those receivables. Our collections may decline with an increase in bankruptcy filings. If our actual collection experience with respect to a defaulted consumer receivable portfolio is significantly lower than we projected when we purchased the portfolio, our earnings could be negatively affected.

 

We are subject to various risks in connection with our litigation funding business.

 

Risks of the litigation funding business include the potential regulation or limitation of interest rates and other fees advanced by our litigation funding subsidiaries under federal and/or state regulation, a change in statutory or case law which limits or restricts the ability of our litigation funding subsidiaries to charge or collect fees and interest at anticipated levels, claimants being unsuccessful in whole or in part in the personal injury claims or divorce settlement upon which our funds are provided, the continued services of the senior management of our litigation funding subsidiaries to source and analyze cases in accordance with the subsidiaries’ respective underwriting guidelines. In addition, negative press regarding the litigation funding business could trigger challenges to funding contracts, have an adverse impact on our reputation, or harm our ability to conduct business with industry participants.

 

 The loss of any of our executive officers may adversely affect our operations and our ability to successfully acquire receivable portfolios.

 

Our executive officers are responsible for making substantially all management decisions, including determining which portfolios to purchase, the purchase price and other material terms of such portfolio acquisitions. These decisions are instrumental to the success of our business. Significant losses of the services of our executive officers or the inability to replace our officers with individuals who have experience in the industry or with the Company could disrupt our operations and adversely affect our ability to successfully acquire receivable portfolios.

 

The Stern family effectively controls the Company, substantially reducing the influence of our other stockholders.

 

Members of the Stern family own directly or indirectly, approximately 62% of our outstanding shares of common stock as of September 30, 2019. Through January 6, 2019, the Stern family, in conjunction with a voting agreement signed with an activist shareholder in January 2017; was limited to voting up to 49% of the outstanding shares. As a result, the Stern family is able to significantly influence the actions that require stockholder approval, including:

 

 

the election of our directors; and

 

 

the approval of mergers, sales of assets or other corporate transactions or matters submitted for stockholder approval.

 

As a result, our other stockholders may have reduced influence over matters submitted for stockholder approval. In addition, the Stern family’s influence could discourage any unsolicited acquisition of the Company and, consequently, materially adversely affect the price of our common stock.

 

On October 30, 2019, Gary M. Stern submitted a non-binding proposal (the “Proposal”) to acquire all of the outstanding shares of common stock. The Board of Directors is evaluating whether the acceptance of the Proposal is in the best interest of the Company and our shareholders. We are uncertain as to what impact the potential transaction by Mr. Stern or any other particular strategic alternative will have on our operating results, our stock price and our business if accomplished or whether any transaction will even occur. There can be no assurance that the review of the Proposal will result in any agreements or transactions. Other uncertainties and risks relating to our review of the Proposal include:

 

 

the review of the Proposal may disrupt our operations, affect morale and distract management which could have a material adverse effect on our operating results;

 

 

 

perceived uncertainties as to our future could have a negative impact on our relationships with customers and may result in the loss of business opportunities;

 

 

perceived uncertainties as to our future may result in increased difficulties in recruiting and retaining employees, particularly highly qualified employees; and

 

 

the process of reviewing the Proposal may be more time consuming and expensive than we currently anticipate.

 

Negative press regarding the debt collection industry may have a negative impact on a customer’s willingness to pay the debt we acquire.

 

Consumers are exposed to information from a number of sources that may cause them to be more reluctant to pay their debts or to pursue legal actions against us. Online, print and other media publish stories about the debt collection industry which cite specific examples of abusive collection practices. These stories can lead to the rapid dissemination of the story, adding to the level of exposure to negative publicity about our industry. Various internet sites are maintained where consumers can list their concerns about the activities of debt collectors and seek guidance from other website posters on how to handle the situation. Advertisements by debt relief attorneys and credit counseling centers are becoming more common, adding to the negative attention given to our industry. As a result of this negative publicity, customers may be more reluctant to pay their debts or could pursue legal action against us regardless of whether those actions are warranted. These actions could impact our ability to collect on the receivables we acquire and affect our revenues and profitability.

 

Class action suits and other litigation could divert our management’s attention from operating our business and increase our expenses.

 

Originators, debt purchasers and third-party collection agencies and attorneys in the consumer credit industry are frequently subject to putative class action lawsuits and other litigation. Claims include failure to comply with applicable laws and regulations and improper or deceptive origination and servicing practices. Being a defendant in such class action lawsuits or other litigation could materially adversely affect our results of operations and financial condition.

 

Economic slowdowns increase our credit losses. 

 

During periods of economic slowdown or recession, we experience an increase in rates of delinquencies and frequency and severity of credit losses. Our actual rates of delinquencies and frequency and severity of credit losses may be comparatively higher during periods of economic slowdown or recession than those experienced by more traditional providers of consumer credit because of our focus on the financially underserved consumer market, which may be disproportionately impacted.

 

Because a significant portion of our reported income is based on management’s estimates of the future performance of our asset portfolios and fees receivable, differences between actual and expected performance of the receivables may cause fluctuations in net income.

 

Significant portions of our reported income (or losses) are based on management’s estimates of cash flows we expect to receive on our asset portfolios and fees receivable, particularly for such assets that we report based on fair value. The expected cash flows are based on management’s estimates of interest rates, default rates, payment rates, cardholder purchases, servicing costs, and discount rates. These estimates are based on a variety of factors, many of which are not within our control. Substantial differences between actual and expected performance of the receivables will occur and cause fluctuations in our net income. For instance, higher than expected rates of delinquencies and losses could cause our net income to be lower than expected. Similarly, levels of loss and delinquency can result in our being required to repay our lenders earlier than expected, thereby reducing funds available to us for future growth.

 

We may determine to incur near-term losses based on longer-term strategic considerations.

 

We may consider long-term strategic considerations more important than near-term economic gains when assessing business arrangements and opportunities. We may nevertheless determine to participate in, or structure, future financing transactions based on longer-term strategic considerations.

 

We may experience losses on portfolios consisting of new types of receivables or receivables in new geographies due to our lack of collection experience with these receivables, which could harm our business, financial condition and operating results.

 

We continually look for opportunities to expand the classes of assets that make up the portfolios we acquire. Therefore, we may acquire portfolios consisting of assets with which we have little or no collection experience or portfolios of receivables in new geographies where we do not historically maintain an operational footprint. Our lack of experience with these assets may hinder our ability to generate expected levels of profits from these portfolios. Further, our existing methods of collections may prove ineffective for these new receivables, and we may not be able to collect on these portfolios. Our inexperience with these receivables may have an adverse effect on our business, financial condition and operating results.

  

 

We may not be able to manage our growth effectively, including the expansion of our foreign operations.

 

Continued growth will place additional demands on our resources, and we cannot be sure that we will be able to manage our growth effectively. For example, continued growth could place strains on our management, operations, and financial resources that our infrastructure, facilities, and personnel may not be able to adequately support. In addition, the recent expansion of our foreign operations subjects us to a number of additional risks and uncertainties, including:

 

 

compliance with and changes in international laws, including regulatory and compliance requirements that could affect our business;            

 

 

increased exposure to U.S. laws that apply abroad, such as the Foreign Corrupt Practices Act;

 

 

social, political and economic instability or recessions;

 

 

fluctuations in foreign economies and currency exchange rates;

 

 

difficulty in hiring, staffing and managing qualified and proficient local employees and advisors to run international operations;

 

 

the difficulty of managing and operating an international enterprise, including difficulties in maintaining effective communications with employees due to distance, language, and cultural barriers;

 

 

difficulties implementing and maintaining effective internal controls and risk management and compliance initiatives;

 

 

potential disagreements with our joint venture business partners;

 

 

differing labor regulations and business practices; and

 

 

foreign tax consequences.

 

To support our growth and improve our international operations, we continue to make investments in infrastructure, facilities, and personnel in our operations; however, these additional investments may not be successful or our investments may not produce profitable results. If we cannot manage our growth effectively, our business, financial condition and operating results may be adversely affected.  

 

 We may seek to make acquisitions that prove unsuccessful or strain or divert our resources. 

 

We may seek to grow through acquisitions of related businesses in the financial services sector. Such acquisitions present risks that could materially adversely affect our business and financial performance, including:

 

 

the diversion of our management’s attention from our everyday business activities;

 

 

the assimilation of the operations and personnel of the acquired business;

 

 

the contingent and latent risks associated with the past operations of, and other unanticipated problems arising in, the acquired business; and

 

 

the need to expand management, administration and operational systems.

 

If we make such acquisitions, we cannot predict whether:

 

 

we will be able to successfully integrate the operations of any new businesses into our business;

 

 

we will realize any anticipated benefits of completed acquisitions; or

 

 

there will be substantial unanticipated costs associated with acquisitions.

 

 

In addition, future acquisitions by us may result in:

 

 

potentially dilutive issuances of our equity securities;

  

 

the incurrence of debt; and

 

 

the recognition of significant charges for depreciation and impairment charges related to goodwill and other intangible assets.

 

If our technology infrastructure is not operational, our operations could be disrupted and our ability to successfully operate the business could be compromised.

 

Our success depends, in part, on sophisticated telecommunications and computer systems. The temporary loss of our computer or telecommunications systems, through casualty, operating malfunction or service provider failure, could disrupt our operations. In addition, we must record and process significant amounts of data quickly and accurately to properly bid on prospective acquisitions of receivable portfolios and to access, maintain and expand the databases we use for our collection and monitoring activities. Any failure of our information systems and their backup systems could interrupt our operations. We may not have adequate backup arrangements for all of our operations and we may incur significant losses if an outage occurs. In addition, we rely on third-party collection agencies and attorneys who also may be adversely affected in the event of an outage in which the third-party collection agencies and attorneys do not have adequate backup arrangements. Any interruption in our operations or our third-party collection agencies’ and attorneys’ operations could have an adverse effect on our results of operations and financial condition. We have implemented a disaster recovery program to mitigate this risk.

 

If we are unable to secure our customers’ confidential information or other private data relating to our employees or our Company, we could be subject to negative publicity, costly government enforcement actions or private litigation, which could damage our business reputation and adversely affect our financial results.

 

As with other companies, we are periodically subject to cyberattacks. Cyberattacks and other cyber incidents are occurring more frequently, are constantly evolving in nature, are becoming more sophisticated and are being made by groups and individuals (including criminal hackers, hacktivists, state-sponsored institutions, terrorist organizations and individuals or groups participating in organized crime) with a wide range of expertise and motives (including monetization of corporate, payment or other internal or personal data, theft of trade secrets and intellectual property for competitive advantage and leverage for political, social, economic and environmental reasons). Such cyberattacks and cyber incidents can take many forms including cyber extortion, denial of service, social engineering, such as impersonation attempts to fraudulently induce employees or others to disclose information or unwittingly provide access to systems or data, introduction of viruses or malware, such as ransomware through phishing emails, website defacement or theft of passwords and other credentials. Although we may incur significant costs in protecting against or remediating cyberattacks or other cyber incidents, no cyberattack or other cyber incident has, to our knowledge, had a material adverse effect on our business, financial condition or results of operations to date.

 

The protection of our customer, employee and company data is critical to us. The regulatory environment surrounding information security and privacy is increasingly demanding, with the frequent imposition of new and constantly changing requirements that affect our business. In addition, customers have a high expectation that we will adequately protect their personal information from cyberattack or other security breaches. We have procedures and technology in place designed to safeguard our customers’ personal information, our employees’ private data and company records, intellectual property and other confidential information, and we continue to devote significant resources to network security, backup and disaster recovery, and other security measures, including training, to protect our systems and data. Nevertheless, these security measures cannot provide absolute security or guarantee that we will be successful in preventing or responding to every such breach or disruption, including through the intentional or negligent actions of our employees, business associates or third parties. As a result, unauthorized parties may obtain access to our data systems and misappropriate customer data and company confidential information.

 

There can be no assurance that advances in computer capabilities, new discoveries in the field of cryptography or other developments will prevent the compromise of our customer transaction processing capabilities and personal data. Furthermore, because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If any such compromise of our security or the security of information residing with our business associates or third parties were to occur, we could be exposed to negative publicity, government enforcement actions, card issuer fines and/or penalties, private litigation or costly response measures. In addition, our reputation within the business community and with our customers may be affected. This could cause us to lose market share to our competitors and could have an adverse effect on our financial results.

 

 

 Our organizational documents and Delaware law may make it harder for us to be acquired without the consent and cooperation of our board of directors and management.

 

Several provisions of our organizational documents and Delaware law may deter or prevent a takeover attempt, including a takeover attempt in which the potential purchaser offers to pay a per share price greater than the current market price of our common stock. Under the terms of our certificate of incorporation, our Board of Directors has the authority, without further action by the stockholders, to issue shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof. The ability to issue shares of preferred stock could tend to discourage takeover or acquisition proposals not supported by our current Board of Directors. In addition, we are subject to Section 203 of the Delaware General Corporation Law, which restricts business combinations with some stockholders once the stockholder acquires 15% or more of our common stock.

  

Future sales of our common stock by our affiliates or other stockholders may depress our stock price.

 

Sales of a substantial number of shares of our common stock in the public market could cause a decrease in the market price of our common stock. We had 6,567,765 shares of common stock issued and outstanding as of December 16, 2019. Of these shares, 4,068,411 are owned by affiliates of the company, which are defined as in Rule 405 under the Act as a “person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with,” an issuer. In addition, options to purchase 722,567 shares of our common stock were outstanding as of September 30, 2019, of which 722,567 were exercisable. We may also issue additional shares in connection with our business and may grant additional stock options or restricted shares to our employees, officers, directors and consultants under our present or future equity compensation plans or we may issue warrants to third parties outside of such plans. As of September 30, 2019, there were 1,328,243 shares available for such purpose with such shares available under the 2012 Stock Option and Performance Award Plan. If a significant portion of these shares were sold in the public market, the market value of our common stock could be adversely affected.

 

We have the ability to issue preferred shares, warrants, convertible debt and other securities without stockholder approval, which could dilute the relative ownership interest of current stockholders and adversely affect our share price.

 

Future sales of our equity-related securities in the public market, could adversely affect the trading price of our common stock and our ability to raise funds in new stock offerings. Our common shares may be subordinate to classes of preferred shares issued in the future in the payment of dividends and other distributions made with respect to common shares, including distributions upon liquidation or dissolution. Our certificate of incorporation permits our Board of Directors to issue preferred shares without first obtaining stockholder approval. If we issued preferred shares, these additional securities may have dividend or liquidation preferences senior to our common shares. If we issue convertible preferred shares, a subsequent conversion may dilute the current common stockholders’ interest. We have similar abilities to issue convertible debt, warrants and other equity securities.

 

Our quarterly operating results may fluctuate and cause our stock price to decline.

 

Because of the nature of our business, our quarterly operating results may fluctuate, which may adversely affect the market price of our common stock. Our results may fluctuate as a result of any of the following:

 

 

the timing and amount of collections on our consumer receivable portfolios;

 

 

our inability to identify and acquire additional consumer receivable portfolios;

 

 

a decline in the estimated future value of our consumer receivable portfolio recoveries;

 

 

increases in operating expenses associated with the growth of our operations;

 

 

general and economic market conditions; and within various jurisdictions; and

 

 

prices we are willing to pay for consumer receivable portfolios.

 

 Our financial performance is subject to risks associated with changes in the value of the U.S. dollar versus local currencies.

 

Our primary exposure to movements in foreign currency exchange rates relates to non- U.S. dollar denominated revenues and operating expenses worldwide. The Company does not use derivative instruments, such as foreign currency forward and option contracts, to hedge certain exposures to fluctuations in foreign currency exchange rates.

 

 

Our business could be negatively affected as a result of actions of activist shareholders, and such activism could impact the trading value of our securities.

 

Responding to activist shareholders can be costly and time-consuming, disrupting our operations and diverting the attention of management and our employees. Such activities could interfere with our ability to execute our strategic plan. In addition, a proxy contest for the election of directors at our annual meeting would require us to incur significant legal fees and proxy solicitation expenses and require significant time and attention by management and our Board of Directors. The perceived uncertainties as to our future direction also could affect the market price and volatility of our securities.

 

We are a “smaller reporting company” and, as such, are allowed to provide less disclosure than larger public companies.

 

We are currently a “smaller reporting company,” as defined by Rule 12b-2 of the Exchange Act. As a “smaller reporting company,” we have certain decreased disclosure obligations in our SEC filings, which may make it harder for investors to analyze our results of operations and financial prospects and may result in less investor confidence.

 

Item 2. 

Properties 

 

Our executive and administrative offices are located in Englewood Cliffs, New Jersey, where we lease approximately 13,400 square feet of general office space. The lease was renewed September 1, 2015 and expires on August 31, 2020. 

 

Our office in Fort Lee, New Jersey occupies approximately 4,948 square feet of general office space. The lease expires on March 31, 2023. 

 

We believe that our existing facilities are adequate for our current needs.

 

Item 3. 

Legal Proceedings. 

 

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

 

Originators, debt purchasers and third-party collection agencies and attorneys in the consumer credit industry are frequently subject to putative class action lawsuits and other litigation. Claims include failure to comply with applicable laws and regulations and improper or deceptive origination and servicing practices. Being a defendant in such class action lawsuits or other litigation could materially adversely affect our results of operations and financial condition.

 

Legal proceedings are subject to substantial uncertainties concerning the outcome of material factual and legal issues relating to the litigation. Accordingly, we cannot currently predict the manner and timing of the resolution of some of these matters and may be unable to estimate a range of possible losses or any minimum loss from such matters.

 

On November 7, 2019, a shareholder of the Company filed a verified shareholder derivative complaint in the Court of Chancery of the State of Delaware against certain current and former officers and directors of the Company, and named the Company as a nominal defendant, alleging that certain actions taken by management constituted a violation of fiduciary duty to the Company.  The Company believes the lawsuit is without merit and intends to vigorously defend the matter.  

 

Item 4. 

Mine Safety Disclosures. 

 

Not applicable.

 

 

PART II

 

Item 5. 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.    

 

Market for Our Common Stock 

 

Our common stock is quoted on the NASDAQ Global Select Market under the symbol “ASFI.” High and low sales prices of our common stock as reported by NASDAQ are set forth below for the periods indicated (such quotations reflect inter-dealer prices without retail markup, markdown, or commission, and may not necessarily represent actual transactions):

  

   

High

   

Low

 

Fiscal Year 2018

               

October 1, 2017 to December 31, 2017

  $ 8.45     $ 7.05  

January 1, 2018 to March 31, 2018

    11.50       3.55  

April 1, 2018 to June 30, 2018

    4.05       3.25  

July 1, 2018 to September 30, 2018

    4.75       2.80  

Fiscal Year 2019

               

October 1, 2018 to December 31, 2018

  $ 4.50     $ 3.46  

January 1, 2019 to March 31, 2019

    5.22       4.04  

April 1, 2019 to June 30, 2019

    7.44       4.40  

July 1, 2019 to September 30, 2019

    8.71       6.70  

  

Dividends 

 

Future dividend payments will be at the discretion of our Board of Directors and will depend upon our financial condition, operating results, capital requirements and any other factors our board of directors deems relevant. In addition, agreements with potential lenders may, from time to time, restrict our ability to pay dividends. Currently there are no restrictions in place and the Company has no debt outstanding as of September 30, 2019. On February 5, 2018, we declared a special cash dividend in the amount of $5.30 per share with respect to our common stock, which was paid on February 28, 2018 to holders of record at the close of business on February 16, 2018. The aggregate payment to shareholders was approximately $35.4 million.

 

Holders of Our Common Stock

 

On September 30, 2019, there were 17 holders of record of our common stock.

 

 Issuer Purchases of Equity Securities

 

The Company repurchased 38,150 shares of its common stock during the three months ended September 30, 2019.

 

On May 17, 2019, the Board of Directors approved the repurchase of up to $10.5 million of the Company’s common stock and authorized management of the Company to enter into the Shares Repurchase Plan under Sections 10b-18 and 10(b)5-1 of the Securities and Exchange Act (the “Shares Repurchase Plan”). The Shares Repurchase Plan was effective through August 17, 2019. During the year ended September 30, 2019, the Company purchased 117,650 shares pursuant to the terms of the Shares Repurchase Plan.

 

 

The following table contains information about purchases by us of our common stock during the year ended September 30, 2019:

 

Period

 

Total Number

of Shares

Purchased

   

Average

Price Paid

per Share

   

Total Number of Shares

Purchased as

Part of Publicly Announced

Plans

   

Maximum Number (or

Approximate Dollar Value) of

Shares that May Yet Be

Purchased Under the Plans

 

April 1- 30, 2019

    -     $ -       -     $ -  

May 1- 31, 2019

    11,700     $ 7.05       11,700     $ 10,417,246  

June 1- 30, 2019

    67,800     $ 7.02       67,800     $ 9,939,750  

July 1- 31, 2019

    29,600     $ 7.39       29,600     $ 9,720,516  

August 1- 17, 2019

    8,550     $ 7.48       8,550     $ 9,656,380  

Year ended September 30, 2019

    117,650     $ 7.15       117,650     $ -  

 

Item 7. 

Management’s Discussion and Analysis of Financial Condition and Results of Operation. 

 

Caution Regarding Forward-Looking Statements

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties. All forward-looking statements included in this Annual Report on Form 10-K are based on information available to us on the date hereof, and except as required by law, we assume no obligation to update any such forward-looking statements. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the caption “Risk Factors” contained in this report and elsewhere herein. The following should be read in conjunction with our annual consolidated financial statements contained in Item 8 in this report.

 

Overview 

 

We are engaged in the businesses of acquiring, managing, servicing and recovering on portfolios of consumer receivables, assisting claimants in the process of social security disability claims and funding personal injury claims.

 

Consumer Receivables

 

The consumer receivable portfolios generally consist of charged-off receivables, which are accounts that have been written-off by the originators and may have been previously serviced by collection agencies.

 

We acquire these consumer receivable portfolios at a significant discount to the amount actually owed by the borrowers. We acquire these portfolios after a qualitative and quantitative analysis of the underlying receivables and calculate the purchase price so that our estimated cash flow offers us an adequate return on our investment after servicing expenses. After purchasing a portfolio, we actively monitor its performance and review and adjust our collection and servicing strategies accordingly.

 

We purchase receivables from credit grantors and others through privately negotiated direct sales, brokered transactions and auctions in which sellers of receivables seek bids from several pre-qualified debt purchasers. We pursue new acquisitions of consumer receivable portfolios on an ongoing basis through:

 

 

our relationships with industry participants, financial institutions, collection agencies, investors and our financing sources;

 

 

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

 

 

other sources.

 

Personal Injury Claims

 

On December 28, 2011, we entered into a joint venture, Pegasus Funding, LLC ("Pegasus"), with Pegasus Legal Funding, LLC (“PLF”). We had an 80% non-controlling interest in the joint venture from the date of formation through January 12, 2018. During this time period we had operational disagreements with PLF, resulting in the amendment of the Pegasus operating agreement, the execution of a liquidation agreement and finally our filing of an arbitration against PLF.

 

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

 

 

On January 12, 2018, ASFI entered into a Membership Interest Purchase Agreement (the “Purchase Agreement) with PLF. Under the Purchase Agreement, ASFI bought PLF’s ownership interests of Pegasus, which was 20% of the issued and outstanding limited liability company interests of Pegasus, for an aggregate purchase price of $1.8 million. As a result of the execution of the Purchase Agreement, ASFI became the owner of 100% of the limited liability company interests of Pegasus, and recognized a loss on acquisition of $1.4 million, which is recorded in our condensed consolidated financial statements. Immediately on acquisition, we changed the name from Pegasus to Sylvave.

 

As of January 12, 2018, we owned 100% of Pegasus, and commencing in the quarter ending March 31, 2018, the financial activity of Pegasus was consolidated into our financial statements. As of January 12, 2018, we were entitled to 100% of all distributions made from Pegasus.

 

On November 11, 2016, we formed Simia, a wholly owned subsidiary. Simia commenced funding personal injury settlement claims in January 2017. Simia was formed in response to our decision not to renew our joint venture with PLF. As of September 30, 2019, Sylvave’s net investment in personal injury claim advances were approximately $3.7 million, and Simia's personal injury claim advances were approximately $1.3 million.

 

The Company formed a new wholly owned subsidiary, Arthur Funding, on March 16, 2018 to continue in the personal injury claims funding business. Arthur Funding commenced funding personal injury settlement claims in May 2019. As of September 30, 2019, Arthur Funding’s net investment in personal injury claim advances were approximately $0.2 million. 

    

Divorce Funding

 

In February 2018, the Company filed a lawsuit against BP Divorce Funding and its principal for, among other things, breach of contract arising from the default. In May 2019, the Company entered into a settlement agreement and mutual release with BP Divorce Funding and its principal. Under the terms of the settlement, BP Divorce Funding’s principal is required to make periodic payments to the Company such that the outstanding balance of the loan will be repaid on or before January 21, 2022. The settlement calls for a balloon payment on or before January 21, 2022 of the then-outstanding balance of the loan, which is currently estimated to be approximately $900,000. The first payment of $25,000 was made on or about May 21, 2019. If any payment is not made in a timely manner, BP Divorce Funding’s principal may be declared in default of the settlement agreement.  

  

Social Security Disability Advocacy Business

 

GAR Disability Advocates and Five Star are disability advocacy groups, which for a fee obtain and represent individuals throughout the United States in their claims for social security disability, supplemental security income benefits from the Social Security Administration and veterans benefits with the Department of Veterans Affairs.

  

Structured Settlement Business - Discontinued Operations

 

On December 13, 2017, we sold all of our issued and outstanding equity capital in CBC Settlement Funding, LLC (“CBC”), our wholly owned subsidiary engaged in structured settlements. As a result of this sale, all periods presented in our consolidated financial statements accounted for CBC as a discontinued operation. This determination resulted in the reclassification of the historical assets and liabilities comprising our structured settlement business to assets and liabilities related to discontinued operations in the consolidated balance sheets, and a corresponding adjustment to our consolidated statements of operations to reflect discontinued operations for all periods presented. As of September 30, 2018, the Company had no assets or liabilities related to discontinued operations. Total revenues for the year ended September 30, 2018 was $2.2 million.

 

 Critical Accounting Policies

 

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

 

 

the interest method; or

 

 

the cost recovery method.

 

      Consumer Receivables  

 

Prior to October 1, 2013 the Company accounted for certain of its investments in Consumer receivables using the interest method in accordance with the guidance of Accounting Standards Codification (“ASC”) ASC 310 - 30. Under the guidance of ASC 310 - 30, static pools of accounts are established. These pools are aggregated based on certain common risk criteria. Each static pool is recorded at cost and is accounted for as a single unit for the recognition of income, principal payments and loss provision. Effective October 1, 2013, due to the substantial reduction of portfolios reported under the interest method, and the ability to reasonably estimate cash collections required to account for those portfolios under the interest method, the Company concluded the cost recovery method is the appropriate accounting method under the circumstances. 

 

 

Although the Company has switched to the cost recovery method on its current inventory of portfolios, the Company must still analyze a portfolio upon acquisition 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.

 

Personal Injury  

 

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 award with respect to such claimant’s claim. Open case revenue is estimated, recognized and accrued at a rate based on the expected realization and underwriting guidelines and facts and circumstances for each individual case. These personal injury claims are non-recourse. When a case is closed and the cash is received for the advance provided to a claimant, revenue is recognized based upon the contractually agreed upon interest rate, and, if applicable, adjusted for any changes due to a settled amount and fees charged to the claimant. 

 

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. 

 

Social Security Disability Advocacy  

 

     The Company recognizes revenue for GAR Disability Advocates when cases close and fees are collected or when the Company receives a notice of award from the Social Security Administration that stipulates the amount of fee approved by the SSA to be paid to the Company.

 

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. 

 

 

Results of Operations 

 

 The following discussion of our operations and financial condition should be read in conjunction with our financial statements and notes thereto included in Item 8 in this report. 

 

   

Years Ended September 30,

 
   

2019

   

2018

 

Finance income, net

  $ 14,050,000     $ 15,863,000  

Personal injury claim income (1)

    2,202,000       1,084,000  

Disability fee income

    4,861,000       4,598,000  
                 

Total revenues

    21,113,000       21,545,000  
                 

Gain on settlements

    596,000       4,044,000  
Interest and dividend income     1,593,000       475,000  

Other income, net

    142,000       4,000  
                 
      23,444,000       26,068,000  
                 

General and administrative expenses

    13,378,000       15,429,000  

Loss on acquisition of minority interest

 

––

      1,420,000  

Interest expense

 

––

      20,000  

Impairments of consumer receivables acquired for liquidation

    225,000       310,000  

Earnings from equity method investment (2)

    87,000       (750,000

)

                 
      13,690,000       16,429,000  
                 

Income before income taxes from continuing operations

    9,754,000       9,639,000  

Income tax expense

    2,579,000       4,969,000  
                 

Income (loss) from continuing operations

    7,175,000       4,670,000  

(Loss) from discontinued operations, net of tax

 

––

      (80,000

)

                 

Net income attributable to Asta Funding, Inc.

  $ 7,175,000     $ 4,590,000  

 

(1) This line item is comprised of the personal injury claims revenue from Simia, Sylvave and Arthur Funding.

 

(2) This line item is comprised of the net earnings from Pegasus from October 1, 2017 to January 11, 2018 and Serlefin Peru.

 

  Year Ended September 30, 2019 Compared to the Year Ended September 30, 2018 

 

Finance income.  For the fiscal year ended September 30, 2019 (“fiscal year 2019”), finance income from consumer receivables decreased $1.8 million, or 11.4% to $14.1 million, as the Company has continued to collect on its existing cost recovered consumer receivable portfolios. During fiscal year 2019 and 2018, the Company did not purchase any portfolios.

 

 

Net collections decreased $2.9 million, or 15.1%, to $15.7 million for fiscal year 2019 from $18.6 million for fiscal year 2018. During fiscal year 2019, gross collections decreased 12.1% to $31.2 million from $35.5 million for fiscal year 2018, reflecting the lower level of purchases over the last few years. Commissions and fees associated with gross collections from our third party collection agencies and attorneys decreased $1.5 million, from $17.0 million to $15.5 million, or 8.7% for fiscal year 2019, as compared with the same period in the prior year and averaged 49.6% of collections for fiscal year 2019 as compared with 47.8% in the same prior year period.

 

For the year ended September 30, 2019 and 2018, approximately 89.2% and 85.5% of collections were recognized in finance income, respectively. The increased percentage in 2019, is the result of consumer portfolio's becoming fully recovered in the current year.

 

Personal Injury Claims income. Personal injury claims income increased 103.1% or $1.1 million to $2.2 million in fiscal year 2019, compared to $1.1 million in fiscal year 2018 as a result of the acquisition of the remaining 20% interest in Sylvave now being consolidated in our financial statements.

 

Disability Fee income. Disability fee income increased 5.7% or $0.3 million to $4.9 million in fiscal year 2019, compared to $4.6 million in fiscal year 2018 as a result of increase in disability claimants cases being settled in the current year, translating into an increase in closed cases.

 

Gain on settlements. For the year ended September 30, 2019, the Company recorded gains on settlements of $0.6 million associated with prior overcharges billed to the Company by a third-party servicer in excess of contractually permitted amounts, a bankruptcy settlement from a previous third party service provider, a gain on settlement associated with Balance Point Divorce Funding and Stacey Napp and a gain on settlement associated with a complaint against a former employee. For the year ended September 30, 2018, the Company recorded a gain on settlements of $4.0 million. The settlements during the fiscal year 2018 were for $3.4 million and $0.6 million from a third-party servicer and a third-party financial institution, respectively.

 

Interest and dividend income. For the year ended September 30, 2019, interest and dividend income was $1.6 million compared with $0.5 million in fiscal 2018.  The increase was primarily due to higher balances in U.S. Treasuries, Unifund settlement interest, notes receivable interest and interest received from a tax refund.

 

Other income. The following table summarizes other income for the years ended September 30, 2019 and 2018:

 

   

2019

   

2018

 

Realized gain

  $ 25,000     $  

Unrealized gain

    57,000        

Other

    60,000       4,000  
                 
    $ 142,000     $ 4,000  

 

General and administrative expenses. For fiscal year 2019, general and administrative expenses decreased $2.0 million, or 13.3%, to $13.4 million from $15.4 million for the prior year. The decrease in general and administrative expenses is related to decreases in bad debt expenses of $0.9 million, professional fees of $1.4 million, and other taxes of $0.3 million partially offset by increases in collection expenses of $0.4 million and unfavorable foreign exchange translation adjustment of $0.2 million.

 

Loss on acquisition of minority interest. For the year ended September 30, 2018, the Company recognized a loss on acquisition of minority interest of $1.4 million on the acquisition of the 20% minority interest in Pegasus, purchased by the Company, which was previously owned by Pegasus Legal Funding. No such losses were incurred in the current period.

 

Impairments. For fiscal year 2019, the Company recorded an impairment of $0.2 million of its consumer receivable portfolio, compared to $0.3 million for fiscal year 2018. For the year ended September 30, 2019, the Company impaired one domestic and two international portfolios which resulted in a charge to expense of $0.1 million and $0.1 million, respectively. For the year ended September 30, 2018, the Company impaired one domestic and two international portfolios which resulted in a charge to expense of $0.1 million and $0.2 million, respectively. 

 

Earnings from equity method investment. For the fiscal year 2019, earnings from equity method investment decreased $0.8 million to a loss of $0.1 million, compared to earnings from equity method investment of $0.7 million for fiscal year 2018, primarily due to acquisition of the remaining 20% of the non-controlling interest on January 12, 2018, no current year fundings and subsequent income being recorded as part of our personal injury claims income from Sylvave, Simia and Arthur Funding in the consolidated statement of operations. The loss from the equity method investment in the current year is related to the Company’s joint venture with Serlefin Peru.

 

Segment profit - Consumer Receivables. Segment profit decreased $5.4 million, to $12.4 million for fiscal year 2019, as compared with $17.8 million for fiscal year 2018, primarily due to decreased revenue of $1.8 million, decreased settlement income of $3.2 million, an increase in collection expenses $0.3 million, and an unfavorable foreign exchange loss of $0.2 million partially offset by a decrease in impairment charges of $0.1 million.

 

 

Segment profit - Social Security Disability Advocacy. Segment profit increased $0.4 million to $1.5 million for fiscal year 2019, compared to a segment profit of $1.1 million for fiscal year 2018, as a result of increased revenues of $0.3 million, decrease in professional fees of $0.2 million, and decreases in payroll related expenses of $0.1 million, partially offset by an increase in advertising expenses $0.2 million.

 

Income tax expense. Income tax expense of $2.6 million was recorded for fiscal year 2019, consisting of a $3.0 million current income tax expense and a $0.4 million deferred income tax benefit. Income tax expense of $5.0 million was recorded for fiscal year 2018, consisting of a $3.7 million current income tax expense and a $1.2 million deferred income tax expense. The tax benefit on discontinued operations was $44,000 and there was income tax expense of $5.0 million on continuing operations.

  

Discontinued operations. Loss from discontinued operations, net of tax, was $0.1 million in fiscal year 2018 due to the sale of CBC during the first quarter of the prior fiscal year.

 

Net income. As a result of the above, the Company had net income of $7.2 million for fiscal year 2019, compared to net income of $4.6 million for fiscal year 2018.

   

 

Liquidity and Capital Resources

 

At September 30, 2019, the Company had $4.3 million in cash and cash equivalents, as well as $64.3 million in investments in debt and equity securities on hand and no debt.  In addition, the Company had $89.2 million in stockholders’ equity at September 30, 2019.

 

Our primary source of cash from operations is collections on the receivable portfolios that we have acquired, the funds generated from our personal injury claim portfolios and the fees received from our disability advocacy business. Our primary uses of cash include costs involved in the collection of consumer receivables, the liquidation of our personal injury portfolio, and the costs to run our disability advocacy business.

 

Receivables Financing Agreement

 

In March 2007, Palisades XVI borrowed approximately $227 million under the Receivables Financing Agreement, as amended in July 2007, December 2007, May 2008, February 2009, October 2010 and August 2013 from the Bank of Montreal (“BMO”), in order to finance the Great Seneca Portfolio Purchase (the “Portfolio Purchase”) which had a purchase price of $300 million. The original term of the agreement was three years. This term was extended by each of the Second, Third, Fourth, Fifth Amendments and the most recent agreement signed in August 2013, discussed below.

 

Financing Agreement. The Settlement Agreement and Omnibus Amendment (“Settlement Agreement”) was in effect on August 7, 2013, Palisades XVI, a 100% owned bankruptcy remote subsidiary, entered into a Settlement Agreement with BMO as an amendment to the Receivables Financing Agreement. In consideration for a $15 million prepayment funded by the Company, BMO has agreed to significantly reduce minimum monthly collection requirements and the interest rate. If and when BMO were to receive the next $15 million of collections from the Portfolio Purchase, (the “Remaining Amount”) less certain credits for payments made prior to the consummation of the Settlement Agreement, the Company would be entitled to recover from future net collections the $15 million prepayment that it funded. Thereafter, BMO would have the right to receive 30% of future net collections. Upon repayment of the Remaining Amount to BMO, the Company would be released from the remaining contractual obligation of the Receivables Financing Agreement (“RFA”) and the Settlement Agreement.

 

On June 3, 2014, Palisades XVI finished paying the Remaining Amount. The final principal payment of $2.9 million included a voluntary prepayment of $1.9 million provided from funds of the Company. Accordingly, Palisades XVI was entitled to receive $16.9 million of future collections from the Portfolio Purchase before BMO is entitled to receive any payments with respect to its Income Interest. During the month of June 2016, the Company received the balance of the $16.9 million, and, as of September 30, 2019 and 2018, the Company recorded a liability to BMO of approximately $22,000 and $117,000, respectively. The funds were subsequently remitted to BMO on October 10, 2019 and 2018, respectively. The liability to BMO is recorded when actual collections are received.

 

With the payment of the Remaining Amount and upon completion of the documents granting the Palisades XVI Income Interest, including a written confirmation from BMO that the obligation has been paid in full, Palisades XVI has been released from further debt obligations from the RFA.  

 

 

Cash Flow 

 

As of September 30, 2019, our cash and cash equivalents decreased $2.0 million to $4.3 million, from $6.3 million at September 30, 2018.

 

Net cash provided by operating activities was $11.3 million during the fiscal year ended September 30, 2019, as compared with $4.0 million provided by operating activities for the fiscal year ended September 30, 2018. The increase in cash provided by operating activities was primarily due to changes in net income of $2.6 million, receipt of income tax carryback claim of $7.9 million, change in income tax receivable of ($6.5) million, income taxes payable of $0.6 million, and settlement receivable of $3.9 million. Net cash used in investing activities was $12.6 million during the fiscal year ended September 30, 2019, as compared with $18.5 million provided by investing activities during the fiscal year ended September 30, 2018. The decrease in cash provided by investing activities was primarily due to higher purchases of equity securities and available-for-sale debt securities during the current fiscal year. Net cash used in financing activities was $0.8 million during the fiscal year ended September 30, 2019, as compared with net cash used in financing activities of $33.6 million during the fiscal year ended September 30, 2018. The decrease in cash used in financing activities during the current year was primarily due to payment of a special dividend in the prior fiscal year, partially offset by purchase of treasury stock in the current fiscal year.

 

Our cash requirements have been and will continue to be significant to operate our various lines of business. Significant requirements include costs involved in the collections of consumer receivables, investment in consumer receivable portfolios, investment in personal injury claims and the operating expenses of disability advocacy segment. In addition, dividends could be paid if and when approved by the Board of Directors. Acquisitions recently have been financed through cash flows from operating activities. We believe we will not be dependent on a credit facility in the short-term to fund operations, as our cash balances will be sufficient to invest in personal injury claims, purchase portfolios and finance the disability advocacy business.

 

We believe our available cash resources and expected cash flows from operations will be sufficient to fund operations for the next twelve months. We do not expect to incur any material capital operating expenditures during the next twelve months.

 

We are cognizant of the current market fundamentals in the debt purchase and company acquisition markets which, because of significant supply and tight capital availability, could result in increased buying opportunities. The outcome of any future transaction(s) is subject to market conditions. In addition, due to these potential opportunities, we continue to maintain relationships with banking organizations and other financial intermediaries on possible loan facility financing.

 

Shares Repurchase Plan

 

On May 17, 2019, the Board of Directors approved the repurchase of up to $10.5 million of the Company’s common stock and authorized management of the Company to enter into the Shares Repurchase Plan under Sections 10b-18 and 10(b)5-1 of the Securities and Exchange Act (the “Shares Repurchase Plan”). The Shares Repurchase Plan was effective through August 17, 2019. During the year ended September 30, 2019, the Company purchased 117,650 shares pursuant to the terms of the Shares Repurchase Plan.

 

The following table contains information about purchases by us of our common stock during the year ended September 30, 2019:

 

Period

 

Total Number

of Shares

Purchased

   

Average

Price Paid

per Share

   

Total Number of Shares

Purchased as

Part of Publicly Announced

Plans

   

Maximum Number (or

Approximate Dollar Value) of

Shares that May Yet Be

Purchased Under the Plans

 

April 1- 30, 2019

    -     $ -       -     $ -  

May 1- 31, 2019

    11,700     $ 7.05       11,700     $ 10,417,246  

June 1- 30, 2019

    67,800     $ 7.02       67,800     $ 9,939,750  

July 1- 31, 2019

    29,600     $ 7.39       29,600     $ 9,720,516  

August 1- 17, 2019

    8,550     $ 7.48       8,550     $ 9,656,380  

Year ended September 30, 2019

    117,650     $ 7.15       117,650     $ -  

 

Off-Balance Sheet Arrangements

 

As of September 30, 2019, we did not have any off-balance sheet arrangements other than lease commitments.

 

 

Recent Accounting Pronouncements 

 

Adopted During the Year Ended September 30, 2019   

 

On October 1, 2018, we adopted FASB update ASC 606, “Revenue from Contracts with Customers,” that requires use of a single principles-based model for recognition of revenue from contracts with customers. The core principle of the model is 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. We adopted the new guidance using the modified retrospective approach which did not require the restatement of prior periods, and recognized a cumulative effect adjustment resulting in an increase in total assets and retained earnings of $173,000, net of taxes of $80,000. 

 

The most significant impact of ASC 606 relates to our accounting for revenue associated with disability claimants’ contracts. Previously we recognized disability fee income when the disability claimants’ cases closed with the social security administration and the applicable fees were collected. Under the new guidance we determined that the various advocacy services, performed on behalf of a claimant, constitute one performance obligation as they represent an integrated set of services designed to provide a claimant with a successful award. It was also determined that the benefit of these services is conveyed to the claimant at the point in time that the award is determined to be successful. In addition, we have made estimates of variable consideration under the expected value method. Therefore, for these arrangements, we will recognize revenue when each case is closed, when cash is received or when we receive a notice of award, stipulating our fees earned on each case directly from the social security administration or Department of Veterans Affairs.

 

The primary impact of adopting the new standard results in acceleration of revenues for the aforementioned contractual arrangements, which relate to the social security disability advocacy segment. Disability fee income represents approximately 23.0% and 21.3% of total consolidated revenues for the years ended September 30, 2019 and 2018, respectively.

 

The following line items in our consolidated statement of operations and comprehensive income for the current year and consolidated balance sheet as of September 30, 2019 have been provided to reflect both the adoption of ASC 606 as well as a comparative presentation in accordance with ASC 605 previously in effect: 

 

Consolidated Statement of Operations and

Comprehensive Income (Loss) for the year ended

September 30, 2019:

 

As Reported

(in accordance

with ASC 606)

   

Balances Without

Adoption of

ASC 606

   

Impact of

Adoption

Higher/(Lower)

 
                         

Disability fee income

  $ 4,861,000     $ 4,848,000     $ 13,000  
                         

Income from continuing operations before income tax

  $ 9,754,000     $ 9,741,000     $ 13,000  

 

 

   

As of September 30, 2019

 

Consolidated Balance Sheet

 

As Reported

(in accordance

with ASC 606)

   

Balances Without

Adoption of

ASC 606

   

Impact of

Adoption

Higher/(Lower)

 
                         

Asset

                       

Accounts receivable, net

  $ 266,000     $ -     $ 266,000  
                         

Stockholders' equity

                       

Retained earnings

  $ 88,172,000     $ 87,919,000     $ 253,000 (1)

 

(1) Does not include the tax impact of $80,000

 

On October 1, 2018, we adopted FASB Update No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The main provision of this guidance requires certain equity investments to be measured at fair value with changes in fair value recognized in net earnings; separate presentation in other comprehensive income for changes in fair value of financial liabilities measured under the fair value option that are due to instrument-specific credit risk; and changes in disclosures associated with the fair value of financial instruments. Upon adoption of this ASU, our investments in equity securities are no longer classified as available for sale, and changes in fair value are reflected in other income, net on our consolidated statement of operations. In conjunction with this adoption we recorded a cumulative effect adjustment with a decrease to opening retained earnings of $10,000 and an increase to opening accumulated other comprehensive income of $10,000, net of tax benefit of $5,000.

 

 

In August 2016 the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments."  This ASU made eight targeted changes as to how cash receipts and cash payments are presented and classified in the statement of cash flows. The new standard was effective for fiscal years beginning after December 15, 2017. Early adoption was permitted. The new standard required adoption on a retrospective basis unless it was impracticable to apply, in which case the Company would have been required to apply the amendments prospectively as of the earliest date practicable. Our adoption of the ASU did not have a material effect on the Company’s consolidated statements of cash flows. 

 

In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.” The new rules provide for the application of a screen test to consider whether substantially all the fair value of the assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If the screen test determines this to be true, the set is not a business. The new standard was effective for the Company in the first quarter of 2019. The adoption of the new accounting rules did not have a material impact on the Company’s consolidated financial condition, results of operations or cash flows.

 

In March 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718) Improvements to Employee Share Based Payment Accounting, to simplify and improve areas of generally accepted accounting principles for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The effective date for this update is for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The adoption of this update did not have a material impact on our consolidated financial statements.

 

Recent Accounting Pronouncements Not Yet Adopted

 

In February 2016, the FASB issued ASU 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. Additionally, in July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements,” which provides an alternative transition method that permits an entity to use the effective date of ASU No. 2016-02 as the date of initial application through the recognition of a cumulative effect adjustment to the opening balance of retained earnings upon adoption. The standard becomes effective for the Company in fiscal years beginning after December 15, 2018 and interim periods within those years, and early adoption is permitted. The Company believes that the adoption of this ASU will not have a material impact on its consolidated financial statements. The Company will adopt the new accounting standard using the modified retrospective transition option on adoption on October 1, 2019. While we are continuing to assess all impacts of the standard, we anticipate this standard will have an immaterial impact to our consolidated balance sheet. Upon adoption, we expect to record additional lease liabilities of approximately $636,000 attributable to our operating leases based on the present value of the remaining minimum lease payments with an increase to right-of-use assets of approximately $636,000. The Company does not expect the adoption of this standard to have a material impact on its consolidated statements of operations or cash flows.

 

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, 2022. Upon adoption, the Company will accelerate the recording of its credit losses and is continuing to assess the impact on its consolidated financial statements. 

  

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 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 did not 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.

 

Item 8. 

Financial Statements and Supplementary Data. 

 

The information called for by Item 8 is included following the index to the financials statements of the Company on page F-1 of this Form 10-K.

 

Item 9. 

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. 

 

None.

 

Item 9A. 

 Controls and Procedures. 

 

Evaluation of Disclosure Controls and Procedures. 

 

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.

 

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2019. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of September 30, 2019 due to the material weaknesses in internal control over financial reporting, which are described below under “Management’s Annual Report on Internal Control Over Financial Reporting.” 

 

As a result of the material weaknesses identified, we performed additional analysis, substantive testing and other post-closing procedures intended to ensure that our consolidated financial statements were prepared in accordance with U.S. GAAP.  Accordingly, management believes that the consolidated financial statements and related notes thereto included in its annual report on Form 10-K fairly present, in all material respects, the Company’s financial condition, results of operations and cash flows for the periods presented.

 

Management’s Annual Report on Internal Control Over Financial Reporting. 

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets, (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, (c) provide reasonable assurance that our receipts and expenditures are being made only in accordance with appropriate authorization of our management and the board of directors, and (d) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on our financial statements.

 

All internal control systems, no matter how well designed and tested, have inherent limitations, including, among other things, the possibility of human error, circumvention or disregard. Therefore, even those systems of internal control that have been determined to be effective can provide only reasonable assurance that the objectives of our internal control system are met and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, management conducted an assessment of the effectiveness of our internal control over financial reporting as of September 30, 2019. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO 2013”) in Internal Control - Integrated Framework, issued in 2013. Based on this assessment, and based on the criteria in COSO 2013, management concluded that, as of September 30, 2019, our internal control over financial reporting was not effective, as management identified deficiencies in internal control over financial reporting that were deemed to be material weaknesses.  A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

 

 

We did not design and implement effective control over our control environment, risk assessment, control activities and monitoring activities with regard to our processes and procedures commensurate with our financial reporting requirements which we determined to be material weaknesses. Specifically, our control deficiencies are in the following areas:

 

Control Environment and Risk Assessment:

 

The Company did not design and implement a sufficient level of formal financial reporting and operating policies and procedures that define how transactions are initiated, processed, approved, recorded and appropriately reported and disclosed within the annual and interim consolidated financial statements.

 

The Company did not maintain sufficient policies and procedures to ensure that financial statement disclosures are complete, accurate and comply with professional standards.

 

The Company did not maintain a sufficient number of personnel with the necessary level of accounting knowledge, experience, and training in the application of U.S. GAAP commensurate with its financial reporting requirements and the complexity of the Company’s operations and transactions.

 

Control Activities:

 

The Company did not maintain and document control activities designed and implemented to identify, review and report, on a timely basis, related party transactions, and account for unusual, non-recurring complex transactions and income taxes.

 

The Company did not maintain and document internal controls with sufficient precision designed to provide reasonable assurance related to third party service providers and third party advocates providing cash collection and advocacy services including the completeness and accuracy of related information.

 

Monitoring Activities:

The Company did not maintain effective monitoring and review activities including communicating deficiencies in a timely manner to those parties responsible for taking corrective action.

 

Management’s Remediation Plan

    

Management has initiated a remediation plan to address the control deficiencies that led to the material weaknesses. The remediation plan includes, but is not limited to:

 

 

The Company established a Disclosure Committee, which now meets on a quarterly basis, and to meet more frequently throughout the year to assure that our public disclosures are complete, accurate, and otherwise comply with applicable accounting principles and regulations. The Company’s Disclosure Committee reports to our Chief Executive Officer with oversight provided by our Audit Committee, and includes individuals knowledgeable about, among other things, SEC rules and regulations, financial reporting, and internal control matters.

 

 

The Company has installed contract management software to manage all of its contracts and associated obligations under those contracts. Management from each department has been trained on the software, and all contracts now require approvals of designated managers and the accounting department prior to execution.

 

 

The Company has increased the frequency of onsite inspections of third-party servicers during 2019, utilizing existing accounting/finance personnel familiar with the specific accounting processes involved at each location. The Company has provided training to accounting personnel at subsidiary locations, and developed detailed checklist and processes that were used and reviewed by management during period ends.   

 

 

The Company began developing policies, procedures, and controls to ensure the proper accounting for complex technical issues are identified, researched and brought to management's attention. The Company trained the appropriate personnel on new and existing accounting pronouncements, Company policies, procedures, and controls.

 

 

The Company implemented changes to the software that manages the social security disability business, to reconcile the amounts received in cash from the Social Security Administration ("SSA") to SSA's notice of award. Additionally, applicable personnel were trained on the new software modifications to ensure compliance in the input and maintenance of claimant's files.

 

We continue to make progress on our remediation plan and our goal is to formally document and test the operating effectiveness of our newly implemented or modified internal controls in 2020.  Until the controls are remediated, we will continue to perform additional account analysis, substantive testing and other post-closing procedures to ensure that our consolidated financial statements and prepared in accordance with U.S. GAAP.

 

 

Changes in Internal Controls over Financial Reporting.  

 

Except for the new material weakness related to the accounting for income taxes, and continued improvements resulting from progress made on the above noted remediation plans, there were no changes to the Company’s internal control over financial reporting during the fourth quarter of 2019, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B. 

Other Information.  

 

None.

 

 

PART III

 

Item 10.

Directors, Executive Officers and Corporate Governance. 

 

Information required by this item is included in the Company’s definitive proxy statement for its 2019 annual meeting of shareholders and is incorporated by reference herein. 

 

 

Item 11.

Executive Compensation

  

Information required by this item is included in the Company’s definitive proxy statement for its 2019 annual meeting of shareholders and is incorporated by reference herein. 

 

Item  12.

Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder Matters

  

Information required by this item is included in the Company’s definitive proxy statement for its 2019 annual meeting of shareholders and is incorporated by reference herein. 

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence. 

 

Information required by this item is included in the Company’s definitive proxy statement for its 2019 annual meeting of shareholders and is incorporated by reference herein. 

 

Item 14.

Principal Accounting Fees and Services. 

 

 Information required by this item is included in the Company’s definitive proxy statement for its 2019 annual meeting of shareholders and is incorporated by reference herein. 

 

 

Part IV

 

Item 15. 

Exhibits, Financial Statement Schedules. 

 

(a) The following documents are filed or furnished as part of this report:

 

Exhibit

Number

 

 

 

2.1#

Membership Interest Purchase Agreement, dated December 31, 2013, by and among CBC Settlement Funding, LLC, CBC Management Services Group, LLC, Asta Funding, Inc. and the other parties thereto (incorporated by reference to Exhibit 10.1 to Asta Funding, Inc.’s Current Report on Form 8-K filed January 7, 2014).

 

 

2.2

Securities Purchase Agreement, dated December 13, 2017, by and between Asta Funding, Inc., and CBC Holdings LLC (incorporated by reference to Exhibit 10.1 to Asta Funding, Inc.’s Current Report on Form 8-K filed December 19, 2017).

 

 

2.3#

Membership Interest Purchase Agreement, dated January 12, 2018, by and between ASFI Pegasus Holdings, LLC and Pegasus Legal Funding, LLC (incorporated by reference to Exhibit 10.1 to Asta Funding, Inc.’s Current Report on Form 8-K filed January 18, 2018).

 

 

2.4#

Term Sheet, dated November 8, 2016, by and among Asta Funding, Inc., ASFI Pegasus Holdings, LLC, Fund Pegasus, LLC, Pegasus Funding, LLC, Pegasus Legal Funding, LLC, Max Alperovich and Alexander Khanas (incorporated by reference to Exhibit 10.1 to Asta Funding, Inc.’s Current Report on Form 8-K filed November 15, 2016).

 

 

3.1

Certificate of Incorporation of Asta Funding, Inc. (incorporated by reference to Exhibit 3.1 to Asta Funding, Inc.’s Quarterly Report on Form 10-Q filed August 9, 2016).

   

3.2

Certificate of Amendment to Certificate of Incorporation of Asta Funding, Inc. (incorporated by reference to Exhibit 3.1(a) to Asta Funding, Inc.’s Quarterly Report on Form 10-QSB filed May 15, 2002).

 

 

3.3

Certificate of Designation of Series A Junior Preferred Stock of Asta Funding, Inc. (incorporated by reference to Exhibit 3.1 to Asta Funding, Inc.’s Current Report on Form 8-K filed August 24, 2012).

 

 

3.4

Exhibit 3.1 to Asta Funding, Inc.’s Current Report on Form 8-K filed on May 5, 2017.

 

 

3.5

Certificate of Designation of Series A Junior Participating Preferred Stock of Asta Funding, Inc. (incorporated by reference to Exhibit 3.2 to Asta Funding, Inc.’s Current Report on Form 8-K filed on May 5, 2017).

 

 

3.6

Amended and Restated By-laws of Asta Funding, Inc. (incorporated by reference to Exhibit 3.3 to Asta Funding, Inc.’s Quarterly Report on Form 10-Q filed August 9, 2016).

 

 

3.7

Amendment to Amended and Restated By-laws of Asta Funding, Inc. (incorporated by reference to Exhibit 3.1 to Asta Funding, Inc.’s Current Report on Form 8-K filed January 9, 2017).

 

 

4.1

Rights Agreement, dated May 5, 2017, by and between Asta Funding, Inc. and American Stock Transfer & Trust Company, LLC. (incorporated by reference to Exhibit 4.1 to Asta Funding Inc.’s Current Report on Form 8-K filed on May 5, 2017).

 

 

10.1+

Asta Funding, Inc. 2002 Stock Option Plan (incorporated by reference to Exhibit 10.10 to Asta Funding, Inc.’s Quarterly Report on Form 10-QSB filed May 15, 2002).

 

 

10.2+

Asta Funding, Inc. Equity Compensation Plan (incorporated by reference to Exhibit 10.1 to Asta Funding, Inc.’s Current Report on Form 8-K filed March 3, 2006).

 

 

10.3+

Asta Funding, Inc. 2012 Stock Option and Performance Award Plan (incorporated by reference to Appendix A to Asta Funding, Inc.’s Definitive Proxy Statement filed February 17, 2012 for the March 21, 2012 Annual Meeting of Stockholders).

 

 

10.4

Form of Subordination and Intercreditor Agreement (incorporated by reference to Exhibit 10.26 to Asta Funding, Inc.’s Annual Report on Form 10-K for the year ended September 30, 2008).

 

 

10.5

Amended and Restated Management Agreement, dated January 16, 2009, by and between Palisades Collection, L.L.C. and the other party thereto (incorporated by reference to Exhibit 10.27 to Asta Funding, Inc.’s Annual Report on Form 10-K for the year ended September 30, 2008).

 

 

10.6

Amended and Restated Master Servicing Agreement, dated January 16, 2009, by and between Palisades Collection, L.L.C. and the other party thereto (incorporated by reference to Exhibit 10.28 to Asta Funding, Inc.’s Annual Report on Form 10-K for the year ended September 30, 2008).

   

 10.7

First Amendment to Amended and Restated Master Servicing Agreement, by and among Palisades Collection and the other parties thereto (incorporated by reference to Exhibit 10.29 to Asta Funding, Inc.’s Annual Report on Form 10-K for the year ended September 30, 2008).

 

 

10.8

Indemnification Agreement, by and among Asta Funding, Inc., GMS Family Investors LLC and Judith R. Feder (incorporated by reference to Exhibit 10.32 to Asta Funding, Inc.’s Annual Report on Form 10-K for the year ended September 30, 2009).

   

10.9

Settlement Agreement and Omnibus Amendment, dated August 7, 2013, by and among Asta Funding, Inc., Palisades Acquisition XVI, LLC, Palisades Collection, L.L.C., Palisades Acquisition XV, LLC, BMO Capital Markets Corp., Fairway Finance Company, LLC and Bank of Montreal (incorporated by reference to Exhibit 10.1 to Asta Funding, Inc.’s Current Report on Form 8-K filed August 9, 2013).

 

 

10.10

Revolving Credit Agreement, dated December 28, 2011, by and between Pegasus Funding, LLC and Fund Pegasus, LLC (incorporated by reference to Exhibit 10.1 to Asta Funding, Inc.’s Current Report on Form 8-K filed January 4, 2012).

 

 

10.11

Security Agreement, dated December 28, 2011, by and between Pegasus Funding, LLC and Fund Pegasus, LLC (incorporated by reference to Exhibit 10.2 to Asta Funding, Inc.’s Current Report on Form 8-K filed January 4, 2012).

 

 

10.12

Secured Revolving Credit Note, dated December 28, 2011, by Pegasus Funding, LLC in favor of Fund Pegasus, LLC (incorporated by reference to Exhibit 10.3 to Asta Funding, Inc.’s Current Report on Form 8-K filed January 4, 2012).

 

 

10.13

Limited Liability Company Operating Agreement of Pegasus Funding, LLC (incorporated by reference to Exhibit 10.4 to Asta Funding, Inc.’s Current Report on Form 8-K filed January 4, 2012).

 

 

10.14

Lease Agreement, dated October 27, 2015, by and between ESL 200, LLC and Asta Funding, Inc. (incorporated by reference to Exhibit 10.1 to Asta Funding, Inc.’s Current Report on Form 8-K filed October 29, 2015).

 

 

10.15

First Amendment to Loan Documents, dated March 30, 2016, by and among Asta Funding, Inc., Palisades Collection, L.L.C. and Bank Hapoalim B.M. (incorporated by reference to Exhibit 10.1 to Asta Funding, Inc.’s Current Report on Form 8-K filed March 31, 2016).

 

 

10.16

Loan Agreement, dated May 2, 2014, by and among Asta Funding, Inc., Palisades Collection, L.L.C. and Bank Hapoalim B.M., dated May 2, 2014 (incorporated by reference to Exhibit 10.1 to Asta Funding, Inc.’s Current Report on Form 8-K filed May 8, 2014).

 

 

10.17

Security Agreement, dated May 2, 2014, by among Asta Funding, Inc., Palisades Collection, L.L.C., and Bank Hapoalim B.M. (incorporated by reference to Exhibit 10.2 to Asta Funding, Inc.’s Current

 

 

10.18

Mutual Confidentiality Agreement, dated May 25, 2016, by and between Asta Funding, Inc. and Mangrove Partners (incorporated by reference to Exhibit 10.1 to Asta Funding, Inc.’s Current Report on Form 8-K filed May 26, 2016).

 

 

10.19+

Employment Agreement, dated March 15, 2016, by and between Asta Funding, Inc. and Bruce Foster (incorporated by reference to Exhibit 10.1 to Asta Funding, Inc.’s Current Report on Form 8-K filed March 15, 2016).

 

 

10.20

Settlement Agreement, dated January 6, 2017, by and among Asta Funding. Inc., The Mangrove Partners Master Fund Ltd., The Mangrove Partners Fund, L.P., Mangrove Partners Fund (Cayman), Ltd., Mangrove Partners, Mangrove Capital and Nathaniel August and, solely for purposes of Section 1(c), 1(d), 2 and 8 thereof, Gary Stern, Ricky Stern, Emily Stern, Arthur Stern, Asta Group, incorporated and GMS Family Investors LLC (incorporated by reference to Exhibit 10.1 to Asta Funding, Inc.’s Current Report on Form 8-K filed on January 9, 2017).

 

 

10.21

Voting Agreement, dated January 6, 2017, by and among Asta Funding, Inc., Gary Stern, Ricky Stern, Emily Stern, Asta Group, incorporated and GMS Family Investors LLC (incorporated by reference to Exhibit 10.2 to Asta Funding, Inc.’s Current Report on Form 8-K filed on January 9, 2017).

 

 

10.22

Assignment Agreement, dated April 28, 2017, by and between CBC Settlement Funding, LLC and the other party thereto (incorporated by reference to Exhibit 10.1 to Asta Funding, Inc.’s Current Report on Form 8-K filed May 4, 2017).

   

10.23

Indemnification Agreement, dated September 11, 2017, by and between Asta Funding Inc. and Bruce Foster (incorporated by reference to Exhibit 10.24 to Asta Funding Inc’s Annual Report on Form 10-K for the year ended September 30, 2017)

 

 

10.24

Indemnification Agreement, dated September 11, 2017, by and between Asta Funding, Inc. and Seth Berman (incorporated by reference to Exhibit 10.25 to Asta Funding Inc’s Annual Report on Form 10-K for the year ended September 30, 2017)

   

10.25

Indemnification Agreement, dated September 11, 2017, by and between Asta Funding Inc. and Mark Levenfus (incorporated by reference to Exhibit 10.26 to Asta Funding Inc’s Annual Report on Form 10-K for the year ended September 30, 2017)

 

 

10.26

Indemnification Agreement, dated September 11, 2017, by and between Asta Funding Inc. and Louis A. Piccolo (incorporated by reference to Exhibit 10.27 to Asta Funding Inc’s Annual Report on Form 10-K for the year ended September 30, 2017)

 

 

10.27

Indemnification Agreement, dated September 11, 2017, by and between Asta Funding Inc. and David Slackman (incorporated by reference to Exhibit 10.28 to Asta Funding Inc’s Annual Report on Form 10-K for the year ended September 30, 2017)

 

 

10.28

Indemnification Agreement, dated September 11, 2017, by and between Asta Funding Inc. and Ricky Stern (incorporated by reference to Exhibit 10.29 to Asta Funding Inc’s Annual Report on Form 10-K for the year ended September 30, 2017)

 

 

10.29

Secured Promissory Note, dated as of December 13, 2017, by and between CBC Holdings LLC and Asta Funding, Inc. (incorporated by reference to Exhibit 10.2 to Asta Funding, Inc.’s Current Report on Form 8-K filed December 19, 2017).

 

 

10.30

Guarantee, dated as of December 13, 2017, by and among 777 Partners, LLC and SuttonPark Capital LLC, for and on behalf of Asta Funding, Inc. (incorporated by reference to Exhibit 10.3 to Asta Funding, Inc.’s Current Report on Form 8-K filed December 19, 2017).

 

 

10.31

Security Agreement, dated as of December 13, 2017, by and between SuttonPark Servicing LLC and Asta Funding, Inc. (incorporated by reference to Exhibit 10.4 to Asta Funding, Inc.’s Current Report on Form 8-K filed December 19, 2017).

 

 

10.32

Settlement Agreement and Release, dated as of January 12, 2018, by and among, Asta Funding, Inc., ASFI Pegasus Holdings, LLC, Fund Pegasus, LLC, Pegasus Funding, LLC, Pegasus Legal Funding, LLC, Max Alperovich, Alex Khanas, Larry Stoddard III, Louis Piccolo and A.L. Piccolo & Co., Inc. (incorporated by reference to Exhibit 10.2 to Asta Funding, Inc's Current Report on Form 8-K filed January 18, 2018).

   

10.33

Indemnification Agreement, dated January 7, 2019, by and between Asta Funding Inc. and Michael Monteleone (incorporated by reference to Exhibit 10.1 to Asta Funding, Inc’s Current Report on Form 8-K filed January 9, 2019).

   

10.34

Departure of Bruce Foster (incorporated by reference to Item 5.02 to Asta Funding, Inc.’s Current Report on Form 8-K filed August 22, 2019).

   

10.35

Indemnification Agreement, dated September 13, 2019, by and between Asta Funding Inc. and Steven Leidenfrost (incorporated by reference to Exhibit 10.1 to Asta Funding, Inc’s Current Report on Form 8-K filed September 16, 2019).

   

21.1*

Subsidiaries of Asta Funding, Inc.

 

 

23.1*

Consent of Independent Registered Public Accounting Firm.

 

 

31.1*

Certification of Gary Stern, Chief Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

31.2*

Certification of Steven Leidenfrost, Chief Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

32.1**

Certification of the Gary Stern, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

   

32.2**

Certification of Steven Leidenfrost, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

101.INS

XBRL Instance.

 

 

101.SCH

XBRL Taxonomy Extension Schema.

 

 

101.CAL

XBRL Taxonomy Extension Calculation.

 

 

101.DEF

XBRL Taxonomy Extension Definition.

 

 

101.LAB

XBRL Taxonomy Extension Labels.

 

 

101.PRE

XBRL Taxonomy Extension Presentation.

 

 

*

Filed herewith 

   

**

This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (“Exchange Act”), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended or the Exchange Act.

   

+

Indicates management contract or compensatory plan.

#

Indicates schedules have been omitted pursuant to Item 6.01(b)(2) of Regulation S-K. Asta Funding Inc. agrees to furnish supplementally a copy of any omitted schedule or exhibit to the SEC upon request.

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

 

Contents

 

 

Page

 

 

Report of Independent Registered Public Accounting Firm

 

F-2

Consolidated Balance Sheets as of September 30, 2019 and 2018

 

F-3

Consolidated Statements of Operations for the years ended September 30, 2019 and 2018

 

F-4

Consolidated Statements of Comprehensive Income for the years ended September 30, 2019 and 2018

 

F-5

Consolidated Statements of Stockholders’ Equity for the years ended September 30, 2019 and 2018

 

F-6

Consolidated Statements of Cash Flows for the years ended September 30, 2019 and 2018

 

F-7

Notes to Consolidated Financial Statements

 

F-8

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Board of Directors and Stockholders of

Asta Funding, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Asta Funding, Inc. and Subsidiaries (the “Company") as of September 30, 2019 and 2018, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company as of September 30, 2019 and 2018, and the consolidated results of their operations and their cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

 

/s/ EisnerAmper LLP

 

We have served as the Company’s auditor since April 2017.

 

EISNERAMPER LLP

Iselin, New Jersey

December 20, 2019

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

 

 

Consolidated Balance Sheets

 

   

September 30,

 
   

2019

   

2018

 

ASSETS

               

Cash and cash equivalents

  $ 4,308,000     $ 6,284,000  

Available-for-sale debt securities (at fair value)

    56,123,000       38,054,000  

Investments in equity securities (at fair value)

    8,136,000        

Consumer receivables acquired for liquidation (at cost)

    1,668,000       3,749,000  

Investment in personal injury claims, net

    5,190,000       10,745,000  

Due from third party collection agencies and attorneys

    596,000       755,000  

Accounts receivable, net

    266,000        

Prepaid and income taxes receivable, net

    264,000       5,387,000  

Furniture and equipment (net of accumulated depreciation of $1,914,000 at September 30, 2019 and $1,821,000 at September 30, 2018)

    120,000       100,000  

Equity method investment

    280,000       236,000  

Note receivable

          4,313,000  

Settlement receivable

    1,558,000       3,339,000  

Deferred income taxes

    9,631,000       9,333,000  

Goodwill

    1,410,000       1,410,000  

Other assets

    1,135,000       1,003,000  
                 

Total assets

  $ 90,685,000     $ 84,708,000  
                 
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

               

Accounts payable and accrued expenses

  $ 941,000     $ 2,281,000  

Income taxes payable

    575,000        
      1,516,000       2,281,000  

Commitments and contingencies

               
                 

STOCKHOLDERS’ EQUITY

               

Preferred stock, $.01 par value; authorized 5,000,000; 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 September 30, 2019 and 2018; and outstanding 6,567,765 at September 30, 2019 and 6,685,415 at September 30, 2018

    135,000       135,000  

Additional paid-in capital

    68,558,000       68,551,000  

Retained earnings

    88,172,000       80,834,000  

Accumulated other comprehensive income, net of income taxes

    276,000       35,000  

Treasury stock (at cost), 6,891,943 shares at September 30, 2019 and 6,774,293 shares at September 30, 2018

    (67,972,000

)

    (67,128,000

)

Total stockholders’ equity

    89,169,000       82,427,000  
                 

Total liabilities and stockholders’ equity

  $ 90,685,000     $ 84,708,000  

 

See notes to accompanying consolidated financial statements

  

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

 

 

Consolidated Statements of Operations

 

   

Year Ended September 30,

 
   

2019

   

2018

 

Revenues:

               

Finance income, net

  $ 14,050,000     $ 15,863,000  

Personal injury claims income

    2,202,000       1,084,000  

Disability fee income

    4,861,000       4,598,000  
                 

Total revenues

    21,113,000       21,545,000  

Gain on settlements

    596,000       4,044,000  
Interest and dividend income     1,593,000       475,000  

Other income, net

    142,000       4,000  
                 
      23,444,000       26,068,000  
                 

Expenses:

               

General and administrative

    13,378,000       15,429,000  

Loss on acquisition of minority interest

          1,420,000  

Interest expense

          20,000  

Impairments of consumer receivables acquired for liquidation

    225,000       310,000  

Loss (earnings) from equity method investment

    87,000       (750,000

)

                 
      13,690,000       16,429,000  
                 

Income from continuing operations before income tax

    9,754,000       9,639,000  

Income tax expense

    2,579,000       4,969,000  
                 

Income from continuing operations

    7,175,000       4,670,000  

Net loss from discontinued operations, net of income tax

          (80,000

)

                 

Net income

  $ 7,175,000     $ 4,590,000  
                 

Net income (loss) per basic shares:

               

Continuing operations

  $ 1.08     $ 0.70  

Discontinued operations

          (0.01

)

    $ 1.08     $ 0.69  

Net income (loss) per diluted shares:

               

Continuing operations

  $ 1.08     $ 0.70  

Discontinued operations

          (0.01

)

    $ 1.08     $ 0.69  

Weighted average number of common shares outstanding:

               

Basic

    6,652,621       6,662,600  

Diluted

    6,652,955       6,664,841  

                                                               

See notes to accompanying consolidated financial statements

 

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

 

Consolidated Statements of Comprehensive Income

 

   

Year Ended September 30,

 
   

2019

   

2018

 

Comprehensive income is as follows:

               

Net income

  $ 7,175,000     $ 4,590,000  
                 

Net unrealized debt securities gain (loss), net of tax (expense)/ benefit of ($50,000) and $9,000 during the years ended September 30, 2019 and 2018 respectively.

    127,000       (17,000

)

Foreign currency translation, net of tax (expense) of ($34,000), and ($17,000), during the years ended September 30, 2019 and 2018 respectively.

    104,000       34,000  
                 

Other comprehensive income

    231,000       17,000  
                 

Total comprehensive income

  $ 7,406,000     $ 4,607,000  

 

See notes to accompanying consolidated financial statements

 

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

 

 

Consolidated Statements of Stockholders’ Equity 

 

For the years ended September 30, 2019 and 2018

 

   

Common Stock

   

Additional

           

Accumulated
Other

           

Total

 
   

Issued
Shares

   

Amount

   

Paid-in
Capital

   

Retained
Earnings

   

Comprehensive
Income

   

Treasury
Stock

   

Stockholders’
Equity

 

Balance, October 1, 2017

    13,398,108     $ 134,000     $ 68,047,000     $ 111,596,000     $ 18,000     $ (67,128,000

)

  $ 112,667,000  

Exercise of options

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

Stock based compensation expense

                106,000                         106,000  

Net income

                      4,590,000                   4,590,000  

Unrealized loss on marketable securities, net

                            (17,000

)

          (17,000

)

Dividends paid

                      (35,352,000

)

                (35,352,000

)

Foreign currency translation, net

                            34,000             34,000  

Balance, September 30, 2018

    13,459,708     $ 135,000     $ 68,551,000     $ 80,834,000     $ 35,000     $ (67,128,000

)

  $ 82,427,000  

Cumulative effect of adjustment for adoption of ASC 606, net of tax of $80,000

                      173,000                   173,000  

Cumulative effect of adjustment for adoption of ASU No. 2016-01, net of tax of $5,000

                      (10,000

)

    10,000              

Adjusted opening equity

    13,459,708     $ 135,000     $ 68,551,000     $ 80,997,000     $ 45,000     $ (67,128,000

)

  $ 82,600,000  

Stock based compensation expense

                7,000                         7,000  

Net income

                      7,175,000                   7,175,000  

Unrealized gain on debt securities, net

                            127,000             127,000  

Foreign currency translation, net

                            104,000             104,000  

Treasury Stock purchased (117,650 shares)

                                  (844,000

)

    (844,000

)

Balance, September 30, 2019

    13,459,708     $ 135,000     $ 68,558,000     $ 88,172,000     $ 276,000     $ (67,972,000

)

  $ 89,169,000  

 

See notes to accompanying consolidated financial statements

 

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

 

 

Consolidated Statements of Cash Flows

 

   

Year Ended September 30,

 
   

2019

   

2018

 

Cash flows from operating activities:

               

Net income from continuing operations

  $ 7,175,000     $ 4,670,000  

Net (loss) from discontinued operations

          (80,000

)

Net income

    7,175,000       4,590,000  

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

               

Depreciation and amortization

    95,000       62,000  

Deferred income taxes

    (348,000

)

    1,232,000  

Impairments of consumer receivables acquired for liquidation

    225,000       310,000  

Stock based compensation

    7,000       106,000  

Unrealized gain on equity securities

    (57,000

)

     

Provision/(recoveries) for bad debts - personal injury claims

    (230,000

)

    499,000  

Settlement receivable

          (3,884,000

)

Loss (earnings) from equity method investment

    87,000       (750,000

)

Changes in:

               
Receipt of income tax carry-back claim     7,894,000        

Prepaid and income taxes receivable

    (2,771,000 )     3,703,000  

Due from third party collection agencies and attorneys

    128,000       54,000  

Income taxes payable

    575,000        

Accounts receivable

    (93,000

)

     

Other assets

    (131,000

)

    40,000  

Accounts payable and accrued expenses

    (1,237,000

)

    (2,665,000

)

Net assets related to discontinued operations

          710,000  
                 

Net cash provided by operating activities

    11,319,000       4,007,000  
                 

Cash flows from investing activities:

               

Principal collected on consumer receivables acquired for liquidation

    1,707,000       2,117,000  

Principal collected on consumer receivable accounts represented by account sales

          3,000  

Purchase of available-for-sale debt securities and investments in equity securities

    (134,337,000

)

    (32,569,000

)

Proceeds from sales of available-for-sale debt securities

    108,366,000        

Purchase of non-controlling interest

          (1,800,000

)

Proceeds from sale of CBC

          4,491,000  

Proceeds from notes receivable

    4,313,000       1,437,000  

Proceeds from settlements

    1,781,000       1,116,000  

Acquisition of personal injury claims portfolios

          (14,571,000

)

Investments in personal injury claims - advances

    (234,000

)

    (60,000

)

Investments in personal injury claims - receipts

    6,019,000       7,091,000  

Change in equity method investment

    (131,000

)

    52,788,000  

Capital expenditures

    (115,000

)

    (38,000

)

Change in investing activities related to discontinued operations

          (1,538,000

)

                 

Net cash (used in) provided by investing activities

    (12,631,000

)

    18,467,000  
                 

Cash flows from financing activities:

               

Proceeds from exercise of stock options

          399,000  

Purchase of treasury stock

    (844,000

)

     

Dividends paid

          (35,352,000

)

Change in financing activities related to discontinued operations

          1,387,000  
                 

Net cash used in financing activities

    (844,000

)

    (33,566,000

)

Foreign currency effect on cash

    180,000       101,000  

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

    (1,976,000

)

    (10,991,000

)

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

          (316,000

)

                 

Net (decrease) in cash and cash equivalents

    (1,976,000

)

    (11,307,000

)

Cash and cash equivalents at beginning of year

    6,284,000       17,591,000  
                 

Cash and cash equivalents at end of year

  $ 4,308,000     $ 6,284,000  
                 

Supplemental disclosure of cash flow information:

               

Continuing operations:

               

Cash paid for:

               

Interest

  $     $ 20,000  
                 

Income taxes

  $ 5,004,000     $ -  
                 

Discontinued operations:

               

Cash paid for:

               

Interest

  $     $ 824,000  
                 

Supplemental disclosures of non-cash investing and financing activities:

               

Continuing operations:

               

Note receivable

  $     $ 5,750,000  

Settlement receivable

  $     $ 3,884,000  

 

See notes to accompanying consolidated financial statements

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

September 30, 2019 and 2018

 

 

 NOTE 1 – CORRECTION OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS

 

During the preparation of its Annual Report on Form 10-K for the fiscal year ended September 30, 2019 (“2019 Form 10-K”), management of Asta Funding, Inc. (the “Company” or “Asta”) determined adjustments were needed to correct the financial statement presentation due to an immaterial accounting error in the Company’s previously reported consolidated financial statements.  Specifically, management determined that it had incorrectly recorded deferred income taxes related to its incentive stock options (“ISO”) that were issued and outstanding for the periods September 2006 through September 2018.  Because ISOs do not result in a tax deduction for the Company and do not create a deductible temporary difference, deferred taxes should not have been recorded at the time of grant.  Additionally, during 2018, deferred income taxes and tax expense related to the ISOs were incorrectly adjusted due to a revaluation of deferred tax assets as a result of the lower tax rate established by the Tax Cuts and Jobs Act (the “Tax Act”).

 

As a result, the accompanying consolidated financial statements and the related Note 13 – Income Taxes and Note 23 – Unaudited Quarterly Data, have been revised to correct the immaterial accounting and reporting error for the affected respective periods.  Correction of this immaterial error resulted in (i) a reduction of deferred tax assets of $2.1 million with a corresponding reduction in retained earnings as of October 1, 2017, to adjust for the cumulative impact of the error as of the beginning of the earliest period presented in the accompany consolidated financial statements; and (ii) an increase in deferred tax assets of $533,000 with a corresponding decrease in income tax expense and an increase in net income for the year ended September 30, 2018, to adjust for the effect of the Tax Act.

 

The following tables summarize the effects of the revision on the Company’s accompanying consolidated financial statements and related income tax note:

 

   

As of September 30, 2018

 

Consolidated Balance Sheet

 

As Previously

Reported

   

Adjustment

   

As Revised

 
                         

Assets:

                       

Deferred income taxes

  $ 10,940,000     $ (1,607,000 )   $ 9,333,000  

Total assets

  $ 86,315,000     $ (1,607,000 )   $ 84,708,000  
                         

Stockholders' equity:

                       

Retained earnings

  $ 82,441,000     $ (1,607,000 )   $ 80,834,000  

Total stockholders’ equity

  $ 84,034,000     $ (1,607,000 )   $ 82,427,000  

 

   

Year Ended September 30, 2018

 

Consolidated Income Statement

 

As Previously

Reported

   

Adjustment

   

As Revised

 
                         

Income tax expense

  $ 5,502,000     $ (533,000 )   $ 4,969,000  

Income from continuing operations

  $ 4,137,000     $ 533,000     $ 4,670,000  

Net income

  $ 4,057,000     $ 533,000     $ 4,590,000  

Net income (loss) per basic shares:

                       
Continuing operations   $ 0.62     $ 0.08     $ 0.70  
Discontinued operations     (0.01 )     -       (0.01 )
    $ 0.61     $ 0.08     $ 0.69  
Net income (loss) per diluted shares:                        
Continuing operations   $ 0.62     $ 0.08     $ 0.70  
Discontinued operations     (0.01 )     -       (0.01 )
    $ 0.61     $ 0.08     $ 0.69  

 

   

Year Ended September 30, 2018

 

Consolidated Statement of Cash Flows

 

As Previously

Reported

   

Adjustment

   

As Revised

 
                         

Net income from continuing operations

  $ 4,137,000     $ 533,000     $ 4,670,000  

Net income

  $ 4,057,000     $ 533,000     $ 4,590,000  

Deferred income taxes

  $ 1,765,000     $ (533,000 )   $ 1,232,000  

Net cash provided by operating activites

  $ 4,007,000     $ -     $ 4,007,000  

 

In accordance with Staff Accounting Bulletin (“SAB”) No. 99, Materiality, and SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, we evaluated the materiality of the error from a qualitative and quantitative perspective and concluded that the effect of the error was not material to our previously issued consolidated financial statements.

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

September 30, 2019 and 2018

 

 

 NOTE 2 - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES

 

 The Company:  

 

Asta, a Delaware Corporation, together with its wholly owned significant operating subsidiaries Palisades Collection, LLC, Palisades Acquisition XVI, LLC (“Palisades XVI”), Palisades Acquisition XIX, LLC (“Palisades XIX”), Palisades Acquisition XXIII, LLC (“Palisades XXIII”), VATIV Recovery Solutions LLC (“VATIV”), ASFI Pegasus Holdings, LLC (“APH”), 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”)), Arthur Funding LLC (“Arthur Funding”) (formerly known as 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 the Company's wholly owned subsidiaries Sylvave, Simia and Arthur Funding, social security disability advocacy through the Company's 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 period October 1, 2017 to January 12, 2018, Pegasus was 80% owned, but not controlled, and accounted for under the equity method. On January 12, 2018 (“Date of Acquisition”), the Company acquired the remaining 20% minority interest and a controlling financial interest, in Pegasus, and changed its name to Sylvave. Commencing on the Date of Acquisition, the Company consolidated the financial results of this entity.

 

We operate principally in the United States in three reportable business segments: consumer receivables, social security disability advocacy and personal injury claims. We previously operated a fourth segment when we engaged in the structured settlements business through our wholly owned subsidiary CBC Settlement Funding, LLC (“CBC”), which we sold on December 13, 2017.

 

As a result of the sale of CBC all periods presented in the Company's consolidated financial statements account for CBC as a discontinued operation. This determination resulted in the reclassification of the historical assets and liabilities comprising the structured settlement business to assets and liabilities related to discontinued operations in the consolidated balance sheets, and a corresponding adjustment to our consolidated statements of operations to reflect discontinued operations for all periods presented (see Note 8).

 

Consumer Receivables

 

This segment is engaged in the business of purchasing, managing for its own account and servicing distressed charged off receivables including consumer receivables. 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 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

 

This segment is comprised of purchased interests in personal injury claims from claimants who are a party to a personal injury claim. The Company advances to each claimant funds on a non-recourse basis at an agreed upon fee, in anticipation of a future settlement. The Company capitalizes employee compensation and benefits expenses as direct costs related to the origination of personal injury advances. Claims purchased consist of the right to receive, from such claimant, part of the proceeds or recoveries which such claimant receives by reason of a settlement, judgment or award with respect to such claimant’s claim. The Company historically funded personal injury claims in Simia and Sylvave. The Company formed a new wholly owned subsidiary, Practical Funding on March 16, 2018 to continue in the personal injury claims funding business. On April 8, 2019, Practical Funding changed its name to Arthur Funding, LLC. Arthur Funding began funding advances on personal injury claims in May 2019 (see Note 6).

 

Simia commenced operations in January 2017, and conducts its business solely in the United States. Simia obtained its business from external brokers and internal sales professionals soliciting attorneys and law firms who represent claimants who have personal injury claims. Business was 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 includes the financial results of Sylvave in its consolidated statement of operations. Simia and Sylvave are not funding any new advances, but continue to collect on outstanding personal claim advances in the ordinary course.

 

Social Security Disability Advocacy 

 

This segment consists of advocacy groups representing individuals throughout the United States in their claims for social security disability and supplemental social security income benefits from the Social Security Administration and Department of Veterans Affairs. It relies upon Search Engine Optimization (“SEO”) to bring awareness to its intended market.

 

 Basis of Presentation:

 

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, and are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and industry practices. All intercompany accounts have been eliminated in consolidation.

 

 Liquidity: 

 

At September 30, 2019, the Company had $4.3 million in cash and cash equivalents, as well as $64.3 million in investments in debt and equity securities on hand and no debt. In addition, the Company had $89.2 million in stockholders' equity at September 30, 2019.

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

September 30, 2019 and 2018

 

NOTE 2 - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

 

We believe that our available cash resources and expected cash inflows from operations will be sufficient to fund operations for the next twelve months.

 

Use of Estimates: 

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. With respect to income recognition the Company takes into consideration the relative credit quality of the underlying receivables constituting the portfolio acquired, the strategy involved to maximize the collections thereof, the time required to implement the collection strategy as well as other factors to estimate the anticipated cash flows. Actual results could differ from those estimates including management’s estimates of future cash flows and the resultant allocation of collections between principal and interest resulting there from. Downward revisions to estimated cash flows will result in impairments.

  

Concentration of Credit Risk – Cash and Cash Equivalents: 

 

The Company considers all highly liquid investments with a maturity 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 two banks that exceeded the balance insured by the FDIC by approximately $0.9 million at September 30, 2019. Additionally, three foreign banks with an aggregate balance of $2.1 million are not FDIC insured. The Company does not believe it is exposed to any significant credit risk due to concentration of cash.

  

Investments in Equity Securities:

  

The Company adopted Accounting Standard Update (“ASU”) No. 2016-01 on October 1, 2018, which requires substantially all equity investments in nonconsolidated entities to be measured at fair value with changes recognized in earnings, except for those accounted for using the equity method of accounting. Changes in the fair value of equity securities are included in other income, net on the consolidated statements of operations.

 

Available-for-Sale Debt Securities:  

 

Non-equity debt investments that the Company intends to hold for an indefinite period of time, but not necessarily to maturity, are classified as available-for-sale debt securities and are carried at fair value. Unrealized gains and losses on available-for-sale debt securities are determined using the specific-identification method. Unrealized gains/losses are recorded in other comprehensive income (loss). 

 

Declines in the fair value of individual available-for-sale debt securities below their respective costs that are other than temporary will result in write-downs of the individual securities to their fair value. Factors affecting the determination of whether another-than-temporary impairment has occurred include: a downgrading of the security by a rating agency, a significant deterioration in the financial condition of the issuer, or that management would not have the ability to hold a security for a period of time sufficient to allow for any anticipated recovery in fair value. 

 

Goodwill

 

Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in a business combination, and is accounted for under Accounting Standards Codification (“ASC”) ASC 350. Goodwill has an indefinite useful life and is evaluated for impairment at the reporting-unit level on an annual basis during the fourth quarter, or more frequently if events or changes in circumstances indicate potential impairment between annual measurement dates. The Company has the option of performing a qualitative assessment of impairment to determine whether any further quantitative testing for impairment is necessary. The qualitative approach assesses whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company determines it is more likely than not that the fair value is less than carrying value, a two-step quantitative impairment test is performed. A step 1 analysis involves calculating the fair value of the associated reporting unit and comparing it to the reporting unit’s carrying value. If the fair value of the reporting unit exceeds the carrying value of the reporting unit including goodwill and the carrying value of the reporting unit is positive, goodwill is considered not to be impaired and no further analysis is required. If the fair value of the reporting unit is less than its carrying value, step 2 of the impairment test must be performed. Step 2 involves calculating and comparing the implied fair value of the reporting unit’s goodwill with its carrying value. Impairment is recognized if the estimated fair value of the reporting unit is less than its net book value. Such loss is calculated as the difference between the estimated impaired fair value of goodwill and its carrying amount. The goodwill of the Company consists of $1.4 million at September 30, 2019 and 2018 from the purchase of VATIV. 

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

September 30, 2019 and 2018

 

NOTE 2 - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

 

Income Recognition – Consumer Receivables  

 

The Company accounts for certain of its investments in consumer receivables using the guidance of Financial Accounting Standards Board (“FASB”) 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. At such time, all cash collections are recognized as revenue when received. 

 

Income Recognition - Social Security Disability Advocacy

 

Effective October 1, 2018, the Company adopted ASC 606 - “Revenue from Contracts with Customer” (“ASC 606”), which was effective for annual periods beginning on or after December 15, 2017. ASC 606 introduced a five-step approach to revenue recognition. See “Recent Accounting Pronouncements” for a discussion of ASC 606.

 

The Company applied ASC 606 in accordance with the modified retrospective transitional approach recognizing the cumulative effect of initially applying the revenue standard as an adjustment to the opening balance of retained earnings during this period (October 1, 2018). Comparative prior year periods were not adjusted. In applying the modified retrospective approach, we elected practical expedients for (a) completed contracts as described in ASC 606-10-65-1-c(2), and (b) contract modifications as described in ASC 606-10-65-1-f(4), allowing (a) the application of the revenue standard only to contracts that were not completed as of the date of initial application, and (b) to reflect the aggregate effect of all modifications that occur before the adoption date in accordance with the new standard when: (i) identifying the satisfied and unsatisfied performance obligations, (ii) determining the transaction price, and (iii) allocating the transaction price to the satisfied and unsatisfied performance obligations. We believe that the impact on the opening balance of retained earnings during the period (October 1, 2018) would not have been significantly different had we not elected to use the practical expedients.

 

The Company recognizes disability fee income for GAR Disability Advocates and Five Star when disability claimant’s cases close, when cash is received or when the Company receives a notice of award from the Social Security Administration (“SSA”) or the Department of Veterans Affairs that stipulates the amount of fee approved by the SSA to be paid to the Company. The Company establishes a reserve for the differentials in amounts awarded by the SSA compared to the actual amounts received by the Company. Fees paid to the Company are withheld by the SSA against the claimant's disability claim award, and are remitted directly to the Company from the SSA. 

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

September 30, 2019 and 2018 

 

NOTE 2 - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

 

Impairments - Consumer Receivables 

 

The Company accounts for its impairments in accordance with ASC 310, which provides guidance on how to account for differences between contractual and expected cash flows from an investor’s initial investment in loans or debt securities acquired in a transfer if those differences are attributable, at least in part, to credit quality. The recognition of income under ASC 310 is dependent on the Company having the ability to develop reasonable expectations of both the timing and amount of cash flows to be collected. In the event the Company cannot develop a reasonable expectation as to both the timing and amount of cash flows expected to be collected, ASC 310 permits the change to the cost recovery method. The Company will recognize income only after it has recovered its carrying value.

 

If collection projections indicate the carrying value will not be recovered, an impairment is required. The impairment will be equal to the difference between the carrying value at the time of the forecast and the corresponding estimated remaining future collections. The Company believes it has significant experience in acquiring certain distressed consumer receivable portfolios at a significant discount to the amount actually owed by underlying customers. The Company invests in these portfolios only after both qualitative and quantitative analyses of the underlying receivables are performed and a calculated purchase price is paid so that it believes its estimated cash flow offers an adequate return on acquisition costs after servicing expenses. Additionally, when considering larger portfolio purchases of accounts, or portfolios from issuers with whom the Company has limited experience, it has the added benefit of soliciting its third party collection agencies and attorneys for their input on liquidation rates and, at times, incorporates such input into the estimates it uses for its expected cash flows, and the Company’s ability to recover their cost basis.

 

Equity method investments:

 

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

 

When the Company's carrying value in an equity method investee company is reduced to zero, no further losses are recorded in the Company's consolidated financial statements unless the Company guaranteed obligations of the investee company or has committed additional funding. When the investee company subsequently reports income, the Company will not record its share of such income until it equals the amount of its share of losses not previously recognized. There were no impairment losses recorded on our equity method investments for the years ended September 30, 2019 and 2018.

 

Personal Injury Claim Advances and Impairments:

 

The Company accounts for its investments in personal injury claims at an agreed upon fee, in anticipation of a future settlement. Purchased personal injury claim advances consists of the right to receive from a claimant part of the proceeds or recoveries which such claimant receives by reason of a settlement, judgment or reward with respect to such claimant’s claim. Open case revenue is estimated, recognized and accrued 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 fee, and, if applicable, adjusted for any changes due to a settled amount and fees charged to the claimant.

 

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

 

 

 ASTA FUNDING, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

September 30, 2019 and 2018

 

NOTE 2 - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

 

 Commissions and fees:

 

Commissions and fees are the contractual commissions earned by third party collection agencies and attorneys, and direct costs associated with the collection effort, generally court costs and asset searches. The Company utilizes third party collection agencies and attorney networks.

 

Furniture and equipment: 

 

Furniture, equipment and software are stated at cost, less accumulated depreciation and amortization. Depreciation is provided using the straight-line method over the estimated useful lives of the assets (3 to 7 years). Leasehold improvements are amortized over the lesser of the useful life of the asset or remaining lease term. An accelerated depreciation method is used for tax purposes.

 

Income taxes: 

 

Deferred federal and state taxes arise from (i) recognition of finance income collected for tax purposes, but not yet recognized for financial reporting; (ii) provision for impairments/credit losses, all resulting in timing differences between financial accounting and tax reporting; (iii) amortization of intangibles resulting in timing differences between financial accounting and tax reporting; (iv) stock based compensation; and (v) partnership investments.

 

Fair Value of Financial Instruments:

 

FASB ASC 825, Financial Instruments, (“ASC 825”), requires disclosure of fair value information about financial instruments, whether or not recognized on the balance sheet, for which it is practicable to estimate that value. Because there are a limited number of market participants for certain of the Company’s assets and liabilities, fair value estimates are based upon judgments regarding credit risk, investor expectation of economic conditions, normal cost of administration and other risk characteristics, including interest rate and prepayment risk. These estimates are subjective in nature and involve uncertainties and matters of judgment, which significantly affect the estimates.

 

The Company records its available-for-sale debt securities and investments in equity securities at estimated fair value on a recurring basis. The accompanying consolidated financial statements include estimated fair value information regarding its available-for-sale debt securities and investments in equity securities as of September 30, 2019, as required by FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s level within the fair value hierarchy is based on the lowest level of input significant to the fair value measurement. 

 

Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to assess at the measurement date.

 

Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities in active markets; quoted prices in markets that are not active for identical or similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.  

 

Level 3 - Unobservable inputs that are supported by little or no market activity and significant to the fair value of the assets or 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.

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

September 30, 2019 and 2018

 

NOTE 2 - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

 

Discontinued Operations:

 

U.S. 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.

  

Net income (loss) per share:  

 

Basic per share data is determined by dividing net income (loss) by the weighted average shares outstanding during the period. Diluted per share data is computed by dividing net income (loss) by the weighted average shares outstanding, assuming all dilutive potential common shares were issued. The assumed proceeds from the exercise of dilutive options are calculated using the treasury stock method based on the average market price for the period.  

 

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 income statement rather than a disclosure in the notes to the Company’s consolidated financial statements. 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.    

 

Foreign Currency Translation: 

 

Most of the Company's operations use their local currency as their functional currency. Financial statements of subsidiaries are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and a weighted average exchange rate for each period for revenues, expenses, gains and losses. Translation adjustments for subsidiaries whose local currency is their functional currency are recorded as a component of accumulated other comprehensive income (loss) within equity. Transaction gains and losses resulting from fluctuations in currency exchange rates on transactions denominated in currencies other than the functional currency are recognized as incurred in the accompanying consolidated statements of operations.

 

Reclassification: 

 

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

 

Impact of Recently Issued Accounting Standards: 

 

Adopted During the Year Ended September 30, 2019   

 

On October 1, 2018, the Company adopted FASB update ASC 606, “Revenue from Contracts with Customers,” that requires use of a single principles-based model for recognition of revenue from contracts with customers. The core principle of the model is 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. The Company adopted the new guidance using the modified retrospective approach which did not require the restatement of prior periods, and recognized a cumulative effect adjustment resulting in an increase in total assets and retained earnings of $173,000, net of taxes of $80,000.

 

The most significant impact of ASC 606 relates to our accounting for revenue associated with disability claimant's contracts. Previously we recognized disability fee income when the disability claimants’ cases closed with the social security administration and the applicable fees were collected. Under the new guidance the Company determined that the various advocacy services, performed on behalf of a claimant, constitute one performance obligation as they represent an integrated set of services designed to provide a claimant with a successful award. It was also determined that the benefit of these services is conveyed to the claimant at the point in time that the award is determined to be successful. In addition, the Company has made estimates of variable consideration under the expected value method. Therefore, for these arrangements, the Company will recognize revenue when each case is closed, when cash is received or when the Company