NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1—
Restatement of Financial Statements
The Company has restated its quarterly unaudited consolidated financial statements as of and for the period ended December 31, 2016. The Company determined that the previously issued unaudited consolidated financial statements contained in the Company’s Quarterly Reports on Form 10-Q for the quarter ended December 31, 2016, should be amended to reflect the revised fair market value relating to the Company’s structured settlements. The Company did not reflect the quarterly increase in certain underlying benchmark interest rates used in determining fair value of the structured settlements. The Company has revised the fair value of the structured settlements which resulted in a decrease in the fair value by approximately $2.6 million, with an associated increase in prepaid income taxes and deferred tax assets of approximately $1.0 million for the quarter ending December 31, 2016. In addition, the Company corrected the financial statements for all known errors consisting of (i) an asset reclassification on the balance sheet from cash and cash equivalents to receivables acquired for liquidation and (ii) the activity for the month of December 2016 for two international subsidiaries of the Company.
In addition, during Q1 2017, the Company identified known out of period adjustments that would have decreased net income by $0.4 million (net of tax) for unallocated collection expenses for fiscal years 2014 through 2016. The impact of this misstatement, which accumulated over the aforementioned years, on the prior years’ financial statements was not significant to the related interim and annual periods. Due to the immateriality of this error on the Company’s previously filed interim and annual reports, the Company elected to restate the prior period information, as of September 30, 2016, in the current filing, and concluded previous filed reports would not require amendment. The individual financial statement line items that were restated included a $0.6 million reduction of the Company’s consumer receivables acquired for liquidation, a decrease of $0.2 million to income taxes payable and a corresponding reduction of $0.4 million to related earnings, which is reflected in the restated stockholders’ equity as of September 30, 2016.
The following tables summarize the effects of the restatements on the specific items presented in the Company’s consolidated financial statements previously included in the Quarterly Report:
Consolidated Balance Sheet
|
|
December 31, 2016
|
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
16,041,000
|
|
|
$
|
(9,531,000
|
)
(1)(2)
|
|
$
|
6,510,000
|
|
Restricted cash
|
|
|
—
|
|
|
|
8,165,000
|
(1)
|
|
|
8,165,000
|
|
Consumer receivables acquired for liquidation
|
|
|
11,884,000
|
|
|
|
1,359,000
|
(2)
|
|
|
13,243,000
|
|
Structured settlements
|
|
|
91,505,000
|
|
|
|
(2,553,000
|
)
(3)
|
|
|
88,952,000
|
|
Due from third party collection agencies and attorneys
|
|
|
937,000
|
|
|
|
98,000
|
(2)
|
|
|
1,035,000
|
|
Prepaid and income taxes receivable
|
|
|
4,358,000
|
|
|
|
909,000
|
(4)
|
|
|
5,267,000
|
|
Deferred income taxes
|
|
|
16,476,000
|
|
|
|
109,000
|
(2)(4)
|
|
|
16,585,000
|
|
Other assets
|
|
|
8,441,000
|
|
|
|
2,000
|
(2)
|
|
|
8,443,000
|
|
Total assets
|
|
$
|
258,905,000
|
|
|
$
|
(1,442,000
|
)
|
|
$
|
257,463,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
7,629,000
|
|
|
|
(13,000
|
)
(2)
|
|
|
7,616,000
|
|
Total liabilities
|
|
|
79,195,000
|
|
|
|
(13,000
|
)
|
|
|
79,182,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
127,814,000
|
|
|
|
(1,408,000
|
)
(1)(2)(4)
|
|
|
126,406,000
|
|
Accumulated other comprehensive loss
|
|
|
(1,528,000
|
)
|
|
|
(21,000
|
)
(2)(4)
|
|
|
(1,549,000
|
)
|
Total stockholders’ equity
|
|
|
179,710,000
|
|
|
|
(1,429,000
|
)
|
|
|
178,281,000
|
|
Total liabilities and stockholders’ equity
|
|
$
|
258,905,000
|
|
|
$
|
(1,442,000
|
)
|
|
$
|
257,463,000
|
|
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Consolidated Statement of Operations
|
|
|
December 31,2016
|
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
Restated
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance income, net
|
|
$
|
3,298,000
|
|
|
$
|
703,000
|
(2)(5)
|
|
$
|
4,001,000
|
|
Unrealized gain (loss) on structured settlements
|
|
|
1,598,000
|
|
|
|
(2,553,000
|
)
(3)
|
|
|
(955,000
|
)
|
Total revenues
|
|
|
10,453,000
|
|
|
|
(1,850,000
|
)
|
|
|
8,603,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
466,000
|
|
|
|
93,000
|
(2)
|
|
|
559,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
10,931,000
|
|
|
|
52,000
|
(2)
|
|
|
10,983,000
|
|
Interest
|
|
|
976,000
|
|
|
|
(42,000
|
)
(2)
|
|
|
934,000
|
|
|
|
|
11,907,000
|
|
|
|
10,000
|
|
|
|
11,917,000
|
|
Loss before income taxes
|
|
|
(988,000
|
)
|
|
|
(1,767,000
|
)
|
|
|
(2,755,000
|
)
|
Income tax benefit
|
|
|
(352,000
|
)
|
|
|
(767,000
|
)
(4)
|
|
|
(1,119,000
|
)
|
Net Loss
|
|
|
(636,000
|
)
|
|
|
(1,000,000
|
)
|
|
|
(1,636,000
|
)
|
Net loss attributable to Asta Funding, Inc.
|
|
$
|
(657,000
|
)
|
|
$
|
(1,000,000
|
)
|
|
$
|
(1,657,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(0.06
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.14
|
)
|
Consolidated Statement of Comprehensive Loss
|
|
|
December 31,2016
|
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(636,000
|
)
|
|
|
(1,000,000
|
)
|
|
|
(1,636,000
|
)
|
Foreign currency translation
|
|
|
(348,000
|
)
|
|
|
(21,000
|
)
(2)(4)
|
|
|
(369,000
|
)
|
Total comprehensive loss
|
|
$
|
(2,250,000
|
)
|
|
$
|
(1,021,000
|
)
|
|
$
|
(3,271,000
|
)
|
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Consolidated Statement of Cash Flows
|
|
|
December 31, 2016
|
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
Restated
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(636,000
|
)
|
|
$
|
(1,000,000
|
)
|
|
$
|
(1,636,000
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
(102,000
|
)
|
|
|
(109,000
|
)
(2)(4)
|
|
|
(211,000
|
)
|
Structured settlements - gains
|
|
|
(1,598,000
|
)
|
|
|
2,553,000
|
(3)
|
|
|
955,000
|
|
Prepaid and income taxes receivable
|
|
|
(3,478,000
|
)
|
|
|
(909,000
|
)
(4)
|
|
|
(4,387,000
|
)
|
Due from third party collection agencies and attorneys
|
|
|
68,000
|
|
|
|
(98,000
|
)
(2)
|
|
|
(30,000
|
)
|
Other assets
|
|
|
(124,000
|
)
|
|
|
(2,000
|
)
(2)
|
|
|
(126,000
|
)
|
Income tax payable
|
|
|
(493,000
|
)
|
|
|
241,000
|
(5)
|
|
|
(252,000
|
)
|
Other liabilities
|
|
|
1,307,000
|
|
|
|
(34,000
|
)
(2)
|
|
|
1,273,000
|
|
Net cash used in operating activities
|
|
|
(6,212,000
|
)
|
|
|
642,000
|
|
|
|
(5,570,000
|
)
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of consumer receivables acquired for liquidation
|
|
|
(463,000
|
)
|
|
|
(1,750,000
|
)
(2)
|
|
|
(2,213,000
|
)
|
Principal collected on receivables acquired for liquidation
|
|
|
2,899,000
|
|
|
|
(258,000
|
)
(2)
|
|
|
2,641,000
|
|
Net cash used in investing activities
|
|
|
(224,000
|
)
|
|
|
(2,008,000
|
)
|
|
|
(2,232,000
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in restricted cash
|
|
|
—
|
|
|
|
(8,165,000
|
)
(1)
|
|
|
(8,165,000
|
)
|
Net cash provided by (used in) financing activities
|
|
|
3,951,000
|
|
|
|
(8,165,000
|
)
|
|
|
(4,214,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(2,485,000
|
)
|
|
|
(9,531,000
|
)
(1)(2)
|
|
|
(12,016,000
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
18,526,000
|
|
|
|
—
|
|
|
|
18,526,000
|
|
Cash and cash equivalents at end of period
|
|
$
|
16,041,000
|
|
|
$
|
(9,531,000
|
)
|
|
$
|
6,510,000
|
|
(1)
|
|
$8.2 million reclassification to restricted cash in the consolidated balance sheet since these assets serve as collateral for the line of credit.
|
(2)
|
|
Consists of (i) an asset reclassification on the balance sheet of $1.4 million from cash and cash equivalents to an international portfolio acquired for liquidation and (ii) the activity for the month of December 2016 for two international subsidiaries of the Company.
|
(3)
|
|
Structured settlements fair value adjustment to reflect underlying benchmark interest rate changes at December 31, 2016.
|
(4)
|
|
Income tax provision adjustments for impact on current year restatement and prior period correction of error.
|
(5)
|
|
Prior period correction of error impact on current year which consists of (i) increase of $0.6 million finance income (ii) decrease of $0.2 million income tax payable and (iii) $0.4 million retained earnings reduction.
|
ASTA
FUNDING, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2—Business and Basis of Presentation
Business
Asta Funding, Inc., together with its wholly owned significant operating subsidiaries Palisades Collection, LLC, Palisades Acquisition XVI, LLC (“Palisades XVI”), VATIV Recovery Solutions LLC (“VATIV”), ASFI Pegasus Holdings, LLC (“APH”), Fund Pegasus, LLC (“Fund Pegasus”), GAR Disability Advocates, LLC (“GAR Disability Advocates”), CBC Settlement Funding, LLC (“CBC”), Simia Capital, LLC (“Simia”) and other subsidiaries, not all wholly owned (the “Company,” “we” or “us”), is engaged in several business segments in the financial services industry including structured settlements through our wholly owned subsidiary CBC, funding of personal injury claims, through our 80% owned subsidiary Pegasus Funding, LLC (“Pegasus”), social security and disability advocacy through our wholly owned subsidiary GAR Disability Advocates and the business of purchasing, managing for its own account and servicing distressed consumer receivables, including charged off receivables, and semi-performing receivables.
Consumer receivables
The Company started out in the consumer receivables business in 1994. Recently, our effort has been in the international areas (mainly South America), as we have not purchased consumer receivables in the United States since 2010. We define consumer receivables as primary charged-off, semi-performing and distressed depending on their collectability. We acquire these consumer receivables at substantial discounts to their face values, based on the characteristics of the underlying accounts of each portfolio.
Personal injury claims
Pegasus conducts its business solely in the United States. Pegasus obtains its business from external brokers and internal sales professionals soliciting individuals with personal injury claims. Business is also obtained from the Pegasus website and through attorneys. The newly-formed, wholly owned subsidiary, Simia, also engages in the personal injury claims business.
Structured settlements
CBC purchases structured settlement and annuity policies through privately negotiated direct consumer purchases and brokered transactions across the United States. CBC funds the purchases primarily from cash, its revolving line of credit, and its securitized debt, issued through its Blue Bell Receivables (“BBR”) subsidiaries.
Social security benefit advocacy
GAR Disability Advocates provides its disability advocacy services throughout the United States. It relies upon search engine optimization (“SEO”) to bring awareness to its intended market.
Basis of Presentation
The consolidated balance sheet as of December 31, 2016, the consolidated statements of operations for the three month periods ended December 31, 2016 and 2015, the consolidated statements of comprehensive (loss) income for the three month periods ended December 31, 2016 and 2015, the consolidated statements of stockholders’ equity as of and for the three months ended December 31, 2016 and 2015, and the consolidated statements of cash flows for the three month periods ended December 31, 2016 and 2015, are unaudited. The September 30, 2016 financial information included in this report was derived from our audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016. In the opinion of management, all adjustments necessary to present fairly our financial position at December 31, 2016, the results of operations for the three month periods ended December 31, 2016 and 2015 and cash flows for the three month periods ended December 31, 2016 and 2015 have been made. The results of operations for the three month periods ended December 31, 2016 and 2015 are not necessarily indicative of the operating results for any other interim period or the full fiscal year.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2—Business and Basis of Presentation
(continued)
Basis of Presentation
(continued)
The accompanying unaudited consolidated financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission and therefore do not include all information and note disclosures required under generally accepted accounting principles. The Company suggests that these financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2016 filed with the Securities and Exchange Commission.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates including management’s estimates of future cash flows and the resulting rates of return.
Principles of Consolidation
The consolidated financial statements include the accounts of Asta Funding, Inc. and its wholly owned and majority owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Concentration of Credit Risk – Cash and Restricted Cash (restated)
The Company considers all highly liquid investments with a maturity date of three months or less at the date of purchase to be cash equivalents.
Cash balances are maintained at various depository institutions and are insured by the Federal Deposit Insurance Corporation (“FDIC”). The Company had cash balances with 7 banks at December 31, 2016 that exceeded the balance insured by the FDIC by approximately $2.9 million. Additionally, two foreign banks with an aggregate $0.5 million balances are not FDIC insured. There is a $8.2 million aggregate balance in a domestic bank that is also not FDIC insured and has been reclassified to restricted cash in the balance sheet since these assets serve as collateral for the line of credit (see Note 9 – Non Recourse Debt). The Company does not believe it is exposed to any significant credit risk due to concentration of cash.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in a business combination, and is accounted for under ASC 350. Goodwill has an indefinite useful life and is evaluated for impairment at the reporting-unit level on an annual basis during the fourth quarter or more frequently if events or changes in circumstances indicate potential impairment between annual measurement dates. The Company has the option of performing a qualitative assessment of impairment to determine whether any further quantitative testing for impairment is necessary. The initial qualitative approach assesses whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company determines it is more likely than not that the fair value is less than carrying value, a two step quantitative impairment test is performed. A step 1 analysis involves calculating the fair value of the associated reporting unit and comparing it to the reporting unit’s carrying value. If the fair value of the reporting unit exceeds the carrying value of the reporting unit including goodwill and the carrying value of the reporting unit is positive, goodwill is considered not to be impaired and no further analysis is required. If the fair value of the reporting unit is less than its carrying value, step 2 of the impairment test must be performed. Step 2 involves calculating and comparing the implied fair value of the reporting unit’s goodwill with its carrying value. Impairment is recognized if the estimated fair value of the reporting unit is less than its net book value. Such loss is calculated as the difference between the estimated impaired fair value of goodwill and its carrying amount. The goodwill of the Company consists of $2.8 million of which approximately $1.4 million from the purchase of CBC and the remaining $1.4 million from the purchase of VATIV.
Recent Accounting Pronouncements
In May 2014, the FASB issued an update to ASC 606, Revenue from Contracts with Customers, that will supersede virtually all existing revenue guidance. Under this update, an entity is required to recognize revenue upon transfer of promised goods or services to customers, in an amount that reflects the entitled consideration received in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from the customer contracts. This update is effective for annual reporting periods beginning after December 15, 2017 including interim periods within that reporting period. Early application is permitted for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Based on the Company’s evaluation, the Company does not believe this new standard will impact the accounting for its revenues.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2—Business and Basis of Presentation
(continued)
Basis of Presentation
(continued)
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The main objective in developing this update is enhancing the reporting model for financial instruments to provide users of financial statements with more decision-useful information. The amendments in this update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The effective date for this update is for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company is currently evaluating the impact this update will have on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842) to amend lease accounting requirements and requires entities to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets. The new standard will require significant additional disclosures about the amount, timing and uncertainty of cash flows from leases. The standard update is effective for fiscal years beginning after December 15, 2018 and interim periods within those years and early adoption is permitted. The standard is to be applied using a modified retrospective approach and includes a number of optional practical expedients that entities may elect to apply. The Company is currently evaluating the impact of adopting this update on its consolidated financial statements and expects that most of its operating leases will be subject to the accounting standard update and will recognize as operating lease liabilities and right-of-use assets upon adoption.
In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share Based Payment Accounting, to simplify and improve areas of generally accepted accounting principles for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The effective date for this update is for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is currently evaluating the impact this update will have on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For the Company, this update will be effective for interim periods and annual periods beginning after December 15, 2019. Upon adoption, the Company will accelerate the recording of its credit losses in its financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The new standard is effective for fiscal years beginning after December 15, 2017. Early adoption is permitted. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case the Company would be required to apply the amendments prospectively as of the earliest date practicable. The Company is in the process of evaluating the provisions of the ASU, but does not expect it to have a material effect on the Company’s consolidated statements of cash flows.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3—Available-for-Sale Investments
Investments classified as available-for-sale at December 31, 2016 and September 30, 2016, consist of the following:
|
|
Amortized
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
December 31, 2016
|
|
$
|
56,115,000
|
|
|
$
|
29,000
|
|
|
$
|
(1,099,000
|
)
|
|
$
|
55,045,000
|
|
September 30, 2016
|
|
$
|
55,724,000
|
|
|
$
|
1,089,000
|
|
|
$
|
(49,000
|
)
|
|
$
|
56,764,000
|
|
The available-for-sale investments do not have any contractual maturities. The Company sold two investments during the three months ended December 31, 2016, with a realized loss of $45,000. The Company received $177,000 in capital gains distributions during the three months ended December 31, 2016. For the three months ended December 31, 2015, the Company sold two investments with a realized loss of $31,000 and also received $47,000 in capital gains distributions during that period. The Company recorded an aggregate realized gain of $132,000 and $16,000 related to its available-for-sale securities for the three months ended December 31, 2016 and 2015, respectively.
At December 31, 2016, there were seven investments, five of which were in unrealized loss positions that had existed for 12 months or more. All of these securities are considered to be acceptable credit risks. Based on the evaluation of the available evidence, including recent changes in market rates and credit rating information, management believes the aggregate decline in fair value for these instruments is temporary. In addition, management has the ability to hold these investment securities for a period of time sufficient to allow for an anticipated recovery or maturity. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period in which the other-than-temporary impairment is identified.
Unrealized holding gains and losses on available-for-sale securities are included in other comprehensive income within stockholders’ equity. Realized gains (losses) on available-for-sale securities are included in other income and, when applicable, are reported as a reclassification adjustment in other comprehensive income.
Note 4—Consumer Receivables Acquired for Liquidation (restated)
Accounts acquired for liquidation are stated at their net estimated realizable value and consist primarily of defaulted consumer loans of individuals primarily throughout the United States and South America.
The Company may account for its investments in consumer receivable portfolios, using either:
|
•
|
the interest method; or
|
|
•
|
the cost recovery method.
|
Prior to October 1, 2013 , the Company accounted for certain of its investments in finance receivables using the interest method in accordance with the guidance of ASC 310, Receivables. Under the guidance of ASC 310-30, static pools of accounts are established. These pools are aggregated based on certain common risk criteria. Each static pool is recorded at cost and is accounted for as a single unit for the recognition of income, principal payments and loss provision. Effective October 1, 2013, due to the substantial reduction of portfolios reported under the interest method, and the ability to reasonably estimate cash collections required to account for those portfolios under the interest method, the Company concluded the cost recovery method is the appropriate accounting method in the circumstances.
Although the Company has switched to the cost recovery method on its current inventory of portfolios, the Company must still analyze a portfolio upon acquisition to ensure which method is appropriate, and once a static pool is established for a quarter, individual receivable accounts are not added to the pool (unless replaced by the seller) or removed from the pool (unless sold or returned to the seller).
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4—Consumer Receivables Acquired for Liquidation (restated)
(continued)
The Company uses the cost recovery method when collections on a particular pool of accounts cannot be reasonably predicted. Under the cost recovery method, no income is recognized until the cost of the portfolio has been fully recovered. A pool can become fully amortized (zero carrying balance on the balance sheet) while still generating cash collections. In this case, all cash collections are recognized as revenue when received.
The Company has extensive liquidating experience in the field of distressed credit card receivables, telecommunication receivables, consumer loan receivables, retail installment contracts, consumer receivables, and auto deficiency receivables.
The Company aggregates portfolios of receivables acquired sharing specific common characteristics which were acquired within a given quarter. In addition, the Company uses a variety of qualitative and quantitative factors to estimate collections and the timing thereof. The Company obtains and utilizes, as appropriate, input, including but not limited to, monthly collection projections and liquidation rates, from third party collection agencies and attorneys, as further evidentiary matter, to assist in evaluating and developing collection strategies and in evaluating and modeling the expected cash flows for a given portfolio.
The following tables summarize the changes in the consolidated balance sheet account of consumer receivables acquired for liquidation during the following periods:
|
|
For the
Three Months Ended
December 31,
|
|
|
|
2016 (restated)
|
|
|
2015
|
|
Balance, beginning of period
|
|
$
|
13,671,000
|
|
|
$
|
15,608,000
|
|
|
|
|
|
|
|
|
|
|
Acquisitions of receivable portfolios
|
|
|
2,213,000
|
|
|
|
4,419,000
|
|
Net cash collections from collection of consumer receivables acquired for liquidation
|
|
|
(6,179,000
|
)
|
|
|
(7,293,000
|
)
|
Net cash collections represented by account sales of consumer receivables acquired for liquidation
|
|
|
(190,000
|
)
|
|
|
—
|
|
Effect of foreign currency translation
|
|
|
(273,000
|
)
|
|
|
(33,000
|
)
|
Finance income recognized
|
|
|
4,001,000
|
|
|
|
5,142,000
|
|
Balance, end of period
|
|
$
|
13,243,000
|
|
|
$
|
17,843,000
|
|
Finance income as a percentage of collections
|
|
|
62.8
|
%
|
|
|
70.5
|
%
|
During the three month periods ended December 31, 2016, the Company purchased $35.0 million of face value portfolios at a cost of $2.2 million. During the three months ended December 31, 2015, the Company purchased $97.7 million of face value portfolios, at a cost of $4.4 million.
The following table summarizes collections received by the Company’s third party collection agencies and attorneys, less commissions and direct costs, for the three month periods ended December 31, 2016 and 2015, respectively.
|
|
For the Three Months Ended
December 31
,
|
|
|
|
2016 (restated)
|
|
|
2015
|
|
Gross collections (1)
|
|
$
|
11,495,000
|
|
|
$
|
11,411,000
|
|
Commissions and fees (2)
|
|
|
5,126,000
|
|
|
|
4,118,000
|
|
Net collections
|
|
$
|
6,369,000
|
|
|
$
|
7,293,000
|
|
(1)
|
Gross collections include: collections from third party collection agencies and attorneys, collections from in-house efforts, and collections represented by account sales.
|
(2)
|
Commissions and fees are the contractual commission earned by third party collection agencies and attorneys, and direct costs associated with the collection effort, generally court costs. Includes a 3% fee charged by a servicer on gross collections received by the Company in connection with the Portfolio Purchase. Such arrangement was consummated in December 2007. The fee is charged for asset location, skip tracing and ultimately suing debtors in connection with this portfolio purchase.
|
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5—Acquisition of CBC
On December 31, 2013, the Company acquired 80% ownership of CBC and its affiliate, CBC Management Services, LLC for approximately $5.9 million.
On December 31, 2015, the Company acquired the remaining 20% ownership of CBC for $1,800,000, through the issuance of restricted stock valued at approximately $1,000,000 and $800,000 in cash. Each of the two original principals received 61,652 shares of restricted stock at a fair market value of $7.95 per share and $400,000 in cash. An aggregate of 123,304 shares of restricted stock were issued as part of the transaction. These shares are subject to a one year lock-up period in which the holders cannot sell the shares. In addition, the shares are subject to certain sales restrictions following the initial lock-up period, which expired on December 31, 2016 (see Note 15 – Stock Based Compensation).
On January 1, 2016, the Company renewed the expiring two-year employment agreements of the two CBC principals for one year terms. The employment contracts of the original two principals expired at the end of December 2016. The Company did not renew those contracts. Ryan Silverman has been appointed CEO/General Counsel effective January 1, 2017 (see Note 11 – Commitments and Contingencies).
Note 6—Structured Settlements (restated) (at fair value)
CBC purchases periodic payments under structured settlements and annuity policies from individuals in exchange for a lump sum payment. The Company elected to carry the structured settlements at fair value. Unearned income on structured settlements is recognized as interest income using the effective interest method over the life of the related structured settlement. Changes in fair value are recorded in unrealized gain (loss) on structured settlements in the Company’s statements of operations. Unrealized gains on structured settlements is comprised of both unrealized gains resulting from fair market valuation at the date of acquisition of the structured settlements and the subsequent fair value adjustments resulting from the change in the discount rate. Of the $1.0 million of unrealized losses recognized in the three month period ended December 31, 2016, approximately $2.1 million is due to day one gains on new structured settlements financed during the period, offset by a decrease of $0.5 million in realized gains recognized as realized interest income on structured settlements, and a reduction in fair value of $2.6 million during the period.
The Company elected the fair value treatment under ASC 825-10-50-28 through 50-32 to be transparent to the user regarding the underlying fair value of the structured settlement which collateralizes the debt of CBC. The Company believes any change in fair value is driven by market risk as opposed to credit risk associated with the underlying structured settlement annuity issuer.
The purchased personal injury structured settlements result in payments over time through an annuity policy. Most of the annuities acquired involve guaranteed payments with specific defined ending dates. CBC also purchases a small number of life contingent annuity payments with specific ending dates but the actual payments to be received could be less due to the mortality risk associated with the measuring life. CBC records a provision for loss each period. The life contingent annuities are not a material portion of assets at December 31, 2016 and revenue for the three month period ended December 31, 2016.
Structured settlements consist of the following as of December 31, 2016 and September 30, 2015:
|
|
December 31
,
2016 (restated)
|
|
|
September 30,
2016
|
|
Maturity (1) (2)
|
|
$
|
143,226,000
|
|
|
$
|
133,059,000
|
|
Unearned income
|
|
|
(54,274,000
|
)
|
|
|
(47,351,000
|
)
|
Structured settlements, net
|
|
$
|
88,952,000
|
|
|
$
|
85,708,000
|
|
(1)
|
The maturity value represents the aggregate unpaid principal balance at December 31, 2016 and September 30, 2016.
|
(2)
|
There are no amounts of structured settlements that are past due, or in nonaccrual status at December 31, 2016 and September 30, 2016.
|
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6—Structured Settlements (restated) (at fair value)
(continued)
Encumbrances on structured settlements as of December 31, 2016 and September 30, 2016 are as follows:
|
|
December 31
,
2016 (restated)
|
|
|
September 30,
2016
|
|
Notes payable secured by settlement receivables with principal and interest outstanding payable until June 2025 (3)
|
|
$
|
1,817,000
|
|
|
$
|
1,862,000
|
|
Notes payable secured by settlement receivables with principal and interest outstanding payable until August 2026 (3)
|
|
|
4,138,000
|
|
|
|
4,242,000
|
|
Notes payable secured by settlement receivables with principal and interest outstanding payable until April 2032 (3)
|
|
|
3,948,000
|
|
|
|
3,987,000
|
|
Notes payable secured by settlement receivables with principal and interest outstanding payable until February 2037 (3)
|
|
|
18,601,000
|
|
|
|
18,978,000
|
|
Notes payable secured by settlement receivables with principal and interest outstanding payable until March 2034 (3)
|
|
|
14,193,000
|
|
|
|
14,507,000
|
|
Notes payable secured by settlement receivables with principal and interest outstanding payable until February 2043 (3)
|
|
|
13,605,000
|
|
|
|
13,705,000
|
|
$25,000,000 revolving line of credit (3)
|
|
|
15,264,000
|
|
|
|
10,154,000
|
|
Encumbered structured settlements
|
|
|
71,566,000
|
|
|
|
67,435,000
|
|
Structured settlements not encumbered
|
|
|
17,386,000
|
|
|
|
18,273,000
|
|
Total structured settlements
|
|
$
|
88,952,000
|
|
|
$
|
85,708,000
|
|
(3)
|
See Note 10 – Other Debt – CBC
|
At December 31, 2016, the expected cash flows of structured settlements based on maturity value are as follows:
September 30, 2017 (9 months)
|
|
$
|
7,635,000
|
|
September 30, 2018
|
|
|
8,556,000
|
|
September 30, 2019
|
|
|
8,914,000
|
|
September 30, 2020
|
|
|
8,371,000
|
|
September 30, 2021
|
|
|
9,105,000
|
|
Thereafter
|
|
|
100,645,000
|
|
Total
|
|
$
|
143,226,000
|
|
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7—Litigation Funding
Personal Injury Claims
On December 28, 2011, the Company entered into a joint venture with Pegasus Legal Funding, LLC (“PLF”) to form the operating subsidiary of Pegasus. Pegasus purchases interests in claims from claimants who are a party to personal injury litigation. Pegasus advances, to each claimant, funds, on a non-recourse basis at an agreed upon interest rate, in anticipation of a future settlement. The interest in each claim purchased by Pegasus consists of the right to receive, from such claimant, part of the proceeds or recoveries which such claimant receives by reason of a settlement, judgment or award with respect to such claimant’s claims. The Company, through Pegasus, earned $2.3 million and $3.1 million in interest and fees during the first quarter of fiscal years 2017 and 2016, respectively. The Company had a net invested balance in personal injury claims of $47.9 million and $48.3 million on December 31, 2016 and September 30, 2016, respectively. Pegasus records reserves for bad debts, which, at December 31, 2016 and 2015 amounted to $9.5 million, and $5.5 million, respectively, as follows:
|
|
For the Three Months Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Balance at beginning of period
|
|
$
|
8,542,000
|
|
|
$
|
5,459,000
|
|
Provisions for losses
|
|
|
1,389,000
|
|
|
|
412,000
|
|
Write offs
|
|
|
(389,000
|
)
|
|
|
(375,000
|
)
|
Balance at end of period
|
|
$
|
9,542,000
|
|
|
$
|
5,496,000
|
|
On November 8, 2016, the Company entered into a binding Term Sheet (the “Term Sheet”) with ASFI Pegasus Holdings, LLC, Fund Pegasus, LLC, Pegasus Funding, LLC, Pegasus Legal Funding, LLC, Max Alperovich and Alexander Khanas. Pegasus is currently the Company’s personal injury claims funding business and is a joint venture that is 80% owned by the Company and 20% owned by PLF. The Company and PLF have decided not to renew the Pegasus joint venture that, by its terms, terminated on December 28, 2016. The Term Sheet amends certain provisions to Pegasus’ operating agreement dated as of December 28, 2011 (as amended, the “Operating Agreement”) and governs the terms relating to the collection of its existing Pegasus portfolio (the “Portfolio”).
Pursuant to the Term Sheet, the parties agreed that Pegasus will continue in existence in order to collect advances on its existing Portfolio. The Company will fund overhead expenses relating to the collection of its Portfolio based on a budget agreed upon by the Company and PLF. Any cash received by Pegasus will be distributed to its members in the order provided for in the Operating Agreement. The Company will be repaid an amount equal to 20% of all principal collected on each investment paid back beginning October 1, 2016 and continuing through the collection of the Portfolio, which will be applied against the outstanding balance of overhead expenses previously advanced by the Company to Pegasus. After January 2, 2017, additional overhead expenses advanced will be paid back monthly as incurred by the Company prior to the calculation and distribution of any profits.
In connection with the Term Sheet, the parties also entered into a customary mutual release and non-disparagement agreement as well as a release from the non-competition obligations under the Operating Agreement.
On November 11, 2016, the Company announced that it will continue its personal injury claims funding business through the formation of a wholly owned subsidiary, Simia. In connection with its formation, Simia entered into an employment agreement with Patrick F. Preece to serve as its Chief Executive Officer.
Matrimonial Claims (included in Other Assets)
On May 8, 2012, the Company formed EMIRIC, LLC, a wholly owned subsidiary of the Company. EMIRIC, LLC entered into a joint venture with California-based Balance Point Divorce Funding, LLC (“BP Divorce Funding”) to create the operating subsidiary BP Case Management, LLC (“BPCM”). BPCM is 60% owned by the Company and 40% owned by BP Divorce Funding. BPCM provides non-recourse funding to a spouse in a matrimonial action. The Company provided a $1.0 million revolving line of credit to partially fund BPCM’s operations, with such loan bearing interest at the prevailing prime rate, with an initial term of twenty-four months. In September 2014, the agreement was revised to extend the term of the loan to August 2016, increase the credit line to $1.5 million and include a personal guarantee of the principal of BP Divorce Funding. Effective August 14, 2016, the Company extended its revolving line of credit with BP Divorce Funding until March 31, 2017, at substantially the same terms as the September 2014 amendment. The loan balance at December 31, 2016 was approximately $1.5 million. The revolving line of credit is collateralized by BP Divorce Funding’s profits share in BPCM and other assets. As of December 31, 2016, the Company’s investment in cases through BPCM was approximately $2.5 million. There was no income recognized in the three month periods ended December 31, 2016 and 2015.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8—Furniture & Equipment
Furniture and equipment consist of the following as of the dates indicated:
|
|
December 31,
2016
|
|
|
September 30,
2016
|
|
Furniture
|
|
$
|
417,000
|
|
|
$
|
417,000
|
|
Equipment
|
|
|
234,000
|
|
|
|
234,000
|
|
Software
|
|
|
1,356,000
|
|
|
|
1,350,000
|
|
|
|
|
2,007,000
|
|
|
|
2,001,000
|
|
Less accumulated depreciation and amortization
|
|
|
1,788,000
|
|
|
|
1,758,000
|
|
Balance, end of period
|
|
$
|
219,000
|
|
|
$
|
243,000
|
|
Note 9—Non Recourse Debt
Non-Recourse Debt –Bank of Montreal (“BMO”)
In March 2007, Palisades XVI borrowed approximately $227 million under the Receivables Financing Agreement, as amended in July 2007, December 2007, May 2008, February 2009, October 2010 and August 2013 (the “RFA”) from BMO, in order to finance the Portfolio Purchase which had a purchase price of $300 million. The original term of the agreement was three years. This term was extended by each of the Second, Third, Fourth and Fifth Amendments and the most recent agreement signed in August 2013.
On August 7, 2013, Palisades XVI, a 100% owned bankruptcy remote subsidiary, entered into a Settlement Agreement and Omnibus Amendment (the “Settlement Agreement”) with BMO as an amendment to the RFA. In consideration for a $15 million prepayment funded by the Company, BMO agreed to significantly reduce minimum monthly collection requirements and the interest rate. If and when BMO receives the next $15 million of collections from the Portfolio Purchase or from voluntary prepayments by Asta Funding, Inc., less certain credits for payments made prior to the consummation of the Settlement Agreement (the “Remaining Amount”), Palisades XVI and its affiliates would be automatically released from liability in connection with the RFA (subject to customary exceptions). A condition to the release was Palisade XVI’s agreement to grant BMO, as of the time of the payment of the Remaining Amount, the right to receive 30% of net collections from the Portfolio Purchase once Palisades XVI has received from future net collections, the sum of $15 million plus voluntary prepayments included in the payment of the Remaining Amount (the “Income Interest”). On June 3, 2014, Palisades XVI paid the Remaining Amount. The final principal payment of $2,901,199 included a voluntary prepayment of $1,866,036 provided from funds of the Company. Accordingly, Palisades XVI was entitled to receive $16.9 million of future collections from the Portfolio Purchase before BMO would be entitled to receive any payments with respect to its Income Interest.
During the month of June, 2016, the Company received the balance of the $16.9 million, and, as of December 31, 2016, the Company recorded a liability to BMO of approximately $179,000, which has been recorded in other liabilities in the Company’s consolidated balance sheet. The funds were subsequently remitted to BMO on January 10, 2017. The liability to BMO is recorded when actual collections are received.
Bank Hapoalim B.M. (“Bank Hapoalim”) Line of Credit (restated)
On May 2, 2014, the Company obtained a $20 million line of credit facility from Bank Hapoalim, pursuant to a Loan Agreement (the “Loan Agreement”) among the Company and its subsidiary, Palisades Collection, LLC, as borrowers (the “Borrowers”), and Bank Hapoalim, as agent and lender. The Loan Agreement provides for a $20.0 million committed line of credit and an accordion feature providing an increase in the line of credit of up to $30 million, at the discretion of the lenders. The facility is for a term of three years at an interest rate of either LIBOR plus 275 basis points or prime, at the Company’s option. The Loan Agreement includes covenants that require the Company to maintain a minimum net worth of $150 million and pay an unused line fee. The facility is secured pursuant to a Security Agreement among the parties to the Loan Agreement, with property of the Borrowers serving as collateral. On March 30, 2016, the Company signed the First Amendment to the Loan Agreement (the “First Amendment”) with Bank Hapoalim which amended certain terms of their banking arrangement. The First Amendment includes (a) the reduction of the interest rate to LIBOR plus 225 basis points; (b) a decrease in the minimum net worth requirement by $50 million, to $100 million and (c) modifies the No Net Loss requirement from a quarterly to an annual basis. All other terms of the original agreement remain in effect. There is an $8.2 million aggregate balance in Bank Hapoalim which has been reclassified as restricted cash in the consolidated balance sheet since these assets serve as collateral for the line of credit (see Note 2 – Business and Basis of Presentation). The Company has not borrowed against the facility and no amounts were outstanding as of December 31, 2016.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 10—Other Debt—CBC
The Company assumed $25.9 million of debt related to the CBC acquisition (see Note 5) on December 31, 2013, including a $12.5 million line of credit with an interest rate floor of 5.5%. Between March 27, 2014 and September 29, 2014, CBC entered into three amendments (Sixth Amendment through Eighth Amendment), resulting in the line of credit increasing to $22.0 million and the interest rate floor reduced to 4.75%. On March 11, 2015, CBC entered into the Ninth Amendment. This amendment, effective March 1, 2015, extended the maturity date on its credit line from February 28, 2015 to March 1, 2017. Additionally, the credit line was increased from $22.0 million to $25.0 million and the interest rate floor was decreased from 4.75% to 4.1%. Other terms and conditions were materially unchanged. On November 26, 2014, CBC completed its fourth private placement, backed by structured settlement and fixed annuity payments. CBC issued, through its subsidiary, BBR IV, LLC, approximately $21.8 million of fixed rate asset-backed notes with a yield of 5.4%. On September 25, 2015, CBC completed its fifth private placement, backed by structured settlement and fixed annuity payments. CBC issued, through its subsidiary, BBR V, LLC, approximately $16.6 million of fixed rate asset-backed notes with a yield of 5.1%. On July 8, 2016, CBC issued, through its subsidiary, BBR VI, approximately $14.8 million of fixed rate asset-backed notes with a yield of 4.85%.
As of December 31, 2016, the remaining debt amounted to $71.6 million, which consisted of $15.3 million drawdown from a line of credit from an institutional source and $56.3 million notes issued by entities 100%-owned and consolidated by CBC. These entities are bankruptcy-remote entities created to issue notes secured by structured settlements. The following table details the other debt at December 31, 2016 and September 30, 2016:
|
|
Interest Rate
|
|
|
December 30
,
2016
|
|
|
September 30,
201
6
|
|
Notes payable secured by settlement receivables with principal and interest outstanding payable until June 2025
|
|
|
8.75
|
%
|
|
$
|
1,817,000
|
|
|
$
|
1,862,000
|
|
Notes payable secured by settlement receivables with principal and interest outstanding payable until August 2026
|
|
|
7.25
|
%
|
|
|
4,138,000
|
|
|
|
4,242,000
|
|
Notes payable secured by settlement receivables with principal and interest outstanding payable until April 2032
|
|
|
7.125
|
%
|
|
|
3,948,000
|
|
|
|
3,987,000
|
|
Notes payable secured by settlement receivables with principal and interest outstanding payable until February 2037
|
|
|
5.39
|
%
|
|
|
18,601,000
|
|
|
|
18,978,000
|
|
Notes payable secured by settlement receivables with principal and interest outstanding payable until March 2034
|
|
|
5.07
|
%
|
|
|
14,193,000
|
|
|
|
14,507,000
|
|
Notes payable secured by settlement receivables with principal and interest outstanding payable until February 2043
|
|
|
4.85
|
%
|
|
|
13,605,000
|
|
|
|
13,705,000
|
|
Subtotal notes payable
|
|
|
|
|
|
|
56,302,000
|
|
|
|
57,281,000
|
|
$25,000,000 revolving line of credit expiring on March 1, 2017
|
|
|
4.1
|
%
|
|
|
15,264,000
|
|
|
|
10,154,000
|
|
Total debt – CBC
|
|
|
|
|
|
$
|
71,566,000
|
|
|
$
|
67,435,000
|
|
Note 11—Commitments and Contingencies
Employment Agreements
On November 11, 2016, the Company announced that it would continue its personal injury claims funding business through the formation of a wholly owned subsidiary Simia. In connection with its formation, Simia entered into an employment agreement (the “Employment Agreement”) with Patrick F. Preece to serve as its Chief Executive Officer. Under the Employment Agreement, Mr. Preece receives an annual base salary of $250,000, subject to annual increases at the discretion of the compensation committee (the “Compensation Committee”) of the Board of Directors of the Company (the “Board”). Mr. Preece is eligible to receive an annual cash or non-cash bonus in the sole and exclusive discretion of the Compensation Committee. Mr. Preece is also eligible to receive a cash or non-cash profit bonus of an aggregate amount up to 15% of the profit of the business of Simia (the “Business”) for each fiscal year in which the Business achieves an internal rate of return of at least 18%. In the event that the Business is sold to a third party solely for cash consideration during Mr. Preece’s employment period, he will be eligible to receive a cash or non-cash sale profit bonus of up to 15% of the closing consideration received by the Company. He is also entitled to participate in any other benefit plans established by the Company for management employees. The Employment Agreement has a five year term. Under the Employment Agreement, Mr. Preece may be terminated with or without “cause” (as defined in the Employment Agreement) and may resign with or without “good reason” (as defined in the Employment Agreement). If Mr. Preece is terminated without “cause” or resigns for “good reason” he will receive severance equal to two years of his base salary. He is also entitled to a pro-rata share of the profit bonus and his deferred compensation will vest immediately. Mr. Preece is also subject to a non-compete and non-solicitation provision during the term of his employment and, unless his employment is terminated without “cause” or he resigns for “good reason,” for two years thereafter.
The employment contracts of the original two CBC principals expired at the end of December 2016. The Company did not renew those contracts. Ryan Silverman has been appointed CEO/General Counsel effective January 1, 2017.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 11—Commitments and Contingencies
(
continued)
Leases
The Company leases its facilities in Englewood Cliffs, NJ, Houston, TX, New York, NY, and Conshohocken, PA.
Legal Matters
In June 2015, a putative class action complaint was filed against the Company, and one of its third party law firm servicers, alleging violation of the federal Fair Debt Collection Practices Act and Racketeer Influenced and Corrupt Organizations Act (“RICO”) and state law arising from debt collection activities and default judgments obtained against certain debtors.
The Company filed a motion to strike the class action allegations and compel arbitration or, to the extent the court declines to order arbitration, to dismiss the RICO claims. On or about March 31, 2015, the court denied the Company’s motion. The Company filed an appeal with the United States Court of Appeals for the Second Circuit. A mediation session was held in July 2015, at which the Company agreed to settle the action on an individual basis for a payment of $13,000 to each named plaintiff, for a total payment of $39,000. Payment was made on or about July 24, 2015. The third party law firm servicer has not yet settled and remains a defendant in the case.
The plaintiffs’ attorneys advised that they were contemplating the filing of another putative class action complaint against the Company alleging substantially the same claims as those that were asserted in this matter. In anticipation of such an eventuality, the Company agreed to non-binding mediation in order to reach a global settlement with other putative class members, which would avert the possibility of further individual or class actions with respect to the affected accounts. Through March 31, 2016, the parties had attended two mediation sessions and were continuing to discuss a global settlement. In connection with such discussions, the parties agreed in principle to settle the action for a payment of $3.9 million (which would be split equally between the Company and the law firm servicer). The Company and law firm servicer had also agreed to cease collection activity on the affected accounts. Accordingly, the Company set up a reserve for settlement costs of $2.0 million during the three months ended March 31, 2016, which was included in general and administrative expenses in the Company’s consolidated statement of operations.
The Company reassessed the situation as of September 30, 2016 and deemed that an additional $0.3 million was necessary to account for legal expenses, which were made during the three month period ended September 30, 2016. The Company reviewed this case as of December 31, 2016 and deemed that the $2.3 million reserve remains valid.
In the ordinary course of the Company’s business, it is involved in numerous legal proceedings. The Company regularly initiates collection lawsuits, using its network of third party law firms, against consumers. Also, consumers occasionally initiate litigation against the Company, in which they allege that the Company has violated a federal or state law in the process of collecting their account. The Company does not believe that these ordinary course matters are material to its business and financial condition. As of the date of this Form 10-Q/A, the Company is not involved in any other material litigation in which it is a defendant.
Note 12—Income Recognition, Impairments, and Commissions and Fees
Income Recognition
The Company accounts for certain of its investments in finance receivables using the guidance of FASB Accounting Standards Codification (“ASC”), Receivables — Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310”). Under the guidance of ASC 310, static pools of accounts are established. These pools are aggregated based on certain common risk criteria. Each static pool is recorded at cost and is accounted for as a single unit for the recognition of income, principal payments and loss provision. Due to the substantial reduction of portfolios reported under the interest method, and the inability to reasonably estimate cash collections required to account for those portfolios under the interest method the Company concluded the cost recovery method is the appropriate accounting method under the circumstances.
Under the guidance of ASC 310-30, the Company must analyze a portfolio upon acquisition to ensure which method is appropriate, and once a static pool is established for a quarter, individual receivable accounts are not added to the pool (unless replaced by the seller) or removed from the pool (unless sold or returned to the seller).
The Company uses the cost recovery method when collections on a particular pool of accounts cannot be reasonably predicted. Under the cost recovery method, no income is recognized until the cost of the portfolio has been fully recovered. A pool can become fully amortized (zero carrying balance on the balance sheet) while still generating cash collections. In this case, all cash collections are recognized as revenue when received.
The Company accounts for its investments in personal injury claims at an agreed upon interest rate, in anticipation of a future settlement. The interest purchased by Pegasus in each claim consists of the right to receive from such claimant part of the proceeds or recoveries which such claimant receives by reason of a settlement, judgment or award with respect to such claimant’s claim. Open case revenue is estimated, recognized and accrued at a rate based on the expected realization and underwriting guidelines and facts and circumstances for each individual case. These personal injury claims are non-recourse. When a case is closed and the cash is received for the advance provided to a claimant, revenue is recognized based upon the contractually agreed upon interest rate, and, if applicable, adjusted for any changes due to a settled amount and fees charged to the claimant.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 12—Income Recognition, Impairments, and Commissions and Fees
(continued)
Income Recognition
(continued)
The funding of matrimonial actions is on a non-recourse basis. Revenue from matrimonial actions is recognized under the cost recovery method.
CBC purchases periodic payments under structured settlements and annuity policies from individuals in exchange for a lump sum payment. The Company elected to carry structured settlements at fair value. Unearned income on structured settlements is recognized as interest income using the effective interest method over the life of the related settlement. Changes in fair value are recorded in unrealized gain (loss) in structured settlements in our statements of operations.
The Company recognizes revenue for GAR Disability Advocates when cases close and fees are collected.
Impairments
The Company accounts for its impairments in accordance with ASC 310, which provides guidance on how to account for differences between contractual and expected cash flows from an investor’s initial investment in loans or debt securities acquired in a transfer if those differences are attributable, at least in part, to credit quality. The recognition of income under ASC 310 is dependent on the Company having the ability to develop reasonable expectations of both the timing and amount of cash flows to be collected. In the event the Company cannot develop a reasonable expectation as to both the timing and amount of cash flows expected to be collected, ASC 310 permits the change to the cost recovery method. The Company will recognize income only after it has recovered its carrying value. If collection projections indicate the carrying value will not be recovered, an impairment is required. The impairment will be equal to the difference between the carrying value at the time of the forecast and the corresponding estimated remaining future collections.
In October 2014, the Company invested $5.0 million in Class A shares of the Topaz MP Fixed Income Fund (“Topaz Fund”), a closed end fund. The Topaz Fund invests indirectly in various portfolios of Non-Performing Small Consumer Loans. The objective of the fund is to obtain a fixed return cash flow representing interest on the invested capital. According to the investment memorandum of the fund, the Topaz Fund proposed to make semi-annual distributions of 14% annual compounded interest on June and December of each year. Since December 2015, no distribution has been received by the Company. The Company received letters from the fund’s General Partner explaining that the distributions were not made due to the negative performance of the fund for the periods.
During the fiscal year 2016, the Company recorded an impairment loss on this investment of $1.0 million, which was included in general and administrative expenses in the consolidated statements of operations. The carrying value of this investment amounted to $3,354,000 at December 31, 2016.
Commissions and fees
Commissions and fees are the contractual commissions earned by third party collection agencies and attorneys, and direct costs associated with the collection effort, generally court costs. The Company utilizes third party collection agencies and attorney networks.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 13—Income Taxes (restated)
At the end of each interim reporting period, the Company estimates its effective income tax rate expected to be applicable for the full year. The estimate is used in providing for income taxes on a year-to-date basis and may change in subsequent interim periods. The Company’s effective tax rate from operations for the three months ended December 31, 2016 was 41%, compared to 31% in the same period of the prior year. The effective rate for fiscal 2017 differed from the U.S. federal statutory rate of 34% due to state income taxes, and other permanent differences. The effective rate for fiscal 2016 differed from the U.S. federal statutory rate of 35% primarily due to state income taxes and other permanent differences.
The Company files income tax returns in the U.S federal jurisdiction, various state jurisdictions, and various foreign countries. The tax returns for the 2014 through 2015 fiscal years are currently under examination by the Internal Revenue Service. The Company does not have any uncertain tax positions.
Note 14—Net (loss) Income per Share (restated)
Basic per share data is calculated by dividing net (loss) income by the weighted average shares outstanding during the period. Diluted earnings per share is calculated similarly, except that it includes the dilutive effect of the assumed exercise of securities, including the effect of shares issuable under the Company’s stock based compensation plans. With respect to the assumed proceeds from the exercise of dilutive options, the treasury stock method is calculated using the average market price for the period.
The following table presents the computation of basic and diluted per share data for the three months ended December 31, 2016 and 2015:
|
|
Three Months Ended December 31, 2016
(restated)
|
|
|
Three Months Ended December 31, 2015
|
|
|
|
Net
Loss
|
|
|
Weighted
Average
Shares
|
|
|
Per
Share
Amount
|
|
|
Net
Income
|
|
|
Weighted
Average
Shares
|
|
|
Per
Share
Amount
|
|
Basic
|
|
$
|
(1,657,000
|
)
|
|
|
11,876,224
|
|
|
$
|
(0.14
|
)
|
|
$
|
1,806,000
|
|
|
|
12,155,421
|
|
|
$
|
0.15
|
|
Effect of Dilutive Stock
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
276,465
|
|
|
|
—
|
|
Diluted
|
|
$
|
(1,657,000
|
)
|
|
|
11,876,224
|
|
|
$
|
(0.14
|
)
|
|
$
|
1,806,000
|
|
|
|
12,431,886
|
|
|
$
|
0.15
|
|
For the three months ended December 31, 2015, 454,205 options at a weighted average exercise price of $9.47 were not included in the diluted earnings per share calculation as they were anti-dilutive.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 15—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 consolidated statement of operations, rather than a disclosure in the notes to the Company’s consolidated financial statements.
On December 16, 2015, the Compensation Committee granted 67,100 stock options to non-officer employees of the Company, of which 9,100 options vested immediately and the remaining 58,000 stock options vest in three equal annual installments and accounted for as one graded vesting award. The exercise price of these options was at the market price on that date. The weighted average assumptions used in the option pricing model were as follows:
Risk-free interest rate
|
|
|
0.24
|
%
|
Expected term (years)
|
|
|
6.25
|
|
Expected volatility
|
|
|
23.4
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
On December 16, 2015, the Compensation Committee granted 5,000 restricted shares to a non-officer employee of the Company. These shares vested fully. On December 31, 2015, the Company issued an aggregate of 123,304 shares to the two former CBC principals (see Note 5 – Acquisition of CBC). These shares are subject to a one year lock up period in which the holders cannot sell the shares. In addition, the shares are subject to certain sales restrictions following the initial lock-up period which expired on December 31, 2016 (see Note 5 – Acquisition of CBC).
Note 16—Stock Option Plans
2012 Stock Option and Performance Award Plan
On February 7, 2012, the Board adopted the Company’s 2012 Stock Option and Performance Award Plan (the “2012 Plan”), which was approved by the stockholders of the Company on March 21, 2012. The 2012 Plan replaced the Equity Compensation Plan (as defined below).
The 2012 Plan provides the Company with flexibility with respect to equity awards by providing for grants of stock awards (i.e. restricted or unrestricted), stock purchase rights and stock appreciation rights, in addition to the granting of stock options.
The Company authorized 2,000,000 shares of Common Stock for issuance under the 2012 Plan. Under the 2012 Plan, the Company has granted options to purchase an aggregate of 484,200 shares, an award of 245,625 shares of restricted stock, and has cancelled 66,568 options, leaving 1,336,743 shares available as of December 31, 2016. At December 31, 2016, 129 of the Company’s employees were able to participate in the 2012 Plan.
Equity Compensation Plan
On December 1, 2005, the Board adopted the Company’s Equity Compensation Plan (the “Equity Compensation Plan”), which was approved by the stockholders of the Company on March 1, 2006. The Equity Compensation Plan was adopted to supplement the Company’s 2002 Stock Option Plan (as defined below).
In addition to permitting the grant of stock options as are permitted under the 2002 Stock Option Plan, the Equity Compensation Plan allowed the Company flexibility with respect to equity awards by also providing for grants of stock awards (i.e. restricted or unrestricted), stock purchase rights and stock appreciation rights.
The Company authorized 1,000,000 shares of Common Stock for issuance under the Equity Compensation Plan. As of March 21, 2012, no more awards could be issued under this plan.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 16—Stock Option Plans
(continued)
2002 Stock Option Plan
On March 5, 2002, the Board adopted the Company’s 2002 Stock Option Plan (the “2002 Plan”), which was approved by the stockholders of the Company on May 1, 2002. The 2002 Plan was adopted in order to attract and retain qualified directors, officers and employees of, and consultants to, the Company.
The 2002 Plan authorized the granting of incentive stock options (as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”)) and non-qualified stock options to eligible employees of the Company, including officers and directors of the Company (whether or not employees) and consultants of the Company.
The Company authorized 1,000,000 shares of Common Stock authorized for issuance under the 2002 Plan. As of March 5, 2012, no more awards could be issued under this plan.
Summary of the Plans
Compensation expense for stock options and restricted stock is recognized over the vesting period. Compensation expense for restricted stock is based upon the market price of the shares underlying the awards on the grant date.
The following table summarizes stock option transactions under the 2012 Plan, the 2002 Plan, and the Equity Compensation Plan:
|
|
Three Months Ended
December 31
,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Number
Of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding options at the beginning of period
|
|
|
949,667
|
|
|
$
|
8.47
|
|
|
|
1,043,566
|
|
|
$
|
8.47
|
|
Options granted
|
|
|
—
|
|
|
|
—
|
|
|
|
67,100
|
|
|
|
7.93
|
|
Options exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Options forfeited/cancelled
|
|
|
(52,500
|
)
|
|
|
14.16
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding options at the end of period
|
|
|
897,167
|
|
|
$
|
8.14
|
|
|
|
1,110,666
|
|
|
$
|
8.43
|
|
Exercisable options at the end of period
|
|
|
844,829
|
|
|
$
|
8.15
|
|
|
|
965,325
|
|
|
$
|
8.46
|
|
The following table summarizes information about the 2012 Plan, 2002 Plan, and the Equity Compensation Plan outstanding options as of December 31, 2016:
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
Range of Exercise Price
|
|
|
Number
of Shares
Outstanding
|
|
|
Weighted
Remaining
Contractual
Life (in Years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
of Shares
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
$2.8751
|
-
|
$5.7500
|
|
|
|
3,800
|
|
|
|
2.3
|
|
|
$
|
2.95
|
|
|
|
3,800
|
|
|
$
|
2.95
|
|
$5.7501
|
-
|
$8.6250
|
|
|
|
768,867
|
|
|
|
5.2
|
|
|
|
7.96
|
|
|
|
716,529
|
|
|
|
7.96
|
|
$8.6251
|
-
|
$11.5000
|
|
|
|
124,500
|
|
|
|
6.1
|
|
|
|
9.40
|
|
|
|
124,500
|
|
|
|
9.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
897,167
|
|
|
|
5.3
|
|
|
$
|
8.14
|
|
|
|
844,829
|
|
|
$
|
8.15
|
|
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 16—Stock Option Plans
(continued)
The Company recognized ($6,000) and $196,000 of compensation (benefit) expense related to the stock option grants during the three month periods ended December 31, 2016 and 2015, respectively. As of December 31, 2016, there was $76,000 of unrecognized compensation cost related to stock option awards. The weighted average period over which such costs are expected to be recognized is 1.8 years. The intrinsic value of the outstanding and exercisable options as of December 31, 2016 was approximately $1,490,000 and $1,398,000, respectively. The weighted average remaining contractual life of exercisable options is 5.1 years. There were no options exercised during the three month periods ended December 31, 2016 and 2015. The fair value of the stock options that vested during the three month periods ended December 31, 2016 and 2015 was approximately $657,000 and $830,000, respectively. There were no options granted during the three month period ended December 31, 2016. The fair value of the options granted during the three month period ended December 31, 2015 was approximately $532,000.
The following table summarizes information about restricted stock transactions:
|
|
Three Months Ended
December 31
,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Unvested at the beginning of period
|
|
|
—
|
|
|
$
|
—
|
|
|
|
44,107
|
|
|
$
|
9.28
|
|
Awards granted
|
|
|
—
|
|
|
|
—
|
|
|
|
5,000
|
|
|
|
7.89
|
|
Vested
|
|
|
—
|
|
|
|
—
|
|
|
|
(34,107
|
)
|
|
|
9.57
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Unvested at the end of period
|
|
|
—
|
|
|
$
|
—
|
|
|
|
15,000
|
|
|
$
|
7.92
|
|
The Company recognized $0 and $87,000 of compensation expense related to the restricted stock awards during the three month periods ended December 31, 2016 and 2015, respectively. As of December 31, 2016, there was no unrecognized compensation cost related to restricted stock awards. No restricted stock was granted during the three month period ended December 31, 2016. An aggregate of 5,000 shares of restricted stock was granted during the three month period ended December 31, 2015. The fair value of the awards vested during the three month periods ended December 31, 2016 and 2015 was $0 and $40,000, respectively.
The Company recognized an aggregate total of ($6,000) and $283,000 in compensation (benefit) expense for the three month periods ended December 31, 2016 and 2015, respectively, for the stock options and restricted stock grants. As of December 31, 2016, there was a total of $76,000 of unrecognized compensation cost related to unvested stock options and restricted stock grants. The method used to calculate stock based compensation is the straight line pro-rated method.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 17—Stockholders’ Equity
Dividends are declared at the discretion of the Board and depend upon the Company’s financial condition, operating results, capital requirements and other factors that the Board deems relevant. In addition, agreements with the Company’s lenders may, from time to time, restrict the ability to pay dividends. As of December 31, 2016, there were no such restrictions. No dividends were declared during the three month periods ended December 31, 2016 and 2015.
On August 11, 2015, the Board approved the repurchase of up to $15,000,000 of the Company’s common stock and authorized management of the Company to enter into the Shares Repurchase Plan under Sections 10b-18 and 10b5-1 of the Securities Exchange Act (the “Shares Repurchase Plan”). The Shares Repurchase Plan was to have been effective to December 31, 2015. On December 17, 2015 the Board approved the extension of the Plan to March 31, 2016 and reset the maximum to an additional $15 million in repurchases. On March 17, 2016, having repurchased approximately $9.9 million of the Company’s common stock, the Board approved further extension of the Plan to December 31, 2016 and reset the maximum to $15 million in repurchases. On March 22, 2016, a Company shareholder commenced a tender offer on the Company’s common stock. Per the provisions of the Shares Repurchase Plan, it terminated immediately, and no further purchases were permitted under the Shares Repurchase Plan. Through September 30, 2016, the Company purchased approximately 1,186,000 shares at an aggregate cost of approximately $10.1 million under the Shares Repurchase Plan.
On May 25, 2016, the Company entered into a Mutual Confidentiality Agreement (the “Agreement”) with MPF InvestCo 4, LLC, a wholly owned subsidiary of The Mangrove Partners Master Fund, Ltd. (“Mangrove”), pursuant to which Mangrove and the Company agreed to (1) provide certain Confidential Information (as defined below) to the other party to the Agreement and the other party’s representatives, (2) the confidentiality of the Confidential Information, and (3) certain restrictions on the activities of the parties to the Agreement.
As of December 31, 2016, and for the three month periods ended December 31, 2015 and 2016, Mangrove due to their ownership in the Company's common stock, which was acquired in a series of OTC transactions, was deemed to be a related party.
Pursuant to the Agreement, the Company made available to Mangrove and its representatives certain confidential information relating to the Company or its subsidiaries, and Mangrove agreed to make available to the Company and its representatives certain confidential information relating to Mangrove and its affiliates (collectively, the “Confidential Information”). The Company and Mangrove agreed not to disclose the Confidential Information, and to cause each of their representatives, respectively, not to disclose the Confidential Information, except as required by law. Pursuant to the Agreement, the Company provided information requested by Mangrove to one or more of Mangrove’s representatives and such representatives prepared summaries of such information (the “Summaries”). The Company approved the Summaries, and the approved Summaries were provided to Mangrove. The Company agreed to release the approved Summaries publicly on or prior to the end of the Extended Period (as defined in the Agreement), to the extent that the information contained in the Summaries has not already been disclosed.
Further, under the terms of the Agreement, Mangrove and the Company agreed to certain restrictions during the Discussion Period, which began on May 25, 2016 and the Extended Period, including that, unless consented to by the other party to the Agreement or required by applicable law, neither party will, and shall cause its affiliates and representatives not to, (i) commence any litigation against the other party, (ii) make any filing with the Securities and Exchange Commission of proxy solicitation materials, preliminary proxy statement, definitive proxy statement or otherwise or call any annual or special meeting of stockholders of the Company, (iii) publicly refer to: (a) the Confidential Information or Discussion Information (as defined in the Agreement), (b) any annual or special meetings of stockholders of the Company or (c) any prior discussions between the parties, including in any filing with the Securities and Exchange Commission (including any proxy solicitation materials, preliminary proxy statement, definitive proxy statement or otherwise), in any press release or in any other written or oral disclosure to a third party, (iv) make any purchases of the Company’s securities, including, but not limited to, pursuant to any stock buyback plans, tender offers, open-market purchases, privately negotiated transactions or otherwise, (v) make any demand under Section 220 of the Delaware General Corporation Law, (vi) make or propose to make any amendments to the Company’s Certificate of Incorporation, as amended, or By-laws, as amended, (vii) adopt, renew, propose or otherwise enter into a Shareholder Rights Plan with respect to the Company’s securities, (viii) adopt or propose any changes to the Company’s capital structure or (ix) negotiate, discuss, enter into, propose or otherwise transact in any extraordinary transactions with respect to the Company, outside the ordinary course of business, including, but not limited to, any mergers, asset sales or asset purchases.
On November 21, 2016, Mangrove notified the Company that Mangrove was terminating the Agreement with the Company. Under the Agreement, the Company and Mangrove agreed to (1) provide certain Confidential Information (as defined below) to the other party to the Agreement and the other party’s representatives, (2) maintain the confidentiality of the Confidential Information, and (3) certain restrictions on the activities of the parties to the Agreement. Upon termination of the Discussion Period, the agreement provides for a period of 30 days thereafter (the “Extended Period”). Throughout the Extended Period of the Agreement, the parties are subject to the standstill provisions of the Agreement. Following the Discussion Period and the Extended Period, nothing in the Agreement shall prohibit any party from taking any of the activities referred to as the Restricted Activities, and specifically nothing shall restrict Mangrove or its representatives from calling a special meeting, nominating one or more candidates to serve as directors of the Company or commencing, or announcing its intention to commence, a “solicitation” of “proxies” (as such terms are used in Regulation 14A of the Securities Exchange Act of 1934, as amended) to vote with respect to any meeting of stockholders of the Company. The effective termination date of this Agreement was January 6, 2017 (see Note 22 – Subsequent Events).
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 18—Fair Value of Financial Measurements and Disclosures (restated)
Disclosures about Fair Value of Financial Instruments
FASB ASC 825, Financial Instruments, (“ASC 825”), requires disclosure of fair value information about financial instruments, whether or not recognized on the balance sheet, for which it is practicable to estimate that value. Because there are a limited number of market participants for certain of the Company’s assets and liabilities, fair value estimates are based upon judgments regarding credit risk, investor expectation of economic conditions, normal cost of administration and other risk characteristics, including interest rate and prepayment risk. These estimates are subjective in nature and involve uncertainties and matters of judgment, which significantly affect the estimates.
The estimated fair value of the Company’s financial instruments is summarized as follows:
|
|
December 31, 2016 (restated)
|
|
|
September 30, 2016
|
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents (Level 1)
|
|
$
|
6,510,000
|
|
|
$
|
6,510,000
|
|
|
$
|
18,526,000
|
|
|
$
|
18,526,000
|
|
Restricted cash (Level 1)
|
|
|
8,165,000
|
|
|
|
8,165,000
|
|
|
|
—
|
|
|
|
—
|
|
Available-for-sale investments (Level 1)
|
|
|
55,045,000
|
|
|
|
55,045,000
|
|
|
|
56,764,000
|
|
|
|
56,764,000
|
|
Consumer receivables acquired for liquidation (Level 3)
|
|
|
13,243,000
|
|
|
|
45,061,000
|
|
|
|
14,320,000
|
|
|
|
47,233,000
|
|
Structured settlements (Level 3)
|
|
|
88,952,000
|
|
|
|
88,952,000
|
|
|
|
85,708,000
|
|
|
|
85,708,000
|
|
Other investments, net (1)
|
|
|
3,354,000
|
|
|
|
3,354,000
|
|
|
|
3,590,000
|
|
|
|
3,590,000
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other debt – CBC, revolving line of credit (Level 3)
|
|
|
15,264,000
|
|
|
|
15,264,000
|
|
|
|
10,154,000
|
|
|
|
10,154,000
|
|
Other debt – CBC, non-recourse notes payable with varying installments (Level 3)
|
|
|
56,302,000
|
|
|
|
56,302,000
|
|
|
|
57,281,000
|
|
|
|
57,281,000
|
|
(1)
|
The Company has adopted ASU 2015-07 and in accordance with ASU 2015-07, certain investments that are measured at fair value using the net asset value per share (or its equivalent) have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheet.
|
Disclosure of the estimated fair values of financial instruments often requires the use of estimates. The Company uses the following methods and assumptions to estimate the fair value of financial instruments:
Cash and cash equivalents – The carrying amount of cash and cash equivalents approximates fair value.
Restricted cash – The carrying amount of restricted cash approximates fair value.
Available-for-sale investments – The available-for-sale securities consist of mutual funds that are valued based on quoted prices in active markets.
Consumer receivables acquired for liquidation – The Company computed the fair value of the consumer receivables acquired for liquidation using its proprietary forecasting model. The Company’s forecasting model utilizes a discounted cash flow analysis. The Company’s cash flows are an estimate of collections for consumer receivables based on variables fully described in Note 4 - Consumer Receivables Acquired for Liquidation. These cash flows are discounted to determine the fair value.
Structured settlements – The Company determined the fair value based on the discounted forecasted future collections of the structured settlements. Unrealized gains on structured settlements is comprised of both unrealized gains resulting from fair market valuation at the date of acquisition of the structured settlements and the subsequent fair value adjustments resulting from the change in the discount rate. Of the $1.0 million of unrealized losses recognized in the three month period ended December 31, 2016, approximately $2.1 million is due to day one gains on new structured settlements financed during the period, offset by a decrease of $0.5 million in realized gains recognized as realized interest income on structured settlements and a reduction in fair value of $2.6 million during the period.
Other investments – The Company estimated the fair value using the net asset value per share of the investment. There are no unfunded commitments and the investment cannot be redeemed for 5 years from the date of the initial investment (October 2014).
Other debt CBC, revolving line of credit – The Company determined the fair value based on similar instruments in the market.
Other debt CBC, notes payable with varying installments – The fair value at December 31, 2016 was based on the discounted forecasted future collections of the structured settlements.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 18—Fair Value of Financial Measurements and Disclosures (restated)
(continued)
Fair Value Hierarchy
The Company recorded its available-for-sale investments at estimated fair value on a recurring basis. The accompanying consolidated financial statements include estimated fair value information regarding its available-for-sale investments as of December 31, 2016, as required by FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s level within the fair value hierarchy is based on the lowest level of input significant to the fair value measurement.
Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to assess at the measurement date.
Level 2 – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities in active markets; quoted prices in markets that are not active for identical or similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.
Level 3 – Unobservable inputs that are supported by little or no market activity and significant to the fair value of the liabilities that are developed using the reporting entities’ estimates and assumptions, which reflect those that market participants would use.
A significant unobservable input used in the fair value measurement of structured settlements is the discount rate. Significant increases and decreases in the discount rate used to estimate the fair value of structured settlements could decrease or increase the fair value measurement of the structured settlements. The discount rate could be affected by factors, which include, but are not limited to, creditworthiness of insurance companies, market conditions, specifically competitive factors, credit quality of receivables purchased, the diversity of the payers of the receivables purchased, the weighted average life of receivables, current benchmark rates (i.e. 10 year treasury or swap rate) and the historical portfolio performance of the originator and/or servicer.
The Company’s available-for-sale investments are classified as Level 1 financial instruments based on the classifications described above. The Company did not have transfers into or (out of) Level 1 investments during the three month period ended December 31, 2016. The Company had no Level 2 or Level 3 available-for-sale investments during the first three months of fiscal year 2017.
The following table sets forth the Company’s quantitative information about its Level 3 fair value measurements as of December 31, 2016:
|
|
Fair Value
|
|
|
Valuation
Technique
|
|
Significant
Unobservable
Input
|
|
Weighted
Average Rate
|
|
Structured settlements at fair value
|
|
$
|
88,952,000
|
|
|
Discounted cash flow
|
|
Discount rate
|
|
4.83%
|
-
|
5.36%
|
|
A significant unobservable input used in the fair value measurement of the Company's structured settlements measured at fair value using unobservable inputs (Level 3) is the discount rate. The inputs comprising the discount rate include A-rated U.S. Financial yield curve, plus illiquidity spread, and cash flows of the portfolio are adjusted to take into consideration survival probabilities, if applicable.
The changes in structured settlements at fair value using significant unobservable inputs (Level 3) during the three months ended December 31, 2016 were as follows:
Balance at September 30, 2016
|
|
$
|
85,708,000
|
|
Fair value adjustment
|
|
|
(2,553,000
|
)
|
Total gains included in earnings
|
|
|
1,598,000
|
|
Purchases
|
|
|
4,595,000
|
|
Interest accreted
|
|
|
1,567,000
|
|
Payments received
|
|
|
(1,963,000
|
)
|
Total
|
|
$
|
88,952,000
|
|
The amount of total gains (losses) for the three month period included in earnings attributable to the change in unrealized gains relating to assets held at December 31, 2016
|
|
$
|
(955,000
|
)
|
Realized and unrealized gains and losses included in earnings in the accompanying consolidated statements of operations for the three months ended December 31, 2016 are reported in the following revenue categories:
Total gains included in the three months ended December 31, 2016
|
|
$
|
(955,000
|
)
|
Change in unrealized gains relating to assets still held at December 31, 2016
|
|
$
|
(955,000
|
)
|
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 19—Segment Reporting (restated)
The Company operates through strategic business units that are aggregated into four reportable segments: consumer receivables, personal injury claims, structured settlements, and GAR Disability Advocates. The four reportable segments consist of the following:
|
•
|
Consumer receivables -
This segment is engaged in the business of purchasing, managing for its own account and servicing distressed consumer receivables, including judgment receivables, charged off receivables and semi-performing receivables. Judgment receivables are accounts where outside attorneys have secured judgments directly against the consumer. Primary charged-off receivables are accounts that have been written-off by the originators and may have been previously serviced by collection agencies. Semi-performing receivables are accounts where the debtor is currently making partial or irregular monthly payments, but the accounts may have been written-off by the originators. Distressed consumer receivables are the unpaid debts of individuals to banks, finance companies and other credit providers. A large portion of our distressed consumer receivables are MasterCard ® , Visa ® and other credit card accounts which were charged-off by the issuers or providers for non-payment. We acquire these and other consumer receivable portfolios at substantial discounts to their face values. The discounts are based on the characteristics (issuer, account size, debtor location and age of debt) of the underlying accounts of each portfolio. The business conducts its activities primarily under the name Palisades Collection, LLC.
|
|
•
|
Personal injury claims
– Pegasus Funding, LLC, purchases interests in personal injury claims from claimants who are a party to personal injury litigation. Pegasus advances to each claimant funds on a non-recourse basis at an agreed upon interest rate, in anticipation of a future settlement. The interest in each claim purchased by Pegasus consists of the right to receive, from such claimant, part of the proceeds or recoveries which such claimant receives by reason of a settlement, judgment or award with respect to such claimant’s claim. Effective January 2017, Simia will commence funding personal injury settlement claims while Pegasus will not fund any new advances, and will remain in operation to liquidate its current portfolio of advances.
|
|
•
|
Structured settlements
– CBC purchases periodic structured settlements and annuity policies from individuals in exchange for a lump sum payment.
|
|
•
|
Social Security benefit advocacy –
GAR Disability Advocates is an advocacy group which represents individuals nationwide in their claims for social security disability and supplemental security income benefits from the Social Security Administration.
|
Certain non-allocated administrative costs, interest income, interest expense and various other non-operating income and expenses are reflected in Corporate. Corporate assets include cash and cash equivalents, available-for-sale securities, property and equipment, goodwill, deferred taxes and other assets.
The following table shows results by reporting segment for the three month periods ended December 31, 2016 and 2015.
The Company eliminates any revenue between the segments.
(Dollars in millions)
|
|
Consumer
Receivables
|
|
|
Personal
Injury
Claims
|
|
|
Structured
Settlements
|
|
|
Social
Security
Benefit
Advocacy
|
|
|
Corporate
|
|
|
Total
Company
|
|
Three Months Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
4.0
|
|
|
$
|
2.3
|
|
|
$
|
0.9
|
|
|
$
|
1.4
|
|
|
$
|
—
|
|
|
$
|
8.6
|
|
Other income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.6
|
|
|
|
0.6
|
|
Income (loss) before income tax
|
|
|
3.3
|
|
|
|
—
|
|
|
|
(1.5
|
)
|
|
|
(0.9
|
)
|
|
|
(3.7
|
)
|
|
|
(2.8
|
)
|
Total Assets
|
|
|
17.5
|
|
|
|
49.0
|
|
|
|
86.6
|
|
|
|
1.5
|
|
|
|
102.9
|
|
|
|
257.5
|
|
2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
5.1
|
|
|
|
3.1
|
|
|
|
2.9
|
|
|
|
0.7
|
|
|
|
—
|
|
|
|
11.8
|
|
Other income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.5
|
|
|
|
0.5
|
|
Income (loss) before income tax
|
|
|
4.7
|
|
|
|
1.9
|
|
|
|
0.8
|
|
|
|
(1.8
|
)
|
|
|
(2.2
|
)
|
|
|
3.4
|
|
Total Assets
|
|
|
17.9
|
|
|
|
35.2
|
|
|
|
73.9
|
|
|
|
2.4
|
|
|
|
106.6
|
|
|
|
236.0
|
|
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 20 - Accumulated Other Comprehensive (Loss) Income (restated)
Accumulated other comprehensive (loss) income consists of:
|
|
December 31, 2016 (restated)
|
|
|
September 30, 2016
|
|
|
|
Unrealized
gain on
marketable
securities
|
|
|
Foreign
currency
translation,
net
|
|
|
Total
|
|
|
Unrealized
gain on
marketable
securities
|
|
|
Foreign
currency
translation,
net
|
|
|
Total
|
|
Beginning Balance
|
|
$
|
624,000
|
|
|
$
|
(538,000
|
)
|
|
$
|
86,000
|
|
|
$
|
(205,000
|
)
|
|
$
|
(1,480,000
|
)
|
|
$
|
(1,685,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized (losses) gains on foreign currency translation, net of tax benefit/(expense) of $246,000 and ($628,000) at December 31, 2016, and September 30, 2016, respectively.
|
|
|
-
|
|
|
|
(369,000
|
)
|
|
|
(369,000
|
)
|
|
|
-
|
|
|
|
942,000
|
|
|
|
942,000
|
|
Change in unrealized (losses) gains on marketable securities, net of tax benefit/ (expense) of $826,000 and ($529,000) at December 31, 2016, and September 30, 2016, respectively.
|
|
|
(1,239,000
|
)
|
|
|
-
|
|
|
|
(1,239,000
|
)
|
|
|
868,000
|
|
|
|
-
|
|
|
|
868,000
|
|
Amount reclassified from accumulated other comprehensive loss, net of tax benefit of $18,000 and $24,000 at December 31, 2016, and September 30, 2016, respectively.
|
|
|
(27,000
|
)
|
|
|
-
|
|
|
|
(27,000
|
)
|
|
|
(39,000
|
)
|
|
|
-
|
|
|
|
(39,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive (loss) income
|
|
|
(1,266,000
|
)
|
|
|
(369,000
|
)
|
|
|
(1,635,000
|
)
|
|
|
829,000
|
|
|
|
942,000
|
|
|
$
|
1,771,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
(642,000
|
)
|
|
$
|
(907,000
|
)
|
|
$
|
(1,549,000
|
)
|
|
$
|
624,000
|
|
|
$
|
(538,000
|
)
|
|
$
|
86,000
|
|
Note 21—Related Party Transactions
On September 17, 2015, the Company and Piccolo Business Advisory (“Piccolo”), which is owned by Louis Piccolo, a director of the Company, entered into a Consulting Agreement, pursuant to which Piccolo provides consulting services which included, but is not limited to, analysis of proposed debt and equity transactions, due diligence and financial analysis and management consulting services (“services”). The Consulting Agreement is for a period of two years, which ends on September 17, 2017. For the three months ended December 31, 2016, the Company booked a liability of $20,000 to Piccolo for such services which was paid on January 6, 2017.
In addition, A. L. Piccolo & Co., Inc. (“ALP”), which is also owned by Louis Piccolo, received a fee from Pegasus which was calculated based on amounts loaned to Pegasus by Fund Pegasus up to maximum of $700,000. The fee is payable over six years including interest at 4% per annum from Pegasus during the term of the Pegasus Operating Agreement that expired on December 28, 2016. Thereafter, it is payable by PLF and its affiliates. Pegasus paid ALP $33,000 for the three months ended December 31, 2016.
ASTA FUNDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 22—Subsequent Events
On January 6, 2017, the Company entered into a settlement agreement with Mangrove (the “Settlement Agreement”). The Settlement Agreement defines Gary Stern, Ricky Stern, Emily Stern, Arthur Stern, Asta Group, Incorporated and GMS Family Investors LLC collectively as the “Stern Family”.
The Settlement Agreement provides that, within ten business days of the Settlement Agreement, the Company will commence a self-tender offer (“Tender Offer”) to repurchase for cash 5,314,009 shares of its common stock at a purchase price of $10.35 per share. The tender offer will expire no later than February 28, 2017. Pursuant to the Settlement Agreement, Mangrove will tender its 4,005,701 shares for purchase by the Company. The Stern Family has agreed not to tender any of their shares in the Tender Offer. In addition, pursuant to a securities purchase agreement dated January 6, 2017 between Mangrove and Gary Stern, Gary Stern will purchase any remaining shares owned by Mangrove eleven business days following the closing of the Tender Offer for $10.35 per share.
The Settlement Agreement includes customary standstill and related provisions. Mangrove and the Company also agreed on a mutual release of claims.
The Settlement Agreement is terminable by either the Company or Mangrove by written notice at any time after the close of business on the second anniversary of the Settlement Agreement. The Settlement Agreement will also terminate if the Tender Offer does not close on or before February 28, 2017 or the Company amends the terms of the Tender Offer in a manner adverse to Mangrove.
In connection with the Settlement Agreement, the Company entered into a Voting Agreement dated January 6, 2017 (the “Voting Agreement”) with Gary Stern, Ricky Stern, Emily Stern, Asta Group, Incorporated and GMS Family Investors LLC (collectively, the “Stern Stockholders”). The Voting Agreement provides that the Stern Stockholders will not have the right to vote more than 49% of the Company’s total outstanding shares, and any additional shares held by the Stern Stockholders will be voted in a manner proportionate to the votes of the outstanding shares not held by the Stern Stockholders.
As contemplated by the Settlement Agreement, the Board unanimously approved an amendment dated January 6, 2017 (“Amendment”) to the Company’s Amended and Restated By-laws. The Amendment provides that at least half of the Board will consist of independent directors and a lead independent director will be elected from among the independent directors. Amendment will terminate on the earlier of January 6, 2019 or when the Company ceases to be a publicly traded company or a reporting company subject to Section 13 or 15(d) of the Securities Exchange Act of 1934.
On January 19, 2017 the Company commenced a self-tender offer to purchase for cash up to 5,314,009 shares of its common stock at a purchase price of $10.35 per share, less applicable withholding taxes and without interest. The NASDAQ closing price of the Company’s common stock on January 18, 2017, was $10.20 per share.
The tender offer will expire on February 15, 2017, at 11:59 p.m., New York City time, unless the tender offer is extended or withdrawn by the Company. Tenders of shares must be made prior to the expiration of the tender offer and may be withdrawn at any time prior to the expiration of the tender offer, in each case in accordance with the procedures described in the tender offer materials that are being distributed to stockholders.
The Company is making the tender offer pursuant to the Settlement Agreement, by and among the Company, and certain of their respective affiliates, pursuant to which Mangrove and its affiliates will tender their 4,005,701 shares. The tender offer will reduce the number of shares in the public market.
Upon the terms and subject to the conditions of the tender offer, stockholders will receive the purchase price in cash, less any applicable withholding taxes and without interest, for shares properly tendered (and not properly withdrawn) at $10.35 per share. If more than 5,314,009 shares are tendered, the Company will purchase all tendered shares on a pro rata basis, subject to the conditional tender provisions described in the Offer to Purchase. Pursuant to the Settlement Agreement, Gary Stern (or his permitted assignees) has unconditionally agreed to purchase from Mangrove and its affiliates any shares owned by Mangrove and its affiliates that the Company did not purchase in the tender offer. The terms and conditions of the tender offer are set forth in an Offer to Purchase, Letter of Transmittal and related documentation that are being distributed to holders of the Company's shares and have been filed with the U.S. Securities and Exchange Commission (the "SEC"). Stockholders whose shares are purchased in the tender offer will be paid the aggregate purchase price net in cash, less applicable withholding taxes and without interest, promptly after the expiration of the tender offer.
The Company will use a portion of its cash and cash equivalents on hand and securities available for sale to fund the purchase of shares in the tender offer. The tender offer is not conditioned upon obtaining financing or any minimum number of shares being tendered; however, the tender offer is subject to a number of other terms and conditions, which are specified in the Offer to Purchase.
The Company's directors and executive officers have informed the Company of their intention not to tender any shares in the tender offer. Pursuant to the Settlement Agreement, Gary Stern and his affiliates who are party to the Settlement Agreement have also agreed not to tender any shares in the tender offer.