Caution Regarding Forward Looking Statements
This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21 E of the Securities Exchange Act of 1934. All statements other than statements of historical facts included or incorporated by reference in this Quarterly Report on Form 10-Q, including without limitation, statements regarding our future financial position, business strategy, budgets, projected revenues, projected costs and plans and objective of management for future operations, are forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expects,” “intends,” “plans,” “projects,” “estimates,” “anticipates,” or “believes” or the negative thereof or any variation there on or similar terminology or expressions.
We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are not guarantees and are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Important factors which could materially affect our results and our future performance include, without limitation, our ability to purchase defaulted consumer receivables at appropriate prices, changes in government regulations that affect our ability to collect sufficient amounts on our defaulted consumer receivables, our ability to employ and retain qualified employees, changes in the credit or capital markets, changes in interest rates, deterioration in economic conditions, negative press regarding the debt collection industry which may have a negative impact on a debtor’s willingness to pay the debt we acquire, and statements of assumption underlying any of the foregoing, as well as other factors set forth under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016 and Item 1A of this Quarterly Report on Form 10-Q.
All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the foregoing. Except as required by law, we assume no duty to update or revise any forward-looking statements.
Overview
Asta Funding, Inc., 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”), Five Star Veterans Disability (“Five Star”), CBC Settlement Funding, LLC (“CBC”), Simia Capital, LLC (“Simia”) and other subsidiaries, which are not all wholly owned (the “Company”, “we” or “us”), is engaged in several business segments in the financial services industry, including structured settlements, through our wholly owned subsidiary, CBC, funding of personal injury claims through our 80% owned subsidiary, Pegasus Funding, LLC (“Pegasus”) and our wholly owned subsidiary, Simia, social security and disability advocacy, through our wholly owned subsidiary, GAR Disability Advocates and Five Star, and the business of purchasing, managing for its own account and servicing distressed consumer receivables, including charged off receivables, and semi-performing receivables. The Company started out in the consumer receivable business in 1995 as a subprime auto lender. The primary charged-off receivables are accounts that have been written-off by the 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. Our efforts in this area have been in the international arena as we have discontinued our active purchasing of consumer receivables in the United States since 2010. We acquire these and other consumer receivable portfolios at substantial discounts to their face values. The discounts are based on the characteristics (issuer, account size, debtor location and age of debt) of the underlying accounts of each portfolio.
GAR Disability Advocates and Five Star is a social security disability advocacy firm. GAR Disability Advocates assists claimants while Five Star assists veterans in obtaining long term disability and supplemental security benefits from the United States Social Security Administration and the Veterans Benefits Administration.
Pegasus provides funding for individuals in need of short term funds pending insurance settlements of their personal injury claims. The funds are recouped when the underlying insurance settlements are paid. The long periods of time taken by insurance companies to settle and pay such claims resulting from lengthy litigation and the court process is fueling the demand for such funding.
In November 2016, the Company formed Simia, a 100% owned subsidiary. Simia commenced funding personal injury settlement claims in January 2017. Simia was formed in response to the Company’s decision not to renew its joint venture with Pegasus Legal Funding, LLC (“PLF”), which expired at the end of December 2016. Pegasus continues to remain in operation to collect its current portfolio of advances, but has not funded any new advances after December 28, 2016. Simia is being operated by a management team, with significant experience in the personal injury funding business.
CBC invests in structured settlements and provides liquidity to consumers by purchasing certain deferred payment streams including, but not limited to, structured settlements and annuities. CBC generates business from direct marketing as well as through wholesale purchases from brokers or other third parties. CBC has its principal office in Conshohocken, Pennsylvania. CBC primarily warehouses the receivables it originates and periodically resells or securitizes those assets on a pooled basis. The structured settlement marketplace is regulated by federal and state law, requiring that each transaction is reviewed and approved by court order.
The Company operates principally in the United States in four reportable business segments.
Financial Information About Operating Segments
The Company operates through strategic business units that are aggregated into four reportable segments consisting of the following:
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Consumer receivables
segment is engaged in the business of purchasing, managing for its own account and servicing distressed consumer receivables, including charged off and semi-performing receivables, primarily in the international sector. The 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. These receivables were acquired 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.
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Personal injury claims
– Pegasus purchased interests in personal injury claims from claimants who are a party to personal injury litigation through December 28, 2016. Pegasus advanced 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 settlement, judgment or award with respect to such claimant’s claim. Effective January 2017, Simia has commenced 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.
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•
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Structured settlements
- CBC purchases periodic structured settlements and annuity policies from individuals in exchange for a lump sum payment.
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Social Security benefit advocacy
– GAR Disability Advocates and Five Star is a social security disability advocacy group, which obtains and represents individuals and veterans in their claims for social security disability and supplemental security income benefits from the United States Social Security Administration and the Veterans Benefits Administration.
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Three of the Company’s business segments accounted for 10% or more of consolidated net revenue for the three month period ended June 30, 2017. All four of the Company’s business segments accounted for 10% or more of consolidated net revenue for the nine month period ended June 30, 2017. Three of the Company’s business segments accounted for 10% or more of consolidated net revenue for the three and nine month periods ended June 30, 2016. The following table summarizes total revenues by percentage from the four lines of business for the three and nine month periods ended June 30, 2017 and 2016:
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Three Month Ended
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Nine Month Ended
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June 30,
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June 30,
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2017
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|
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2016
|
|
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2017
|
|
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2016
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Finance income (consumer receivables)
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26.9
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%
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24.5
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%
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37.9
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%
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|
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35.6
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%
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Personal injury claims
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37.7
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%
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52.3
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%
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31.6
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%
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|
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35.8
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%
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Structured settlements
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27.7
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%
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17.0
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%
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|
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17.9
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%
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|
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22.0
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%
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GAR Disability Advocates
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7.7
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%
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|
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6.2
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%
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12.6
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%
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|
|
6.6
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%
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Total revenues
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|
|
100.0
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%
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|
|
100.0
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%
|
|
|
100.0
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%
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|
|
100.0
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%
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International operations are included in the consumer receivables segment and are not significant to the overall operations of that segment.
Information about the results of each of the Company’s reportable segments for the three and nine month periods ended June 30, 2017 and 2016, reconciled to the Company’s consolidated results, are set forth below:
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Personal
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GAR
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(Dollars in millions)
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Consumer
Receivables
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Injury
Claims
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Structured
Settlements
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Disability
Advocates
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Corporate
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Total
Company
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Three Months Ended June 30,
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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2017:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total Revenues
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$
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4.0
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$
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5.6
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|
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$
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4.1
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|
|
$
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1.1
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|
|
$
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—
|
|
|
$
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14.8
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Other income
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|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.1
|
|
|
|
0.1
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Income (loss) before income tax
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|
|
3.3
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|
|
|
3.6
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|
|
|
1.0
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|
|
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—
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|
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(3.6
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)
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4.3
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2016:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total Revenues
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4.6
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|
|
|
9.8
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|
|
|
3.2
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|
|
|
1.2
|
|
|
|
—
|
|
|
|
18.8
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Other income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.2
|
|
|
|
0.2
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|
Income (loss) before income tax
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|
|
4.2
|
|
|
|
7.7
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|
|
|
1.0
|
|
|
|
(1.8
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)
|
|
|
(3.5
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)
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|
|
7.6
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|
Nine Months Ended June 30,
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|
|
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2017:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total Revenues
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12.0
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|
10.0
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5.7
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|
|
4.0
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|
|
|
—
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|
|
|
31.7
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Other income
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|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
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Income (loss) before income tax
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|
|
10.3
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|
|
|
3.2
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|
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(2.5
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)
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(1.4
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)
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|
(17.5
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)
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|
|
(7.9
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)
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Total Assets
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20.0
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|
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|
53.5
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|
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|
86.0
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|
|
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3.3
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|
|
|
53.4
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|
|
|
216.2
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|
2016:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
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|
14.7
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|
|
|
14.8
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|
|
|
9.0
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|
|
|
2.7
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|
|
|
—
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|
|
|
41.2
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|
Other income
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|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.1
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|
|
|
1.1
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|
Income (loss) before income tax
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|
|
10.6
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|
|
|
10.0
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|
|
|
2.4
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|
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|
(6.3
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)
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|
|
(8.9
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)
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|
7.8
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|
Total Assets
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|
19.4
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|
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|
45.3
|
|
|
|
76.4
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|
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1.6
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|
|
|
103.1
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|
|
|
245.8
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|
The Company eliminates revenue between segments.
Consumer Receivables
The consumer receivable portfolios generally consist of one or more of the following types of consumer receivables:
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charged-off receivables —
accounts that have been written-off by the originators and may have been previously serviced by collection agencies; and
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•
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semi-performing receivables —
accounts where the debtor is making partial or irregular monthly payments, but the accounts may have been written-off by the originators.
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We acquire these consumer receivable portfolios at a significant discount to the amount actually owed by the borrowers. We acquire these portfolios after a qualitative and quantitative analysis of the underlying receivables and calculate the purchase price so that our estimated cash flow offers us an adequate return on our investment after servicing expenses. After purchasing a portfolio, we actively monitor its performance and review and adjust our collection and servicing strategies accordingly.
We purchase receivables from credit grantors and others through privately negotiated direct sales, brokered transactions and auctions in which sellers of receivables seek bids from several pre-qualified debt purchasers. We pursue new acquisitions of consumer receivable portfolios on an ongoing basis through:
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our relationships with industry participants, financial institutions, collection agencies, investors and our financing sources;
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brokers who specialize in the sale of consumer receivable portfolios; and
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Litigation Funding Business
In 2011, the Company purchased an 80% interest in Pegasus. “PLF”, an unrelated third party, holds the other 20% interest. The Company is committed to loan up to $22.4 million per year to Pegasus for a term of five years, all of which is secured by the assets of Pegasus. These loans has provided financing for the personal injury litigation claims and operating expenses of Pegasus.
The Pegasus business model entails the outlay of non-recourse advances to a plaintiff with an agreed-upon fee structure to be repaid from the plaintiff’s recovery. Typically, such advances to a plaintiff approximate 10-20% of the anticipated recovery. These funds are generally used by the plaintiff for a variety of urgent necessities, ranging from surgical procedures to everyday living expenses.
Pegasus’s profits and losses will be distributed at 80% to the Company and 20% to PLF. These distributions are made only after the repayment of Fund Pegasus’ principal amount loaned, plus an amount equal to advances for overhead expenses.
On November 8, 2016, the Company entered into a binding Term Sheet (the “Term Sheet”) with ASFI Pegasus Holdings, LLC, Fund Pegasus, LLC, Pegasus Funding, LLC, Pegasus Legal Funding, LLC, Max Alperovich and Alexander Khanas. The Company and PLF decided not to renew the Pegasus joint venture that, by its terms, terminated on December 28, 2016. The Term Sheet amended certain provisions to Pegasus’ Operating Agreement dated as of December 28, 2011 and governs the terms relating to the liquidation of the existing Pegasus portfolio.
Pursuant to the Term Sheet, the parties have agreed that Pegasus will continue in existence to collect advances on its Portfolio. The Company will fund overhead expenses relating to its Portfolio based on a budget agreed upon by the Company and PLF. Any cash received by Pegasus will be distributed to its members in the order provided for in the Operating Agreement. The Company will be allocated an amount equal to 20% of all principal collected on each investment paid back beginning October 1, 2016 and continuing through the collection of the Portfolio, which will be applied against the outstanding balance of overhead expenses previously advanced by the Company to Pegasus. After January 2, 2017, additional overhead expenses advanced will be paid back monthly as incurred by the Company prior to the calculation and distribution of any profits. In connection with the Term Sheet, the parties also entered into a customary mutual release and non-disparagement agreement as well as a release from the non-competition obligations under the Operating Agreement.
The Company filed for arbitration with the American Arbitration Association ("AAA") against Pegasus in April 2017 for breaches in the Operating and Liquidation Agreements. On April 18, 2017, the Company was granted an Emergent Award restraining the cash in Pegasus, until a formal arbitration panel is confirmed and can review the case. As of June 30, 2017 there was approximately $24.7 million in cash that was restrained under the Emergent Award, and is classified as restricted on the Company's consolidated balance sheet.
On July 17, 2017, an arbitration panel was confirmed, and a hearing date has been scheduled for August 25, 2017 on the Company's motion to have PLF removed from managing Pegasus and replacing them with Company designated representatives, and to permit disbursements to the Company in accordance with the Operating and Term Sheet.
On November 11, 2016, the Company formed Simia, a wholly owned subsidiary, in response to the Company’s decision not to renew its joint venture with PLF. Simia commenced funding personal injury settlement claims in January 2017. As of June 30, 2017, the Company’s net investment in personal injury cases was approximately $27.5 million.
In 2012, the Company announced the formation of EMIRIC, LLC, a wholly owned subsidiary of the Company. EMIRIC, LLC entered into a joint venture (the “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. The Venture provides non-recourse funding to a spouse in a matrimonial action where the marital assets exceed $2,000,000. Such funds can be used for legal fees, expert costs and necessary living expenses. The Venture receives an agreed percentage of the proceeds received by such spouse upon final resolution of the case. BP Divorce Funding's profits and losses will be distributed 60% to BPCM and 40% to BP Divorce Funding, after the return of the Company’s investment on a case by case basis and after a 15% preferred return to the Company. BPCM’s initial investment in the Venture consisted of up to $15 million to fund divorce claims to be fulfilled in three tranches of $5 million each. Each investment tranche is contingent upon a minimum 15% cash-on-cash return to the Company. At the Company’s option, there could be an additional $35 million investment in divorce claims in tranches of $10 million, $10 million, and $15 million, also with a 15% preferred return and such investments may even exceed a total of $50 million, at BPCM’s sole option. Should the preferred return be less than 15% on any $5 million tranche, the 60%/40% profit and loss split would be adjusted to reflect BPCM’s priority to a 15% preferred return. As of June30, 2017, BPCM has invested $1.7 million, net of reserve charges, in cases managed by this Venture.
In 2012, the Company provided a $1.0 million revolving line of credit to partially fund BP Divorce Funding’s operations with such loan bearing interest at the prevailing prime rate with an initial term of twenty four months. In September 2014, the agreement was revised to extend the term of the loan to August 2016, increase the credit line to $1.5 million and include a personal guarantee of the principal of BP Divorce Funding. The revolving line of credit is collateralized by BP Divorce Funding’s profits share in the venture and other assets. Effective August 14, 2016, BPCM extended its revolving line of credit with BP Divorce Funding until March 31, 2017, at substantially the same terms as the September 2014 amendment. On April 1, 2017, BP Divorce Funding defaulted on this agreement, and as such, the loan balance of approximately $1.5 million was deemed uncollectible and was written off in general and administrative expenses on the consolidated statement of operations during the nine months ended June 30, 2017.
Structured Settlement Business
On December 31, 2013, the Company acquired 80% ownership of CBC and its affiliate, CBC Management Services, LLC, for approximately $5.9 million. In addition, the Company agreed to provide financing to CBC of up to $5.0 million, amended to $7.5 million in March 2015. On December 31, 2015, the Company acquired the remaining 20% ownership of CBC for $1.8 million, through the issuance of restricted stock valued at $1.0 million and $800,000 in cash. Each of the two original principals received 61,652 shares of restricted stock at an agreed upon market price of $8.11 per share and $400,000 in cash. An aggregate of 123,304 shares of restricted stock were issued, and $800,000 was paid. CBC purchases periodic payments under structured settlements and annuity policies from individuals in exchange for a lump sum payment.
CBC has a portfolio of structured settlements which is financed by approximately $76.4 million of debt, consisting of an $4.3 million line of credit with an institutional source and $72.1 million in notes issued by CBC to third party investors. The employment contracts of the original two principals expired at the end of December 2016. The Company did not renew those contracts. Ryan Silverman was appointed CEO/General Counsel, effective January 1, 2017.
Social Security Benefit Advocacy Business
GAR Disability Advocates and Five Star is a social security disability advocacy group, which represents individuals and veterans in their claims for social security disability and supplemental security income benefits from the United States Social Security Administration.
Critical Accounting Policies
We may account for our investments in consumer receivable portfolios, using either:
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the interest method; or
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•
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the cost recovery method.
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Our extensive liquidating experience in certain asset classes such as distressed credit card receivables, consumer loan receivables and mixed consumer receivables has matured, we use the interest method when we believe we can reasonably estimate the timing of the cash flows. In those situations where we diversify our acquisitions into other asset classes in which we do not possess the same expertise or history, or we cannot reasonably estimate the timing of the cash flows, we utilize the cost recovery method of accounting for those portfolios of receivables.
The Company accounts for certain of its investments in finance receivables using the interest method under the guidance of FASB Accounting Standards Codification (“ASC”) Topic 310, Receivables — Loans and Debt Securities Acquired with Deteriorated Credit Quality, (“ASC 310”). Under the guidance of ASC 310, static pools of accounts are established. These pools are aggregated based on certain common risk criteria. Each static pool is recorded at cost and is accounted for as a single unit for the recognition of income, principal payments and loss provision. Due to the substantial reduction of portfolios reported under the interest method, and the inability to reasonably estimate cash collections required to account for those portfolios under the interest method, the Company concluded the cost recovery method is the appropriate accounting method under the circumstances.
Under the guidance of ASC 310, the Company must analyze a portfolio upon acquisition to ensure which method is appropriate, and once a static pool is established for a quarter, individual receivable accounts are not added to the pool (unless replaced by the seller) or removed from the pool (unless sold or returned to the seller).
The Company uses the cost recovery method when collections on a particular pool of accounts cannot be reasonably predicted. Under the cost recovery method, no income is recognized until the cost of the portfolio has been fully recovered. A pool can become fully amortized (zero carrying balance on the balance sheet) while still generating cash collections. In this case, all cash collections are recognized as revenue when received.
The Company accounts for its investments in personal injury claims at an agreed upon interest rate, in anticipation of a future settlement. The interest purchased by Pegasus in each claim will consist of the right to receive from such claimant part of the proceeds or recoveries which such claimant receives by reason of a settlement, judgment or 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.
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 income.
The Company recognizes revenue for GAR Disability Advocates and Five Star when cases close and fees are collected.
In the following discussions, most percentages and dollar amounts have been rounded to aid in the presentation. As a result, all figures are approximations.
Results of Operations
Nine Months Ended June 30, 2017, Compared to the Nine Months Ended June 30, 2016
Finance income
. For the nine months ended June 30, 2017, finance income decreased $2.7 million or 18.2% to $12.0 million from $14.7 million for the nine months ended June 30, 2016. During the nine months ended June 30, 2017, the Company purchased $35.0 million of face value portfolios at a cost of $2.2 million. During the first nine months of fiscal year 2016, the Company purchased $123.2 million of face value portfolios at a cost of $6.5 million. Net collections for the nine months ended June 30, 2017 decreased 15.8% to $18.5 million from $22.0 million for the same prior year period. During the first nine months of fiscal year 2017, gross collections decreased 3.6% or $1.3 million to $32.7 million from $34.0 million for the nine months ended June 30, 2016. Commissions and fees associated with gross collections from our third party collection agencies and attorneys increased $2.2 million, or 18.7%, to $14.3 million for the current fiscal nine month period from $12.0 million for the nine months ended June 30, 2016. Commissions and fees amounted to 43.6% of gross collections for the nine month period ended June 30, 2017, compared to 35.4% in the same period of the prior year, resulting from higher percentage of commissionable collections in the current year period.
Personal injury claims income
. For the nine months ended June 30, 2017, personal injury claims income decreased $4.8 million or 32.2% from $14.8 million in the prior year to $10.0 million in the current year, as a result of the liquidation of the Pegasus joint venture, effective December 28, 2016, partially offset by income earned by Simia.
Structured settlement income.
For the nine months ended June 30, 2017, structured settlement income of $5.7 million includes $5.2 million of unrealized gain, $5.8 million of interest income and a loss on sale of structured settlements $5.3 million. For the nine months ended June 30, 2016, structured settlement income of $9.0 million included $4.5 million of unrealized gains and $4.5 million of interest income. This decrease in income primarily results from the loss on sale of a portion of CBC’s life contingent annuities portfolio. Unrealized gains on structured settlements is comprised of both unrealized gains resulting from fair market valuation at the date of acquisition of the structured settlements and the subsequent fair value adjustments resulting from the change in the discount rate. Of the $5.2 million of unrealized loss recognized in the nine month period ended June 30, 2017, approximately $5.9 million is due to day one gains on new structured settlements financed during the period, $0.8 million gain due to a change in the discount rate, offset by a decrease of $1.5 million in realized gains recognized as realized interest income on structured settlements during the period. There were no other changes in assumptions during the period.
Social security benefit advocacy fee income.
For the nine months ended June 30, 2017, disability fee income increased $1.3 million, or 47.8%, to $4.0 million as compared to $2.7 million for the nine months ended June 30, 2016, due to the increase in the number of closed cases with the United States Social Security Administration.
Other income (loss).
The following table summarizes other income (loss) for the nine months ended June 30, 2017 and 2016:
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Interest and dividend income
|
|
$
|
828,000
|
|
|
$
|
866,000
|
|
Realized (loss)/gain
|
|
|
(833,000
|
)
|
|
|
(16,000
|
)
|
Other
|
|
|
(26,000
|
)
|
|
|
258,000
|
|
|
|
$
|
(31,000
|
)
|
|
$
|
1,108,000
|
|
General and administrative expenses.
For the nine months ended June 30, 2017, general and administrative expense increased $4.3 million, or 13.4 %, to $36.3 million from $32.0 million for the nine months ended June 30, 2016, primarily due to an increase in professional fees of $2.5 million, primarily related to the Mangrove matter, increase in bad debt expense of $3.5 million, and a loss on investment of $3.4 million, partially offset by the reduction in litigation settlement costs of $2.1 million, reduction in GAR Disability Advocates office salaries of $1.5 million and advertising expense of $1.2 million.
Interest expense
. For the nine months ended June 30, 2017, interest expense increased $0.7 million to $3.0 million as compared to $2.3 million for the nine months ended June 30, 2016. The increased interest expense is a result of the additional CBC debt incurred during the period to expand the investment in structured settlements and the interest expense related to the Bank Hapoalim line of credit.
Segment profit – Consumer Receivables
. For the nine months ended June 30, 2017, segment profit decreased $0.3 million to $10.3 million from $10.6 million for the nine months ended June 30, 2016, primarily due to lower revenues of $2.7 million partially offset by the reduction in litigation settlement costs of $2.1 million.
Segment profit – Personal Injury Claims
. For the nine months ended June 30, 2017, segment profit was $3.2 million as compared to segment profit of $10.0 million for the nine months ended June 30, 2016. The decrease is primarily attributable to increased bad debt expense of $2.3 million and the liquidation of the Pegasus joint venture that was effective December 28, 2016.
Segment loss – Structured Settlements
. For the nine months ended June 30, 2017, segment loss was $2.5 million as compared to segment profit of $2.4 million for the nine months ended June 30, 2016. The $4.9 million decrease in profitability was primarily due to the loss on sale of CBC’s life contingent annuities portfolio of $5.4 million, increase in interest expense of $0.5 million, outside services of $0.4 million, advertising expense of $0.3 million partially offset by increased revenues derived from the investment in structured settlements of $1.9 million.
Segment loss – GAR Disability Advocates
. For the nine months ended June 30, 2017, segment loss was $1.4 million as compared to a $6.3 million loss for the same period in the prior year. This reduced loss in the current period is primarily the result of increased revenues of $1.3 million and the reduction in general and administrative expenses of $3.5 million
Income tax (benefit) expense
. For the nine months ended June 30, 2017, income tax benefit, consisting of federal and state income taxes, was $3.2 million as compared to an income tax expense of $2.5 million for the nine months ended June 30, 2016, as a result of the taxable loss in the current year.
Net loss.
As a result of the above, the Company had a net loss for the nine months ended June 30, 2017 of $4.7 million, as compared to $5.3 million net income for the nine months ended June 30, 2016.
Income attributable to non-controlling interest
. The income attributable to non-controlling interest of $0.7 is the portion attributable to Pegasus for the nine months ended June 30, 2017, as compared to $2.2 million attributable to Pegasus and CBC for the nine months ended June 30, 2016.
Net loss attributable to Asta Funding, Inc.
Net loss attributable to Asta Funding, Inc. was $5.4 million for the nine months ended June 30, 2017 as compared to net income of $3.2 million for the nine months ended June 30 2016.
The following table details non-controlling interest for the nine months ended June 30, 2017 and 2016:
|
|
For the
Nine
Months Ended
June 30
, 2017
|
|
|
For the
Nine
Months Ended
June 30
, 2016
|
|
|
|
|
|
|
|
CBC
|
|
|
Total
Non-
|
|
|
|
|
|
|
CBC
|
|
|
Total
Non-
|
|
|
|
Pegasus
|
|
|
Settlement
|
|
|
Controlling
|
|
|
Pegasus
|
|
|
Settlement
|
|
|
Controlling
|
|
|
|
Funding, LLC
|
|
|
Funding, LLC
|
|
|
Interests
|
|
|
Funding, LLC
|
|
|
Funding, LLC
|
|
|
Interests
|
|
Balance, beginning of period
|
|
$
|
(645,000
|
)
|
|
$
|
—
|
|
|
$
|
(645,000
|
)
|
|
$
|
(1,768,000
|
)
|
|
$
|
771,000
|
|
|
$
|
(997,000
|
)
|
Purchase of subsidiary shares from non-controlling interest
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(927,000
|
)
|
|
|
(927,000
|
)
|
Income from non-controlling interest
|
|
|
742,000
|
|
|
|
—
|
|
|
|
742,000
|
|
|
|
2,005,000
|
|
|
|
156,000
|
|
|
|
2,161,000
|
|
Distributions to non-controlling interest
|
|
|
(366,000
|
)
|
|
|
—
|
|
|
|
(366,000
|
)
|
|
|
(1,139,000
|
)
|
|
|
—
|
|
|
|
(1,139,000
|
)
|
Balance, end of period
|
|
$
|
(269,000
|
)
|
|
$
|
—
|
|
|
$
|
(269,000
|
)
|
|
$
|
(902,000
|
)
|
|
$
|
—
|
|
|
$
|
(902,000
|
)
|
Three Months Ended June 30, 2017, Compared to the Three Months Ended June 30, 2016
Finance income
. For the three months ended June 30, 2017, finance income decreased $0.6 million or 13.7% to $4.0 million from $4.6 million for the three months ended June 30, 2016. During the three months ended June 30, 2017, the Company did not purchase any portfolios. During the three months ended June 30, 2016, the Company purchased $2.2 million in face value of new portfolios at a cost of $0.3 million. Net collections for the three months ended June 30, 2017, decreased 15.0% to $6.1 million from $7.2 million for the three months ended June 30, 2016. During the third quarter of fiscal year 2017, gross collections decreased 4.3% or $0.5 million to $10.6 million from $11.1 million for the three months ended June 30, 2016. Commissions and fees associated with gross collections from third party collection agencies and attorneys increased to $4.5 million for the three months ended June 30, 2017 from $3.9 million for the three months ended June 30, 2016. Commissions and fees amounted to 42.5% of gross collections for the three months ended June 30, 2017, compared to 35.3% for the three months ended June 30, 2016, resulting from higher percentage of commissionable collections in the current period.
Personal injury claims income
. For the three months ended June 30, 2017, personal injury claims income decreased $4.2 million to $5.6 million as compared to $9.8 million for the three months ended June 30, 2016, as a result of the liquidation of the Pegasus joint venture, effective December 28, 2016, partially offset by income earned by Simia.
Structured settlement income.
For the three months ended June 30, 2017, structured settlement income of $4.1million included $7.5 million of unrealized gains and $1.9 million of interest income offset by a loss of $5.3 million on the sale of CBC’s life contingent annuities portfolio. For the three months ended June 30, 2016, structured settlement income of $3.2 million included $1.4 million of unrealized gains and $1.8 million of interest income. Unrealized gains on structured settlements is comprised of both unrealized gains resulting from the fair market valuation at the date of acquisition of the structured settlements and the subsequent fair value adjustments resulting from the change in the discount rate. Of the $7.5 million of unrealized gains recognized in the three months ended June 30, 2017, approximately $1.6 million is due to day one gains on new structured settlements financed during the period, a decrease of $5.4 million in unrealized losses recognized as loss on sale of structured settlements and a $0.5 million gain due to a change in the discount rate. There were no other changes in assumptions during the period.
Social security benefit advocacy fee income.
For the three months ended June 30, 2017, disability fee income decreased $0.1 million to $1.1 million as compared to $1.2 million for the three months ended June 30, 2016, due to the timing of the cases closed with the United States Social Security Administration.
Other income (loss).
The following table summarizes other income (loss) for the three months ended June 30, 2017 and 2016:
|
|
June
|
|
|
|
2017
|
|
|
2016
|
|
Interest and dividend income
|
|
$
|
145,000
|
|
|
$
|
199,000
|
|
Realized loss
|
|
|
(18,000
|
)
|
|
|
(32,000
|
)
|
Other
|
|
|
(29,000
|
)
|
|
|
48,000
|
|
|
|
$
|
98,000
|
|
|
$
|
215,000
|
|
General and administrative expenses.
For the three months ended June 30, 2017, general and administrative expense decreased $1.2 million, or 11.7 %, to $9.4 million from $10.6 million for the three months ended June 30, 2016, primarily attributable to a reduction in GAR Disability expenses for advertising and payroll costs .
Interest expense
. For the three months ended June 30, 2017, interest expense increased $0.3 million to $1.1 million as compared to $0.8 million for the three months ended June 30, 2016. The increased interest expense in the current period is the result of the additional CBC debt incurred to expand the investment in structured settlements and interest expense related to the Bank Hapoalim line of credit.
Segment profit – Consumer Receivables
. For the three months ended June 30, 2017, segment profit decreased $0.9 million to $3.3 million as compared to $4.2 million for the three months ended June 30, 2016, primarily due to a decrease in revenue of $0.6 million and impairment charges of approximately $0.2 million.
Segment profit– Personal Injury Claims
. For the three months ended June 30, 2017, segment profit was $3.6 million as compared to $7.7 million profit for the three months ended June 30, 2016. The decrease is primarily attributable to the increase in bad debt expense of $0.2 million and the liquidation of the Pegasus joint venture that was effective December 28, 2016.
Segment profit– Structured Settlement
. For the three months ended June 30, 2017, segment profit was $1.0 million as compared to $1.0 million profit for the three months ended June 30, 2016.
Segment loss – GAR Disability Advocates
. For the three months ended June 30, 2017, segment loss was $0.0 million as compared to a $1.8 million loss for the same period in the prior year. This reduced loss in the current fiscal year is primarily the result a of reduction in general and administrative expenses of $1.8 million.
Income tax expense
. For the three months ended June 30, 2017, income tax expense, consisting of federal and state components, was $1.7 million as compared to income tax expense of $2.9 million for the three months ended June 30, 2016, resulting from decreased taxable income in the current period.
Net income.
As a result of the above, for the three months ended June 30, 2017, the Company had a net income of $2.6 million as compared to a net income of $4.7 million for the three months ended June 30, 2016.
Income attributable to non-controlling interest.
The income attributable to non-controlling interest of $0.7 million is the portion of results attributable to Pegasus for the three months ended June 30, 2017, as compared to income attributable to non-controlling interest of $1.5 million income for the three months ended June 30, 2016.
Net income attributable to Asta Funding, Inc.
Net income attributable to Asta Funding, Inc. was $1.8 million for the three months ended June 30, 2017 as compared to net income of $3.2 million for the three months ended June 30, 2016.
The following table details non-controlling interest for the three months ended June 30, 2017 and 2016:
|
|
For the Three Months Ended
June 30
, 2017
|
|
|
For the Three Months Ended
June 30
,
2016
|
|
|
|
|
|
|
|
Total
Non-
|
|
|
|
|
|
|
Total
Non-
|
|
|
|
Pegasus
|
|
|
Controlling
|
|
|
Pegasus
|
|
|
Controlling
|
|
|
|
Funding, LLC
|
|
|
Interests
|
|
|
Funding, LLC
|
|
|
Interests
|
|
Balance, beginning of period
|
|
$
|
(999,000
|
)
|
|
$
|
(999,000
|
)
|
|
$
|
(2,101,000
|
)
|
|
$
|
(2,101,000
|
)
|
Income from non-controlling interest
|
|
|
730,000
|
|
|
|
730,000
|
|
|
|
1,549,000
|
|
|
|
1,549,000
|
|
Distributions to non-controlling interest
|
|
|
—
|
|
|
|
—
|
|
|
|
(350,000
|
)
|
|
|
(350,000
|
)
|
Balance, end of period
|
|
$
|
(269,000
|
)
|
|
$
|
(269,000
|
)
|
|
$
|
(902,000
|
)
|
|
$
|
(902,000
|
)
|
Liquidity and Capital Resources
Our primary source of cash from operations is collections on the receivable portfolios we have acquired and the funds generated from the personal injury claims and structured settlement business segments. Our primary uses of cash include repayments of debt and associated interest payment, purchases of structured settlements and advances of personal injury claims, costs involved in the collection of consumer receivables, taxes and to support the day-to-day operations of the Company.
Receivables Financing Agreement (“RFA”)
In March 2007, Palisades XVI borrowed approximately $227 million under the RFA, as amended in July 2007, December 2007, May 2008, February 2009, October 2010 and August 2013 from BMO, in order to finance the Portfolio Purchase which had a purchase price of $300 million. The original term of the agreement was three years. This term was extended by each of the Second, Third, Fourth, and Fifth Amendments and the most recent agreement signed in August 2013, discussed below.
Financing Agreement. The Settlement Agreement and Omnibus Amendment (“Settlement Agreement”) was in effect on August 7, 2013, Palisades XVI, a 100% owned bankruptcy remote subsidiary, entered into a Settlement Agreement with BMO as an amendment to the RFA. In consideration for a $15 million prepayment funded by the Company, BMO has agreed to significantly reduce minimum monthly collection requirements and the interest rate. If and when BMO were to receive the next $15 million of collections from the Portfolio Purchase, (the “Remaining Amount”) less certain credits for payments made prior to the consummation of the Settlement Agreement, the Company would be entitled to recover from future net collections the $15 million prepayment that it funded. Thereafter, BMO would have the right to receive 30% of future net collections. Upon repayment of the Remaining Amount to BMO, the Company would be released from the remaining contractual obligation of the RFA and the Settlement Agreement.
On June 3, 2014, Palisades XVI finished paying the Remaining Amount. The final principal payment of $2.9 million included a voluntary prepayment of $1.9 million provided from funds of the Company. Accordingly, Palisades XVI was entitled to receive $16.9 million of future collections from the Portfolio Purchase before BMO is entitled to receive any payments with respect to its Income Interest. During the month of June 2016, the Company received the balance of the $16.9 million, and, as of June 30, 2017, the Company recorded a liability to BMO of approximately $.02 million. The liability to BMO is recorded when actual collections are received.
Bank Hapoalim B.M. (“Bank Hapoalim”) Line of Credit
On May 2, 2014, the Company obtained a $20 million line of credit facility from Bank Hapoalim, pursuant to a Loan Agreement (the “Loan Agreement”) among the Company and its subsidiary, Palisades Collection, LLC, as borrowers, and Bank Hapoalim, as agent and lender. The Loan Agreement provides for a $20.0 million committed line of credit and an accordion feature providing an increase in the line of credit of up to $30 million, at the discretion of the lenders. The facility is for a term of three years at an interest rate of either LIBOR plus 275 basis points or prime, at the Company’s option. The Loan Agreement includes covenants that require the Company to maintain a minimum net worth of $150 million and pay an unused line fee. The facility is secured pursuant to a Security Agreement among the parties to the Loan Agreement. On March 30, 2016, the Company signed the First Amendment to the Loan Agreement (the “First Amendment”) with Bank Hapoalim which amended certain terms of their banking arrangement. The First Amendment includes (a) the reduction of the interest rate to LIBOR plus 225 basis points; (b) a decrease in the minimum net worth requirement by $50 million, to $100 million and (c) modifies the No Net Loss requirement from a quarterly to an annual basis. All other terms of the original agreement remain in effect. The Company has $9.6 million as outstanding balance against the facility as of June 30, 2017. There is a $10.0 million aggregate balance on deposit at Bank Hapoalim which has been reclassified to restricted cash in the consolidated balance sheet since these assets serve as collateral for the line of credit. On April 28, 2017, the Company renewed the line of credit facility with the new maturity date of August 2, 2017, under the existing terms and conditions as of June 30, 2017. On August 2, 2017, the Bank Hapoalim $9.6 million line of credit expired and the Company satisfied the debt with cash that was held in deposit as collateral with the bank.
Tender Offer of Company Common Shares
On March 22, 2016, MPF InvestCo 4, LLC, a wholly owned subsidiary of The Mangrove Partners Master Fund, Ltd. ("Mangrove"), filed a Tender Offer Statement with the SEC, announcing the commencement of an unsolicited tender offer to acquire up to 3,000,000 shares of Asta common stock at price of $9.00 per share (“the Mangrove Offer”). The Mangrove Offer was sent to the holders of common stock of the Issuer. If the Offer is fully subscribed, the Mangrove Offer would represent approximately 25.0% of the issued and outstanding Shares and would result in Mangrove owning an aggregate of approximately 5,102,427 Shares, which would represent approximately 42.5% of issued and outstanding Shares, based on the 12,011,476 Shares, issued and outstanding as of March 31, 2016.
On March 31, 2016, the Company announced that its Board of Directors, after careful consideration and in consultation with a special committee of the Board and its financial and legal advisors, has unanimously determined to recommend that shareholders reject the Mangrove Offer. Furthermore, the Company has announced its intention to commence an issuer tender offer for 3,000,000 shares of Asta common stock pursuant to a "Dutch Auction" format at a price range of $9.50 to $10.25 per share.
On April 15, 2016, Mangrove amended its previously announced unsolicited tender offer to acquire up to 3,000,000 shares of Asta’s common stock, increasing the price per share from $9.00 to $9.50, and extending the expiration date to May 9, 2016. In addition, the amendment added certain additional conditions to Mangrove’s obligation to consummate its offer. On April 21, 2016, The Company’s Board of Directors unanimously reaffirmed its recommendation to shareholders that they reject the unsolicited offer, citing the fact that the increased offer is still at the bottom of the range in the Company’s self-tender, as described above.
On April15, 2016, MPF InvestCo 4, LLC and Mangrove Master Fund (“Mangrove”) amended its previously announced unsolicited tender offer to acquire up to 3,000,000 shares of Asta’s common stock, increasing the price per share from $9.00 to $9.50, and extending the expiration date to May 9, 2016. In addition, the amendment added certain additional conditions to Mangrove’s obligation to consummate its offer. On April 21, 2016, The Company’s Board of Directors unanimously reaffirmed its recommendation to shareholders that they reject the unsolicited offer, citing the fact that the increased offer is still at the bottom of the range in the Company’s self-tender, as described above. On April 26, 2016, Mangrove announced the termination of its Tender Offer, previously due to expire on May 9, 2016. Mangrove terminated its offer because it determined that a condition of the offer would not be satisfied. None of the shares of the Company’s common stock were purchased under the Mangrove offer.
The Company’s Tender offer expired on May 12, 2016.
On January 19, 2017, the Company commenced a self-tender offer to purchase for cash up to 5,314,009 shares of its common stock at a purchase price of $10.35 per share, less applicable withholding taxes and without interest. The Company made the tender offer pursuant to the Settlement Agreement dated as of January 6, 2017, by and among the Company, Mangrove and certain of their respective affiliates, pursuant to which Mangrove and its affiliates will tender their 4,005,701 shares. The tender offer will reduce the number of shares in the public market.
If more than 5,314,009 shares had been tendered, the Company would have purchased all tendered shares on a pro rata basis, subject to the conditional tender provisions described in the Offer to Purchase. Pursuant to the Settlement Agreement, Gary Stern (or his permitted assignees) had unconditionally agreed to purchase from Mangrove and its affiliates any shares owned by Mangrove and its affiliates that the Company did not purchase in the tender offer.
The tender offer expired on February 15, 2017, at 11:59 p.m., New York City time. Based on the final count by American Stock Transfer & Trust Company, LLC ("AMSTOCK"), the depositary for the tender offer, a total of approximately 6,022,253 shares of the Company’s common stock were validly tendered and not validly withdrawn. Because the tender offer was oversubscribed by 708,244 shares, the Company purchased only a prorated portion of the shares properly tendered by each tendering stockholder. The depositary had informed the Company that the final proration factor for the tender offer is approximately 88.24% of the shares validly tendered and not validly withdrawn. AMSTOCK promptly issued payment for the 5,314,009 shares accepted pursuant to the tender offer and returned all other shares tendered and not purchased. The shares acquired represented approximately 44.7% of the total number of shares of the Company’s common stock issued and outstanding as of February 6, 2017. As a result of this tender offer the Company recorded an additional $54.2 million in treasury stock and an $0.8 million charge to general and administrative expense during the nine months ended June 30, 2017. Additionally, the Ricky Stern Family 2012 Trust (Gary Stern's permitted assignee) acquired 471,086 Shares under the Purchase Agreement with Mangrove and its affiliates on March 10, 2017 for $4.9 million.
Personal Injury Claims
On December 28, 2011, we formed a joint venture Pegasus. Pegasus purchases interests in personal injury claims from claimants who are a party to personal injury litigation with the expectation of a settlement in the future. Pegasus advances to each claimant funds on a non-recourse basis at an agreed upon interest rate in anticipation of a future settlement. The interest purchased by Pegasus in each claim will consist of the right to receive from such claimant part of the proceeds or recoveries which such claimant receives by reason of a settlement, judgment or award with respect to such claimant’s claim. The profits from the joint venture are distributed based on the ownership percentage of the parties, with Asta Funding, Inc. receiving 80% and PLF receiving 20%.
On November 8, 2016, the Company entered into a binding Term Sheet (the “Term Sheet”) with Pegasus and PLF. The Company and PLF have decided not to renew the Pegasus joint venture that by its terms terminates on December 28, 2016. The Term Sheet amends certain provisions to Pegasus’ operating agreement dated as of December 28, 2011 (as amended, the “Operating Agreement”) and governs the terms relating to the collection of its existing Pegasus portfolio (the “Portfolio”).
Pursuant to the Term Sheet, the parties thereto have agreed that Pegasus will continue in existence in order to collect advances on its existing Portfolio. The Company will fund overhead expenses relating to the collection of the Portfolio based on a budget agreed upon by the Company and PLF. Any cash received by Pegasus will be distributed to its members in the order provided for in the Operating Agreement. The Company will be allocated an amount equal to 20% of all principal collected on each investment paid back beginning October 1, 2016 and continuing through the collection of the Portfolio, which will be applied against the outstanding balance of overhead expenses previously advanced by the Company to Pegasus. After January 2, 2017, additional overhead expenses advanced will be paid back monthly as incurred by the Company prior to the calculation and distribution of any profits.
In connection with the Term Sheet, the parties thereto have also entered into a customary mutual release and non-disparagement agreement as well as a release from the non-competition obligations under the Operating Agreement.
The Company filed for arbitration with the American Arbitration Association ("AAA") against Pegasus in April 2017 for breaches in the Operating and Liquidation Agreements. On April 18, 2017, the Company was granted an Emergent Award restraining the cash in Pegasus, until a formal arbitration panel is confirmed and can review the case. As of June 30, 2017 there was approximately $24.7 million in cash that was restrained under the Emergent Award, and is classified as restricted on the Company's consolidated balance sheet.
On July 17, 2017, an arbitration panel was confirmed, and a hearing date has been scheduled for August 25, 2017 on the Company's motion to have PLF removed from managing Pegasus and replacing them with Company designated representatives, and to permit disbursements to the Company in accordance with the Operating and Term Agreements. On November 11, 2016, the Company announced that it will continue its personal injury claims funding business through the formation of a wholly owned subsidiary, Simia.
On March 24, 2017, Simia purchased a portfolio of personal injury claims from a third party for approximately $3.0 million, The Company plans to grow the business organically, but may from time to time purchase portfolios of personal injury claims from third parties if the opportunity presented aligns with the Company's strategic growth plans.
Divorce Funding
On May 8, 2012, the Company formed EMIRIC, LLC, a wholly owned subsidiary of the Company. EMIRIC, LLC entered into a joint venture with California-based Balance Point Divorce Funding, LLC (“BP Divorce Funding”) to create BP Case Management, LLC (“BPCM”). BPCM is 60% owned by the Company and 40% owned by BP Divorce Funding. BPCM provides non-recourse funding to a spouse in a matrimonial action. The Company provides a $1.5 million revolving line of credit to partially fund BP Divorce Funding’s operations, with such loan bearing interest at the prevailing prime rate, with an initial term of twenty-four months. The term of the loan was to end in May 2014, but had been extended to August 2016. Effective August 14, 2016, the Company extended its revolving line of credit with Balance Point until March 31, 2017, at substantially the same terms as the September 14, 2014 amendment. The revolving line of credit is collateralized by BP Divorce Funding’s profit share in BPCM and other assets. On April 1, 2017, this loan was in default as BPCM failed to make the required payments due under the loan agreement. Accordingly, the loan balance of $1.5 million was deemed uncollectible and written off during the second quarter of fiscal 2017 with a charge to general and administrative expenses.
Structured Settlements
On December 31, 2013, the Company acquired 80% ownership of CBC and its affiliate, CBC Management Services, LLC for approximately $5.9 million. At the closing, the operating principals of CBC, namely William J. Skyrm, Esq. and James Goodman, were each issued a 10% interest in CBC. In addition, the Company agreed to provide financing to CBC of up to $5 million, amended to $7.5 million in March 2015. Through the transaction we acquired structured settlements valued at $30.4 million and debt that totaled $23.4 million, consisting of $9.6 million of a revolving line of credit with a financial institution and $13.8 million of non-recourse notes issued by CBC’s subsidiaries. On December 31, 2015, the Company acquired the remaining 20% ownership of CBC for $1,800,000, through the issuance of restricted stock valued at approximately $1,000,000 and $800,000 in cash. Each of the two original principals received 61,652 shares of restricted stock at fair market value of $7.95 per share and $400,000 in cash. An aggregate of 123,304 shares of restricted stock was issued. As of June 30, 2017, CBC had structured settlements valued at $89 million and debt of $76.4 million, consisting of a $4.3 million line of credit and an aggregate of $72.1million of non-recourse notes.
On April 28, 2017, CBC entered into an Assignment Agreement (the “Assignment Agreement”) by and among CBC and an unrelated third party (Assignee”). The Assignment Agreement provided for the sale of the Company’s entire life contingent asset portfolio included in the Company’s structured settlements to the Assignee for a purchase price of $7.7 million. The Company realized a loss from the sale of $5.3 million for the three months ended June 30, 2017.
Cash Flow
As of June 30, 2017, our cash and cash equivalents decreased $1.9 million to $16.6 million from $18.5 million at September 30, 2016. Additionally, the Company had $35.2 million in cash and cash equivalents that has been classified as restricted at June 30, 2017.
Net cash used in operating activities was $6.6 million during the nine months ended June 30, 2017 compared to $2.3 million provided by operating activities during the nine months ended June 30, 2016. Net cash provided by investing activities was $75.9 million during the nine month period ended June 30, 2017 compared to $9.2 million used in investing activities during the nine months ended June 30, 2016. The increase was primarily attributed to the proceeds realized from the sale of available for sale securities of $62.4 million, and collections on personal injury claims of $35.4 million, in the current year. Net cash used in financing activities was $71.2 million during the nine months ended June 30, 2017, as compared to cash used in financing activities of $0.4 million during the nine months ended June 30, 2016. The increase in net cash in financing activities in the current period is primarily the result of treasury stock purchase in conjunction with the Company’s self-tender of $54.2 million, the reclassification of $10 million of cash collateral as restricted for the Company’s line of credit with Bank Hapoalim and $24.7 million in cash that was restrained under the Emergent Award against Pegasus partially offset by $9.6 million in borrowings from Bank Hapoalim.
Our cash requirements have been and will continue to be significant and include external financing to operate various lines of business. Significant requirements include investment in personal injury claims, investment in structured settlements, costs involved in the collections of consumer receivables, repayment of CBC debt and investment in consumer receivable portfolios. We believe we may secure credit facilities with financial institutions as we look to grow the Company, support current operations, and execute on our short and long term business initiatives. In the short-term, our cash balances will be sufficient to invest in personal injury claims, purchase portfolios and finance the disability advocacy business. Structured settlements are financed through the use of a credit line, warehouse facility, and private placement financing.
We believe our available cash resources and expected cash flows from operations will be sufficient to fund operations for the next twelve months. We do not expect to incur any material capital expenditures during the next twelve months. The Company used a portion of its cash and cash equivalents on hand to fund the purchase of shares in the tender offer.
We are cognizant of the current market fundamentals in the debt purchase and company acquisition markets which, because of significant supply and tight capital availability, could result in increased buying opportunities. The outcome of any future transaction(s) is subject to market conditions. In addition, due to these opportunities, we continue to seek opportunities with banking organizations and others on a possible financing loan facility.
Off Balance Sheet Arrangements
As of June 30, 2017, we did not have any relationships with unconsolidated entities or financial partners, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
Additional Supplementary Information:
We do not anticipate collecting the majority of the purchased principal amounts of our various portfolios. Accordingly, the difference between the carrying value of the portfolios and the gross receivables is not indicative of future revenues from these accounts acquired for liquidation. Since we purchased these accounts at significant discounts, we anticipate collecting only a portion of the face amounts.
For additional information regarding our methods of accounting for our investment in finance receivables, the qualitative and quantitative factors we use to determine estimated cash flows, and our performance expectations of our portfolios, see “
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies
” above.
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.
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 recognized 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.