ASFI Asta Funding Inc

 

Note 1—Business and Basis of Presentation   

 

Business   

 

Asta Funding, Inc. (“Asta”), a Delaware Corporation, together with its wholly owned significant operating subsidiaries Palisades Collection, LLC, Palisades Acquisition XVI, LLC (“Palisades XVI”), Palisades Acquisition XIX, LLC (“Palisades XIX”), Palisades Acquisition XXIII, LLC (“Palisades XXIII”), VATIV Recovery Solutions LLC (“VATIV”), ASFI Pegasus Holdings, LLC (“ASFI”), Fund Pegasus, LLC (“Fund Pegasus”), GAR Disability Advocates, LLC (“GAR Disability Advocates”), Five Star Veterans Disability, LLC (“Five Star”), EMIRIC, LLC (“EMIRIC”), Simia Capital, LLC (“Simia”), Sylvave, LLC (“Sylvave”) (formerly known as Pegasus Funding, LLC (“Pegasus”)), Arthur Funding LLC (“Arthur Funding”) (formerly known as Practical Funding, LLC (“Practical Funding”)) , and other subsidiaries, which are not all wholly owned (the “Company,” “we” or “us”), is engaged in several business segments in the financial services industry including servicing of personal injury claims, through the Company's wholly owned subsidiaries Sylvave, Simia and Arthur Funding, social security disability advocacy through the Company's wholly owned subsidiaries GAR Disability Advocates and Five Star and the business of purchasing, managing for its own account and servicing distressed charged off consumer receivables, including charged off receivables, and semi-performing receivables. 

 

For the period October 1, 2017 to January 12, 2018, Pegasus was 80% owned, but not controlled, and accounted for under the equity method. On January 12, 2018 (“Date of Acquisition”), the Company acquired the remaining 20% minority interest and a controlling financial interest, in Pegasus, and changed its name to Sylvave. Commencing on the Date of Acquisition, the Company consolidated the financial results of this entity. 

 

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

 

As a result of the sale of CBC, all periods presented in the Company's condensed consolidated financial statements account for CBC as a discontinued operation. This determination resulted in the reclassification of the historical assets and liabilities comprising the structured settlement business to assets and liabilities related to discontinued operations in the condensed consolidated balance sheets, and a corresponding adjustment to our condensed consolidated statements of operations to reflect discontinued operations for all periods presented. See Note 7 - Discontinued Operations. 

 

Consumer receivables

 

This segment is engaged in the business of purchasing, managing for its own account and servicing distressed charged off consumer receivables, including charged off receivables, and semi-performing receivables. Recently, our effort has been in the international areas (mainly South America), as we have curtailed our active purchasing of consumer receivables in the United States. We acquire these consumer receivables at substantial discounts to their face values, based on the characteristics of the underlying accounts of each portfolio.

 

  Personal injury claims

 

This segment is comprised of purchased interests in personal injury claims from claimants who are a party to a personal injury claim. The Company advances to each claimant funds on a non-recourse basis at an agreed upon fee, in anticipation of a future settlement. Claims purchased consists of the right to receive, from such claimant, part of the proceeds or recoveries which such claimant receives by reason of a settlement, judgment or award with respect to such claimant’s claim. The Company historically funded personal injury claims in Simia and Sylvave. The Company formed a new wholly owned subsidiary, Practical Funding on March 16, 2018, to continue in the personal injury claims funding business. On April 8, 2018, Practical Funding changed its name to Arthur Funding, LLC. Arthur Funding began funding advances on personal injury claims in May 2019; see Note 5 .

 

Simia commenced operations in January 2017, and conducts its business solely in the United States. Simia obtained its business from external brokers and internal sales professionals soliciting attorneys and law firms who represent claimants who have personal injury claims. Business was also obtained from its website and through attorneys. The Company accounted for its investment in Sylvave under the equity method of accounting through January 12, 2018, and for subsequent periods the Company includes the financial results of Sylvave in its consolidated statement of operations. Simia and Sylvave are not funding any new advances, but continue to collect on outstanding personal claim advances in the ordinary course. 

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1—Business and Basis of Presentation (Continued)

 

Social security disability advocacy  

 

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

 

Basis of Presentation  

 

The consolidated balance sheet as of June 30, 2019, the consolidated statements of operations for the three and nine months ended June 30, 2019 and 2018, the consolidated statements of comprehensive income (loss) for the three and nine months ended June 30, 2019 and 2018, the consolidated statements of stockholders’ equity as of and for the three and nine months ended June 30, 2019 and 2018, and the consolidated statements of cash flows for the nine months ended June 30, 2019 and 2018, are unaudited. The September 30, 2018 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, 2018. In the opinion of management, all adjustments necessary to present fairly our financial position at June 30, 2019, the results of operations for the three and nine months ended June 30, 2019 and 2018, the statement of comprehensive income (loss) for the three and nine months ended June 30, 2019 and 2018, the statement of stockholders' equity for the three and nine months ended June 30, 2019 and 2018 and cash flows for the nine months ended June 30, 2019 and 2018 have been made. The results of operations for the three and nine months ended June 30, 2019 and 2018 are not necessarily indicative of the operating results for any other interim period or the full fiscal year. 

 

The accompanying unaudited condensed 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 our Form 10-K for the fiscal year ended September 30, 2018 filed with the Securities and Exchange Commission.

 

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

 

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates including management’s estimates of future cash flows and the resulting rates of return.

 

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

 

  Liquidity

 

 At June 30, 2019, the Company had $2.9 million in cash and cash equivalents, as well as $58.3 million in investments in debt and equity securities on hand and no debt.  In addition, the Company had $89.2 million in stockholders' equity at June 30, 2019.

 

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

 

Concentration of Credit Risk – Cash and cash equivalents

 

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 two banks at June 30, 2019 that each exceeded the balance insured by the FDIC by approximately $0.1 million. Additionally, three foreign banks with an aggregate $1.5 million in cash balances are not FDIC insured. The Company does not believe it is exposed to any significant credit risk due to concentration of cash.    

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)  

 

Note 1—Business and Basis of Presentation (Continued)

 

Investments in Equity Securities  

 

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

 

Available-for-Sale Debt Securities    

 

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

 

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

 

Equity method investments  

 

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

 

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

 

Personal Injury Claim Advances and Impairments

 

The Company accounts for its investments in personal injury claims at an agreed upon fee, in anticipation of a future settlement. Purchased personal injury claim advances consists of the right to receive from a claimant part of the proceeds or recoveries which such claimant receives by reason of a settlement, judgment or reward with respect to such claimant’s claim. Open case revenue is estimated, recognized and accrued based on the expected realization and underwriting guidelines and facts and circumstances for each individual case. These personal injury claims are non-recourse. When a case is closed and the cash is received for the advance provided to a claimant, revenue is recognized based upon the contractually agreed upon fee, and, if applicable, adjusted for any changes due to a settled amount and fees charged to the claimant. 

 

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

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1—Business and Basis of Presentation (Continued)

 

Income Recognition - Consumer Receivables  

 

The Company accounts for certain of its investments in consumer receivables using the guidance of Financial Accounting Standards Board (“FASB”) 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.   

 

Impairments - Consumer Receivables  

 

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

 

If collection projections indicate the carrying value will not be recovered, an impairment is required. The impairment will be equal to the difference between the carrying value at the time of the forecast and the corresponding estimated remaining future collections. The Company believes it has significant experience in acquiring certain distressed consumer receivable portfolios at a significant discount to the amount actually owed by underlying customers. The Company invests in these portfolios only after both qualitative and quantitative analyses of the underlying receivables are performed and a calculated purchase price is paid so that it believes its estimated cash flow offers an adequate return on acquisition costs after servicing expenses. Additionally, when considering larger portfolio purchases of accounts, or portfolios from issuers with whom the Company has limited experience, it has the added benefit of soliciting its third party collection agencies and attorneys for their input on liquidation rates and, at times, incorporates such input into the estimates it uses for its expected cash flows, and the Company’s ability to recover their cost basis. For the three and nine months ended June 30, 2019, the Company recorded a $0.1 million impairment on an international portfolio. For the three and nine months ended June 30, 2018, the Company recorded a $0.1 million impairment on a domestic portfolio.

 

Income Recognition - Social Security Disability Advocacy

 

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

 

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

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1—Business and Basis of Presentation (Continued)

 

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

 

Commissions and fees  

 

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

 

Income taxes  

 

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

 

Fair Value Hierarchy  

 

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

 

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

 

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

 

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

 

Level 3 - Unobservable inputs that are supported by little or no market activity and significant to the fair value of the assets or liabilities that are developed using the reporting entities’ estimates and assumptions, which reflect those that market participants would use.

 

Reclassification  

 

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

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1—Business and Basis of Presentation (Continued)

 

Recent Accounting Pronouncements

 

Adopted During The Nine Months Ended June 30 , 2019   

 

On October 1, 2018, the Company adopted FASB update ASC 606 that requires use of a single principles-based model for recognition of revenue from contracts with customers. The core principle of the model is to recognize revenue upon transfer of promised goods or services to customers, in an amount that reflects the entitled consideration received in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from the customer contracts. The Company adopted the new guidance using the modified retrospective approach which did not require the restatement of prior periods, and recognized a cumulative effect adjustment resulting in an increase in total assets and retained earnings of $173,000, net of taxes of $80,000.

 

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

 

The primary impact of adopting the new standard results in acceleration of revenues for the aforementioned contractual arrangements, which relate to the social security disability advocacy segment. Disability fee income represents approximately 22.2% and 23.3% of the Company’s total consolidated revenues for the three and nine months ended June 30, 2019.

 

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

 

Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) for the three months ended June 30 , 2019		As Reported (in accordance with ASC 606)				Balances Without Adoption of ASC 606				Impact of Adoption Higher/(Lower)
Disability fee income		$	1,175,000			$	1,322,000			$	(147,000	)
Income from continuing operations before income tax		$	3,341,000			$	3,488,000			$	(147,000	)

 

 

Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) for the nine months ended June 30 , 2019		As Reported (in accordance with ASC 606)				Balances Without Adoption of ASC 606				Impact of Adoption Higher/(Lower)
Disability fee income		$	3,732,000			$	3,750,000			$	(18,000	)
Income from continuing operations before income tax		$	7,498,000			$	7,516,000			$	(18,000	)

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1—Business and Basis of Presentation (Continued)

 

		As of June 30 , 2019
Condensed Consolidated Balance Sheet		As Reported (in accordance with ASC 606)				Balances Without Adoption of ASC 606				Impact of Adoption Higher/(Lower)
Asset
Accounts receivable		$	235,000			$	—			$	235,000
Stockholders' equity
Retained earnings		$	87,956,000			$	87,703,000			$	253,000	(1)

  

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

 

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

 

In August 2016, the FASB issued ASU No. 2016-15 "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments."  This ASU made eight targeted changes 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 was permitted. The new standard required adoption on a retrospective basis unless it impracticable to apply, in which case the Company would have been required to apply the amendments prospectively as of the earliest date practicable. The Company's adoption of the ASU did not have a material effect on the Company’s condensed consolidated statements of cash flows.

 

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

 

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

 

  

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1—Business and Basis of Presentation ( Continued )

   

Recent Accounting Pronouncements Not Yet Adopted

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) which requires lessees to recognize right-of-use assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. For a lease with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize a right-of-use asset and lease liability. Additionally, when measuring assets and liabilities arising from a lease, optional periods should be included only if the lessee is reasonably certain to exercise an option to extend the lease, exercise a purchase option or not exercise an option to terminate the lease. In January 2018, the FASB issued ASU No. 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to ASC 842. ASU No. 2018-01 was issued to address concerns about the cost and complexity of complying with the transition provisions of ASU No. 2018-01. Additionally, in July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements, ” which provides an alternative transition method that permits an entity to use the effective date of ASU No. 2016-02 as the date of initial application through the recognition of a cumulative effect adjustment to the opening balance of retained earnings upon adoption. The standard becomes effective in for fiscal years beginning after December 15, 2019 and interim periods within those years, and early adoption is permitted. The Company believes that the adoption of this ASU will not have a material impact on its consolidated financial statements.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.  The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.  For the Company, this update will be effective for interim periods and annual periods beginning after December 15, 2019. Upon adoption, the Company expects that it will accelerate the recording of its credit losses in its financial statements. 

 

In January 2017, the FASB issued ASU No. 2017-04 Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The objective of this update is to simplify the subsequent measurement of goodwill, by eliminating step 2 from the goodwill impairment test. The amendments in this update are effective for annual periods beginning after December 15, 2019, and interim periods within those fiscal years. The Company does not believe this update will have a material impact on its consolidated financial statements.

 

In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income (loss) to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act enacted on December 22, 2017, and requires certain disclosures about stranded tax effects. ASU 2018-02 will be effective for the Company's fiscal year beginning October 1, 2019, with early adoption permitted, and should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Act is recognized.  The adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.

 

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements on fair value measurements. The ASU removes the requirement to disclose: the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 3 fair value measurements. The ASU requires disclosure of changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements. 

 

  

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

 

Note 2—Investments in Debt and Equity Securities

 

Investments in Equity Securities  

 

Investments of equity securities at June 30, 2019 and September 30, 2018, consists of mutual funds valued at $8.0 million and $7.6 million, respectively. See (1) below.

 

Net gains and losses recognized on investments in equity securities for the three and nine months ended June 30, 2019 are as follows:

 

		For the Three Months Ended June 30 , 2019				For the Nine Months Ended June 30 , 2019
Net gains and losses recognized during the period on equity securities		$	32,000			$	53,000
Less: Net gains and losses recognized during the period on equity securities sold during the period			—				—
Unrealized gains and losses recognized during the reporting period on equity securities still held at the reporting date		$	32,000			$	53,000

 

Available for Sale Debt Securities

 

Available for sale debt securities at June 30, 2019 and September 30, 2018, consist of the following:

 

June 30, 2019		Amortized Cost				Unrealized Gains				Unrealized Losses				Fair Value
Available for sale debt securities		$	50,144,000			$	142,000			$	—			$	50,286,000

 

At June 30, 2019, the Company had $50.3 million in U.S. Treasury Bills, classified as available-for-sale debt securities on the Company's condensed consolidated balance sheet.  These treasury bills had $102,000 (net of tax expense of $40,000) in unrealized gains that were recorded in other comprehensive income for the nine months ended June 30, 2019.

 

September 30, 2018 (1)		Amortized Cost				Unrealized Gains				Unrealized Losses				Fair Value
Available for sale debt securities		$	30,479,000			$	—			$	—			$	30,479,000

 

(1) At September 30, 2018, the Company reported investments in equity securities and available for sale debt securities as a single line item on the Company's condensed consolidated balance sheet. With the Company's adoption of ASU No. 2016-01 on October 1, 2018, the Company has included the current breakout above for comparability purposes only.

 

At September 30, 2018 ,  the Company had $30.5 million in U.S. Treasury Bills, which are carried at fair value, and are classified as available for sale debt securities. Both the mutual funds and the U.S. Treasury Bills are deemed to be level 2 assets, none of which were in an unrealized loss position that had existed for 12 months or more. In addition, management had the ability but did not believe it would be required to sell those investments in debt securities for a period of time sufficient to allow for an anticipated recovery or maturity. Should the impairment of any of those 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 were identified.    

 

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

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)   

 

 

Note 3—Consumer Receivables Acquired for Liquidation  

 

Accounts acquired for liquidation are stated at cost and consist primarily of defaulted consumer loans of individuals primarily, throughout the United States and South America. 

 

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 June 30 ,
		2019				2018
Balance, beginning of period		$	2,626,000			$	5,525,000
Net cash collections from collection of consumer receivables acquired for liquidation			(4,112,000	)			(5,146,000	)
Net cash collections represented by account sales of consumer receivables acquired for liquidation			—				(1,000	)
Impairment			(100,000	)			(100,000	)
Effect of foreign currency translation			86,000				(167,000	)
Finance income recognized			3,684,000				4,509,000
Balance, end of period		$	2,184,000			$	4,620,000
Finance income as a percentage of collections			89.6	%			87.6	%

 

		For the Nine Months Ended June 30 ,
		2019				2018
Balance, beginning of period		$	3,749,000			$	6,841,000
Net cash collections from collection of consumer receivables acquired for liquidation			(12,026,000	)			(14,844,000	)
Net cash collections represented by account sales of consumer receivables acquired for liquidation			—				(3,000	)
Impairment			(100,000	)			(100,000	)
Effect of foreign currency translation			(98,000	)			(69,000	)
Finance income recognized			10,659,000				12,795,000
Balance, end of period		$	2,184,000			$	4,620,000
Finance income as a percentage of collections			88.6	%			86.2	%

 

During the three and nine months ended June 30, 2019 and 2018 the Company did not purchase any new portfolios. 

 

As of June 30, 2019, the Company held consumer receivables acquired for liquidation from Peru and Colombia of $1.3 million and $0.5 million, respectively. The total amount of internationally held consumer receivables acquired for liquidation was $1.8 million, or 84.3% of the $2.2 million in total consumer receivables held at June 30, 2019. Of the total consumer receivables four individual portfolios comprise 25.0%, 15.7%, 12.6% and 10.0% of the overall asset balance at June 30, 2019. 

 

As of September 30, 2018, the Company held consumer receivables acquired for liquidation from Peru and Colombia of $2.0 million and $1.3 million, respectively. The total amount of internationally held consumer receivables acquired for liquidation was $3.3 million, or 88.7% of the total consumer receivables held of $3.7 million at September 30, 2018. Of the total consumer receivables three individual portfolios comprise 20%, 11% and 11% of the overall asset balance at September 30, 2018. 

 

As of June 30, 2019, and September 30, 2018, 4.3% and 5.9% of the Company's total assets were related to its international operations, respectively. For the three and nine months ended June 30, 2019 and 2018, 3.9% and 3.1%, respectively, and 4.6% and 2.8%, respectively, of the Company's total revenue were related to its international operations.

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

  

Note 3—Consumer Receivables Acquired for Liquidation (Continued)

 

At June 30, 2019, and September 30, 2018, approximately 26% of the Company’s portfolio face value was serviced by five collection organizations. The Company has servicing agreements in place with these five collection organizations, as well as all of the Company’s other third-party collection agencies and attorneys that cover standard contingency fees and servicing of the accounts. While the five collection organizations represent only 26% as of June 30, 2019 and 31% as of September 30, 2018, of the Company’s portfolio face value, it does represent approximately 85% and 87% of the Company’s portfolio face value at all third-party collection agencies and attorneys as of June 30, 2019 and September 30, 2018, respectively.

 

The following table summarizes collections received by the Company’s third-party collection agencies and attorneys, less commissions and direct costs, for the three and nine months ended June 30, 2019 and 2018, respectively. 

 

		For the Three Months Ended June 30 ,								For the Nine Months Ended June 30 ,
		2019				2018				2019				2018
Gross collections (1)		$	7,680,000			$	9,551,000			$	23,262,000			$	27,134,000
Commissions and fees (2)			(3,568,000	)			(4,404,000	)			(11,236,000	)			(12,287,000	)
Net collections		$	4,112,000			$	5,147,000			$	12,026,000			$	14,847,000

 

(1)

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

(2)

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

   

 

Note 4—Equity Method Investments

 

Acquisition of Equity Method Investment

 

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

 

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

 

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

 

The fair values of the assets acquired and liabilities assumed at the acquisition date are as follows:

 

		Fair Value
Cash		$	5,748,000
Personal injury claim advances portfolio			14,571,000
Accounts payable and accrued expenses			(664,000	)
Total net assets acquired		$	19,655,000

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 4—Equity Method Investments (continued)

 

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

 

The results of operations of the Company’s historical equity method investment in Pegasus prior to acquisition on January 12, 2018 were as follows:

 

		Condensed Statement of Operations Information
		For the Period October 1, 2017 to January 12, 2018
Personal injury claims income		$	671,000
Operating expenses			(386,000	)
Income from operations		$	1,057,000
Earnings from equity method investment		$	845,000

  

Serlefin  

 

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

 

Additionally, the Company and Serlefin jointly purchase international consumer debt portfolios under a purchase agreement. The Company and Serlefin purchase the portfolios on a pro-rata basis of 80% and 20%, respectively. The purchased portfolios are transferred to an administrative and payment trust, where the Company and Serlefin are trustees. Serlefin provides collection services to the trust, and receives a performance fee determined by the parties for each loan portfolio acquired. Serlefin received approximately $0.2 million and $0.7 million in performance fees for the three and nine months ended June 30, 2019, respectively. Serlefin received approximately $0.3 million and $0.8 million in performance fees for the three and nine months ended June30, 2018, respectively. 

 

The carrying value of the investment in Serlefin Peru was $0.2 million as of June 30, 2019 and September 30, 2018. The cumulative net loss from our investment in Serlefin Peru from the date of the initial investment through June 30, 2019 was approximately $0.3 million, and was not significant to the Company's consolidated statement of operations.

  

 

Note 5—Personal Injury Claims Funding  

 

Simia and Sylvave  

 

On November 11, 2016, the Company formed Simia, a wholly owned subsidiary, to continue its personal injury claims funding business following the Company's decision not to renew its joint venture with PLF.  Simia commenced operation in January 2017.  As of June 30, 2019, Simia had a personal injury claims portfolio of $1.5 million, and recognized revenue for the three and nine months then ended of $31,000 and $60,000, respectively.  As of September 30, 2018, Simia had a personal injury claims portfolio of $2.3 million, and recognized revenue of $53,000 and $300,000, respectively, for the three and nine months ended June 30, 2018. 

 

As of June 30, 2019, Sylvave had a personal injury claims portfolio of $4.3 million, and recognized revenue for the three and nine months then ended of $406,000 and $1,546,000, respectively.   As of September 30, 2018, Sylvave had a personal injury claims portfolio of $8.4 million. For the three and nine months ended June 30, 2018, Sylvave recognized revenue of $1.5 million and $1.9 million respectively.   

 

As noted in Note 4 - Equity Method Investments, effective January 12, 2018, the Company accounts for Sylvave, its wholly owned subsidiary, on a consolidated basis. Simia and Sylvave remain in operation to continue to collect on their outstanding personal injury claim portfolios, but will not be funding any new advances to claimants.  

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 5—Personal Injury Claims Funding  (continued)

 

Arthur Funding

 

The Company formed a new wholly owned subsidiary, Arthur Funding, on March 16, 2018 to continue in the personal injury claims funding business. Arthur Funding began funding advances on personal injury claims in May, 2019.

 

As of June 30, 2019, Arthur Funding had a personal injury claims portfolio of $125,000 and recorded revenue for the three and nine months ended June 30, 2019 of $2,000.

 

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

 

		For the Three Months ended June 3 0 ,
		2019				2018
Balance, beginning of period		$	6,630,000			$	15,994,000
Personal claim advances			123,000				—
Provision for losses			(141,000	)			(6,000	)
(Write offs) recoveries			389,000				(408,000	)
Personal injury claims income			439,000				1,557,000
Personal injury claims receipts			(1,531,000	)			(3,344,000	)
Balance, end of period		$	5,909,000			$	13,793,000

 

		For the Nine Months ended June 3 0 ,
		2019				2018
Balance, beginning of period		$	10,745,000			$	3,704,000
Acquisition of personal injury funding portfolio (1)			—				14,571,000
Personal claim advances			123,000				60,000
Provision for losses			(299,000	)			(465,000	)
(Write offs) recoveries			389,000				(371,000	)
Personal injury claims income			1,608,000				2,167,000
Personal injury claims receipts			(6,657,000	)			(5,872,000	)
Balance, end of period		$	5,909,000			$	13,793,000

 

(1) Fully acquired through the acquisition of Pegasus.

 

 The Company recognized personal injury claims income of $0.4 million and $1.6 million for the three months ended June 30, 2019 and 2018, respectively, and $1.6 million and $2.2 million for the nine months ended June 30, 2019 and 2018, respectively. The Company has recorded a reserve on principle fundings in personal injury claims of $1.2 million as of June 30, 2019 and $0.5 million as of September 30, 2018.

   

 

Note 6—Non-Recourse Debt

 

Non-Recourse Debt –Bank of Montreal (“BMO”)

 

In March 2007, Palisades XVI borrowed approximately $227 million under a 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.

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 6—Non-Recourse Debt (continued)

 

On August 7, 2013, Palisades XVI, a 100% owned bankruptcy remote subsidiary, entered into a Settlement Agreement and Omnibus Amendment (the “BMO 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 the Company, less certain credits for payments made prior to the consummation of the BMO 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 on the release was Palisades XVI’s agreement to grant BMO, as of the time of the payment of the Remaining Amount, the right to receive 30% of net collections from the Portfolio Purchase once Palisades XVI has received from future net collections, the sum of $15 million plus voluntary prepayments included in the payment of the Remaining Amount (the “Income Interest”). On June 3, 2014, Palisades XVI paid the Remaining Amount. The final principal payment of $2.9 million included a voluntary prepayment of $1.9 million provided from funds of the Company. Accordingly, Palisades XVI was entitled to receive $16.9 million of future collections from the Portfolio Purchase before BMO would be entitled to receive any payments with respect to its Income Interest.

 

During the month of June 2016, the Company received the balance of the $16.9 million and, as of June 30, 2019 and September 30, 2018, the Company recorded a liability to BMO of approximately $120,000 and $121,000, respectively, which has been recorded in accounts payable and accrued expenses on the Company’s consolidated balance sheet. The funds were subsequently remitted to BMO on July 10, 2019 and October 10, 2018, respectively. The liability to BMO is recorded when actual collections are received. 

 

 

Note 7—Discontinued Operations

 

On December 31, 2013, the Company acquired 80% ownership of CBC and its affiliate, CBC Management Services, LLC for approximately $5.9 million.

 

On December 31, 2015, the Company acquired the remaining 20% ownership of CBC for $1.8 million, through the issuance of restricted stock valued at approximately $1.0 million and $0.8 million in cash. Each of the two original principals of CBC received 61,652 shares of restricted stock at a fair market value of $7.95 per share and $0.4 million in cash. An aggregate of 123,304 shares of restricted stock were issued as part of the transaction.

 

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

 

During November 2017, a competitor of CBC alleged that CBC had unlawfully purchased certain of the competitor's trade secrets and customer lists from intermediaries who allegedly arranged and/or paid for said materials from the competitor.  CBC denied any wrongdoing and disclaimed liability.  The parties settled the matter for a payment of $0.5 million on or about November 22, 2017, in exchange for a complete release.

 

On December 13, 2017, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement) with CBC Holdings LLC, a Delaware limited liability company (the “Buyer”). Under the Securities Purchase Agreement, the Company sold all of the issued and outstanding equity capital of CBC for an aggregate purchase price of approximately $10.3 million. Of the aggregate purchase price, approximately $4.5 million was paid in cash, and $5.8 million was paid under a promissory note at an annual interest rate of 7% to be paid quarterly to the Company and secured by a first priority security interest in and lien on such Buyer’s affiliates’ rights to certain servicing fees. See Note 8 - Note Receivable. The remaining amount of the aggregate purchase price was paid as reimbursement of certain invoices of CBC. The Company recognized a loss of approximately $2.4 million on the above sale of CBC as of September 30, 2017.

  

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

 

As of June 30, 2019, and September 30, 2018, the Company had no assets or liabilities designated as discontinued operations. For the three and nine months ended June 30, 2019 and 2018, the components of the Company designated as discontinued operations reported a loss, net of income tax benefit of $0 and $80,000, respectively.

  

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 7—Discontinued Operations (Continued) 

  

The following table presents the operating results for the three and nine months ended June 30, 2019 and 2018, for the components of the Company designated as discontinued operations:

 

		For the Three Months ended								For the Nine Months ended
		June 30 , 2019				June 30 , 2018				June 30 , 2019				June 30 , 2018
Revenues:
Unrealized gain on structured settlements		$	—			$	—			$	—			$	244,000
Interest income on structured settlements			—				—				—				2,005,000
Total revenues			—				—				—				2,249,000
Other income			—				—				—				11,000
			—				—				—				2,260,000
Expenses:
General and administrative expenses			—				—				—				1,560,000
Interest expense			—				—				—				824,000
			—				—				—				2,384,000
Loss from discontinued operations before income tax			—				—				—				(124,000	)
Income tax benefit from discontinuing operations			—				—				—				(44,000	)
Loss from discontinued operations, net of income tax		$	—			$	—			$	—			$	(80,000	)

 

Prior to its sale, we, through CBC, purchased periodic payments under structured settlements and annuity policies from individuals in exchange for a lump sum payment. The Company elected to carry the structured settlements at fair value. Unearned income on structured settlements is recognized as interest income using the effective interest method over the life of the related structured settlement. Changes in fair value are recorded in unrealized gain (loss) on structured settlements in the Company’s statements of operations. Unrealized gains on structured settlements is comprised of both unrealized gains resulting from fair market valuation at the date of acquisition of the structured settlements and the subsequent fair value adjustments resulting from the change in the discount rate. Of the $0.2 million of unrealized gains recognized for the nine months ended June 30, 2018, approximately $0.2 million is due to day one gains on new structured settlements financed during the period. There were no other changes in assumptions during the period. 

    

 

Note 8 —Note Receivable

 

Pursuant to the Securities Purchase Agreement, CBC sold to the Buyer all of the issued and outstanding equity capital of CBC for $10.3 million. In conjunction with this sale the Company received $4.5 million in cash, and a Promissory Note (the “Note”) for $5.8 million from the Buyer. The Note bears interest at 7% per annum, payable in quarterly installments of principle and interest through December 13, 2020, and is secured pursuant to a Security Agreement (the “Security Agreement”) with an affiliate of the Buyer. Under the Security Agreement the Company has a first priority security interest and lien on all servicing fees received by the affiliate. The payment due from the Buyer on March 13, 2019 was not received by the Company, and accordingly, the Buyer was not current on its obligations under the Note at June 30, 2019. On April 11, 2019, the Company signed a forbearance agreement with the Buyer, whereby the Company agreed to forbear from exercising any enforcement remedies with respect to the loan documents, as long as payment in full of all amounts due were received by the Company no later than April 15, 2019. The principle amount outstanding on this Note at June 30, 2019 and September 30, 2018 was $0.0 million and $4.3 million, respectively. For the three and nine months ended June 30, 2019 and 2018, the Company recorded $68,000 and $92,000, respectively, and $224,000 and $193,000, respectively, in interest income, which has been classified as other income in the Company’s consolidated statements of operations, associated with this note. See Note 7 - Discontinued Operations.

 

On April 15, 2019, the Company received a lump sum payment of $4 million from the buyer, consisting of $3.8 million in principle and $0.2 million in interest income. Effective April 15, 2019, the Note was paid in full, and the security interests that were secured by the Security Agreement were released by the Company back to the Buyer.

   

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

  Note 9 — Settlements

 

In August 2014, the Company filed a lawsuit in Delaware state court against a third-party servicer arising from the third-party servicer’s failure to pay the Company certain amounts that are due the Company under a servicing agreement.  The third-party servicer filed a counterclaim in the Delaware action alleging that the Company owes certain amounts to the third-party servicer for court costs pursuant to an alleged arrangement between the companies.  On or about July 12, 2018, the parties agreed to settle the action pursuant to a settlement agreement and release, which provides for, among other things, the payment by the third-party servicer of $4.4 million to the Company pursuant to an agreed upon schedule with a lump sum payment to be made at the third anniversary of the agreement.  

  

These fee-based settlements are required to total $2.4 million and $4.4 million by the second and third anniversaries, respectively. To the extent that these fee-based settlement fees are less than these amounts, the servicer is required to make lump sum true-up payments.

 

The Company determined the fair value of this settlement using (i) historical collection history to estimate the fee based settlement fees that are expected to be received each month from the servicer; (ii) the contractual true-up dates, discussed above, in order to estimate the anticipated true-up payments that will be received from the servicer on the second and third anniversaries; and (iii) an imputed interest rate of 8.5%.

 

As of June 30, 2019, and September 30, 2018, the Company has a settlement receivable due from this third-party servicer of $2.0 million and $3.3 million, respectively. During the nine months ended June 30, 2019, the Company received $1.5 million in payments from this third-party servicer. For the three and nine months ended June 30, 2019 and 2018, the Company recorded $53,000 and $0, respectively, and $180,000 and $0, respectively, in interest income, which is included in other income on the Company's consolidated statements of operations. 

 

Additionally, on March 31, 2019 the Company recorded a settlement receivable due from a third-party servicer of $0.2 million in the Company's consolidated balance sheet, in conjunction with prior overcharges billed to the Company in excess of contractually permitted amounts.  For the three and nine months ended June 30, 2019, the Company recognized $0 and $0.3 million in settlement income associated with the excess charges, and has recorded as a gain on settlement in the Company's consolidated statements of operations.

 

On January 22, 2018, DLCA, LLC ("DLCA"), a Delaware limited liability company and a wholly owned subsidiary of the Company, filed a complaint against Balance Point Divorce Funding, LLC. ("Balance Point") and Stacey Napp ("Napp") in the United States District Court of New Jersey, asserting various claims including breach of contract, conversion, unjust enrichment and fraud associated with a loan made to Balance Point and Napp in May 2012.

 

On May 22, 2019, Napp and DLCA entered into a Settlement Agreement that settled the action as well as all other claims for monies and/or other obligations owed as and between the parties.

 

Napp agreed to pay the sum of $1.4 million (the "Settlement Amount"), the payment terms of which are between May 21, 2019 and January 12, 2022.

 

The Company has previously reviewed the financial condition of both Balance Point and Napp, and has concluded that neither entity currently has assets sufficient to honor the obligations set forth in the Settlement Agreement. Therefore, due to the uncertainty of collecting the Settlement Amount from either Balance Point or Napp, the Company will realize the gain on this settlement, as the Company receives the cash proceeds. The Company has recognized a gain on settlement of $25,000 for the three and nine months ended June 30, 2019 in its consolidated statements of operations.

 

On June 30, 2017, GAR Disability Advocates, filed a complaint against a former employee, Pamela Hofer ("Hofer"), and others in the United States Court for the District of New Jersey (the "Action"), asserting claims of conversion and tortious interference with existing business relationships. On May 22, 2018, the Action was transferred to the Eastern District of Kentucky.

 

On May 7, 2019, GAR agreed to dismiss and settle the Action for a payment from Hofer in the amount of $47,500, payable to GAR no later than May 8, 2019.

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

  Note 9 — Settlements (Continued) 

 

On May 8, 2019, GAR received the payment from Hofer, and delivered to Hofer an executed Stipulation of Dismissal of the Action. The Company recognized a gain on settlement of $47,500 for the three and nine months ended June 30, 2019 in its consolidated statements of operations.

 

On May 15, 2019, the Company received $0.2 million from the bankruptcy trustee in New Jersey, associated with the bankruptcy filing of Axiant, LLC, a previous third party servicer. The Company recorded a gain on settlement of $0.2 million for the three and nine months ended June 30, 2019 in its consolidated statements of operations.

 

 

 

Note 1 1 —Commitments and Contingencies   

 

Leases   

 

The Company leases its facilities in Englewood Cliffs, NJ, Houston, TX, and Louisville, KY. The lease in Louisville, KY expired in December 2018 and was not renewed. Rent expense for the three and nine months ended June 30, 2019 and 2018 was $69,000 and $94,000 and $209,000 and $281,000 respectively.

 

On July 15, 2019, GAR entered into a sublease agreement with a third party for office space in Fort Lee, NJ. The agreement expires in April 2023, with future minimum lease payments of $0.3 million.

 

Legal Matters  

 

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

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 12—Income Taxes   

 

 At the end of each interim reporting period, the Company estimates its effective income tax rate expected to be applicable for the full year. The estimate is used in providing for income taxes on a year-to-date basis and may change in subsequent interim periods. The Company’s effective tax rate from operations for the three and nine months ended June 30, 2019 was 29% and 28%, respectively, compared to 35% for the same periods in the prior year. The effective rate for fiscal 2019 and 2018 differed from the U.S. federal statutory rate of 21% and 28%, respectively, primarily due to state income taxes, other permanent differences, and the first full year the reduced federal tax rate of 21% was applicable.

 

On December 22, 2017, the Tax Cuts and Jobs Act (the "Tax Act") was enacted into law in the United States. The Tax Act significantly revises corporate income tax law by, among other things, lowering the corporate income tax rates from 35% to 21%. Under GAAP, deferred taxes must be adjusted for enacted changes in tax laws or rates during the period in which new tax legislation is enacted. During the year ended September 30, 2018, tax expense of approximately $4.4 million was recorded, representing the revaluation of deferred tax assets and liabilities as a result of the lower corporate tax rate established by the Tax Act.  

 

 The Company files income tax returns in the U.S federal jurisdiction, various state jurisdictions, and various foreign countries. The Company does not have any uncertain tax positions. The Company is no longer subject to examination by U.S federal income tax authorities for tax years prior to 2016.  The Company has closed the Internal Revenue Service audit of its federal tax returns for years September 30, 2014 and 2015.  Effective March 21, 2019, the Company received an approval of its 2014 carry-back claim of $3.2 million as part of this audit, which was received by the Company on May 28, 2019. In addition, the Company received $0.2 million in interest income on its 2014 carry-back claim, which has been booked as other income in the consolidated statement of operations for the three and nine months ended June 30, 2019. On July 19, 2019, the Company received $4.7 million from the Internal Revenue Service for its 2016 carry-back claim.

  

 

Note 1 3 —Net Income (Loss) per Share

 

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

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 13—Net Income (Loss) per Share (Continued) 

 

The following table presents the computation of basic and diluted per share data for the three and nine months ended June 30, 2019 and 2018:

 

		For the Three Months Ended June 30 , 2019				For the Three Months Ended June 30 , 2018				For the Nine Months Ended June 30 , 2019				For the Nine Months Ended June 30 , 2018
Income from continuing operations		$	2,304,000			$	1,957,000			$	5,352,000			$	388,000
Loss from discontinued operations			—				—				—				(80,000	)
Net Income		$	2,304,000			$	1,957,000			$	5,352,000			$	308,000
Basic earnings per common share from continuing operations		$	0.35			$	0.29			$	0.80			$	0.06
Basic loss per common share from discontinued operations			—				—				—				(0.01	)
Basic earnings per share		$	0.35			$	0.29			$	0.80			$	0.05
Diluted earnings per common share from continuing operations		$	0.35			$	0.29			$	0.80			$	0.06
Diluted loss per common share from discontinuing operations			—				—				—				(0.01	)
Diluted earnings per share		$	0.35			$	0.29			$	0.80			$	0.05
Weighted average number of common shares outstanding:
Basic			6,666,012				6,685,415				6,678,947				6,654,911
Dilutive effect of stock options			219				213				313				2,929
Diluted			6,666,231				6,685,628				6,679,260				6,657,840

 

 

 

Note 1 4 —Stock Option Plans

 

2012 Stock Option and Performance Award Plan

 

On February 7, 2012, the Company adopted the 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 540,800 shares, awarded 245,625 shares of restricted stock, and has cancelled 111,868 options, leaving 1,325,443 shares available as of June 30, 2019. At June 30, 2019, 53 of the Company’s employees were able to participate in the 2012 Plan.

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) 

 

Note 1 4 —Stock Option Plans ( Continued)

 

Equity Compensation Plan

 

On December 1, 2005, the Company adopted the 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.

 

2002 Stock Option Plan  

 

On March 5, 2002, the Company adopted the 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 under the 2002 Plan. As of March 5, 2012, no more awards could be issued under this plan.

 

Stock Based Compensation  

 

The Company accounts for stock-based employee compensation under ASC No. 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 condensed consolidated statement of operations.

 

Summary of the Plans

 

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

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1 4 —Stock Option Plans (Continued)

 

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

  

		For the Three Months Ended June 30 ,
		2019								2018
		Number Of Shares				Weighted Average Exercise Price				Number of Shares				Weighted Average Exercise Price
Outstanding options at the beginning of period			726,767			$	8.17				796,767			$	8.16
Options exercised			—				—				—				—
Options forfeited/cancelled			(1,200	)			2.95				(200	)			7.93
Outstanding options at the end of period			725,567			$	8.18				796,567			$	8.16
Exercisable options at the end of period			725,567			$	8.18				778,394			$	8.16

 

		For the Nine Months Ended June 3 0 ,
		2019								2018
		Number Of Shares				Weighted Average Exercise Price				Number of Shares				Weighted Average Exercise Price
Outstanding options at the beginning of period			728,867			$	8.17				880,567			$	8.05
Options exercised			—				—				(61,600	)			6.48
Options forfeited/cancelled			(3,300	)			6.27				(22,400	)			8.39
Outstanding options at the end of period			725,567			$	8.18				796,567			$	8.16
Exercisable options at the end of period			725,567			$	8.18				778,394			$	8.16

  

The following table summarizes information about the Plans outstanding options as of June 30, 2019:

 

						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			—				—			$	—				—			$	—
$5.7501			-	$8.6250			616,067				2.95				7.97				616,067				7.97
$8.6251			-	$11.5000			109,500				3.58				9.37				109,500				9.37
							725,567							$	8.18				725,567			$	8.18

  

The Company recognized $0 and $7,000 of compensation expense related to the stock options vested during the three and nine months ended June 30, 2019, respectively. The Company recognized $9,000 and $98,000 of compensation expense related to the stock option grants during the three and nine months ended June 30, 2018, respectively. As of June 30, 2019, there was no unrecognized compensation cost related to stock option awards.

 

The intrinsic value of the outstanding and exercisable options as of June 30, 2019 was approximately $1,000. The weighted average remaining contractual life of exercisable options is three years. There were no options exercised during the three and nine months ended June 30, 2019. There were 61,600 options exercised during the three and nine months ended June 30, 2018 for $399,000. The fair value of the stock options that vested during the three and nine months ended June 30, 2019 was approximately $0 and $126,000, respectively. The fair value of the stock options that vested during the three and nine months ended June 30, 2018 was approximately $0 and $222,000, respectively. There were no options granted during the three and nine months ended June 30, 2019 and 2018. 

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1 4 —Stock Option Plans (Continued)

 

The Company did not grant any restricted stock awards during the three and nine months ended June 30, 2019 and 2018. As of June 30, 2019, and September 30, 2018, there was no unrecognized compensation cost related to restricted stock awards.