Notes to Consolidated Financial Statements
September 30, 201
8
and 201
7
NOTE
1
- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
[1] The Company:
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 (“APH”), Fund Pegasus, LLC (“Fund Pegasus”), GAR Disability Advocates, LLC (“GAR Disability Advocates”), Five Star Veterans Disability, LLC (“Five Star”), EMIRIC, LLC (“EMIRIC”), Simia Capital, LLC (“Simia”), Sylvave, LLC (“Sylvave”) (formerly known as Pegasus Funding, LLC (“Pegasus”)), Practical Funding LLC (“Practical Funding”), and other subsidiaries, which are not all wholly owned (the “Company,” “we” or “us”), is engaged in several business segments in the financial services industry including funding of personal injury claims, through the Company's wholly owned subsidiaries Sylvave, Simia and Practical Funding, social security disability advocacy through the Company's wholly owned subsidiaries GAR Disability Advocates and Five Star and the business of purchasing, managing for its own account and servicing distressed consumer receivables, including charged off receivables, and semi-performing receivables.
For the current year period from 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 shareholder's interest, and a controlling financial interest, in Pegasus, changed its name to Sylvave and now currently owns 100% of Sylvave. Commencing on the Date of Acquisition, the Company consolidated the financial results of this entity.
We operate principally in the United States in three reportable business segments: consumer receivables, social security disability advocacy and personal injury claims. We previously operated a fourth segment when we engaged in the structured settlements business through our wholly owned subsidiary CBC Settlement Funding, LLC (“CBC”), which we sold on December 13, 2017.
As a result of the sale of CBC all periods presented in the Company's consolidated financial statements account for CBC as a discontinued operation. This determination resulted in the reclassification of the historical assets and liabilities comprising the structured settlement business to assets and liabilities related to discontinued operations in the consolidated balance sheets, and a corresponding adjustment to our consolidated statements of operations to reflect discontinued operations for all periods presented. See Note 2 - Discontinued Operations.
Consumer receivables
This segment is engaged in the business of purchasing, managing for its own account and servicing distressed consumer receivables, charged off 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 interest rate, in anticipation of a future settlement. The interest in each claim purchased consists of the right to receive, from such claimant, part of the proceeds or recoveries which such claimant receives by reason of a settlement, judgment or award with respect to such claimant’s claim. 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. To date, Practical Funding has not funded any advances on personal injury claims.
Simia commenced operations in January 2017, and conducts its business solely in the United States. Simia obtained its business from external brokers and internal sales professionals soliciting attorneys and law firms who represent claimants who have personal injury claims. Business was also obtained from its website and through attorneys. The Company accounted for its investment in Sylvave under the equity method of accounting through January 12, 2018, for subsequent periods the Company includes the financial results of Sylvave in its consolidated statement of operations. Simia and Sylvave are not funding any new advances, but continue to collect on outstanding personal claim advances in the ordinary course.
ASTA FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2018
and
2017
NOTE
1
- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
[1] The Company (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. It relies upon Search Engine Optimization (“SEO”) to bring awareness to its intended market.
[2] Basis of Presentation:
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, and are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and industry practices. All intercompany accounts have been eliminated in consolidation.
[
3
] Liquidity:
At September 30, 2018, the Company had $6.3 million in cash and cash equivalents, as well as $38.1 million in level 1 securities that are classified as available for sale, on hand and no debt. In addition, the Company had working capital of $84 million at September 30, 2018.
We believe that our available cash resources and expected cash inflows from operations will be sufficient to fund operations for the next twelve months.
[4] Use of estimates:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. With respect to income recognition the Company takes into consideration the relative credit quality of the underlying receivables constituting the portfolio acquired, the strategy involved to maximize the collections thereof, the time required to implement the collection strategy as well as other factors to estimate the anticipated cash flows. Actual results could differ from those estimates including management’s estimates of future cash flows and the resultant allocation of collections between principal and interest resulting there from. Downward revisions to estimated cash flows will result in impairments.
[5] Concentration of Credit Risk
–
Cash
, Cash Equivalents and
Restricted Cash:
The Company considers all highly liquid investments with a maturity of three months or less at the date of purchase to be cash equivalents.
Cash balances are maintained at various depository institutions and are insured by the Federal Deposit Insurance Corporation (“FDIC”). The Company had cash balances with four banks that exceeded the balance insured by the FDIC by approximately $1.1 million at September 30, 2018. Additionally, two foreign banks with an aggregate balance of $1.4 million are not FDIC insured. The Company had $0.5 million of restricted cash at September 30, 2017, which was classified within assets related to discontinued operations on the consolidated balance sheet. The Company does not believe it is exposed to any significant credit risk due to concentration of cash.
[6] Available-for-Sale Investments:
Investments that the Company intends to hold for an indefinite period of time, but not necessarily to maturity, are classified as available-for-sale and are carried at fair value. Unrealized gains and losses on available-for-sale securities are determined using the specific-identification method.
Declines in the fair value of individual available-for-sale securities below their respective costs that are other than temporary will result in write-downs of the individual securities to their fair value. Factors affecting the determination of whether another-than-temporary impairment has occurred include: a downgrading of the security by a rating agency, a significant deterioration in the financial condition of the issuer, or that management would not have the ability to hold a security for a period of time sufficient to allow for any anticipated recovery in fair value.
ASTA FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2018
and
2017
NOTE
1
- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
[7] Goodwill
Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in a business combination, and is accounted for under ASC 350. Goodwill has an indefinite useful life and is evaluated for impairment at the reporting-unit level on an annual basis during the fourth quarter, or more frequently if events or changes in circumstances indicate potential impairment between annual measurement dates. The Company has the option of performing a qualitative assessment of impairment to determine whether any further quantitative testing for impairment is necessary. The qualitative approach assesses whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company determines it is more likely than not that the fair value is less than carrying value, a two step quantitative impairment test is performed. A step 1 analysis involves calculating the fair value of the associated reporting unit and comparing it to the reporting unit’s carrying value. If the fair value of the reporting unit exceeds the carrying value of the reporting unit including goodwill and the carrying value of the reporting unit is positive, goodwill is considered not to be impaired and no further analysis is required. If the fair value of the reporting unit is less than its carrying value, step 2 of the impairment test must be performed. Step 2 involves calculating and comparing the implied fair value of the reporting unit’s goodwill with its carrying value. Impairment is recognized if the estimated fair value of the reporting unit is less than its net book value. Such loss is calculated as the difference between the estimated impaired fair value of goodwill and its carrying amount. The goodwill of the Company consists of $1.4 million from the purchase of VATIV.
[8] Income recognition, Impairments and Accretable yield adjustments:
Income Recognition
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.
The Company accounts for its investments in personal injury claims at an agreed upon interest rate, in anticipation of a future settlement. The Company's interest purchased in 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 at a rate based on the expected realization and underwriting guidelines and facts and circumstances for each individual case. These personal injury claims are non-recourse. When a case is closed and the cash is received for the advance provided to a claimant, revenue is recognized based upon the contractually agreed upon interest rate, and, if applicable, adjusted for any changes due to a settled amount and fees charged to the claimant.
The Company recognizes revenue for GAR Disability Advocates and Five Star when disability claimants cases close with the social security administration and the applicable fees are collected.
ASTA FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2018
and
2017
NOTE
1
- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
[8] Income recognition, Impairments and Accretable yield adjustments (Continued):
Impairments and accretable yield adjustments
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.
In October 2014, the Company invested $5.0 million in Class A shares of the Topaz MP Fixed Income Fund (“Topaz Fund”), a closed end fund. The Topaz Fund invests indirectly in various portfolios of Non-Performing Small Consumer Loans. The objective of the fund is to obtain a fixed return cash flow representing interest on the invested capital. According to the investment memorandum of the fund, the Topaz Fund proposed to make semi-annual distributions of 14% annual compounded interest on June and December of each year. Since December 2015, no distribution has been received by the Company. The Company received letters from the fund’s General Partner explaining that the distributions were not made due to the negative performance of the fund for the periods.
During the fiscal year 2016, the Company recorded an impairment loss on this investment of $1.0 million, which was included in general and administrative expenses in the consolidated statements of operations. In fiscal year 2017, the Company received an announcement that the investment was being liquidated. After careful consideration, the $3.4 million carrying value of this investment was written off as of March 31, 2017.
[9] Equity method investment
s
:
Investee companies that are not consolidated, but over which the Company exercises significant influence, are accounted for under the equity method of accounting. Whether or not the Company exercises significant influence with respect to an investee depends on an evaluation of several factors including, among others, representation on the investee company's board of directors and ownership level, which is generally a 20% to 50% interest in voting securities of the investee company. Under the equity method of accounting, an investee company's accounts are not reflected within the Company's consolidated balance sheets and statements of operations, however, the Company's share of the earnings of the investee company is reflected as earnings and loss from equity method investment in the Company's consolidated statement of operations. The Company's carrying value in an equity method investee company is reflected on the Company's consolidated balance sheet, as equity method investment.
When the Company's carrying value in an equity method investee company is reduced to zero, no further losses are recorded in the Company's consolidated financial statements unless the Company guaranteed obligations of the investee company or has committed additional funding. When the investee company subsequently reports income, the Company will not record its share of such income until it equals the amount of its share of losses not previously recognized. There were no impairment losses recorded on our equity method investments for the years ended September 30, 2018 and 2017.
ASTA FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2018
and
2017
NOTE
1
- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
[10] Personal Injury Claim Advances
:
Management assesses the quality of the personal injury claims portfolio through an analysis of the underlying personal injury fundings on a case by case basis. Cases are reviewed through periodic updates with attorneys handling the cases, as well as with third party research tools which monitor public filings, such as motions or judgments rendered on specific cases. The Company specifically reserves for those fundings where the underlying cases are identified as uncollectible, due to anticipated non-favorable verdicts and/or settlements at levels where recovery of the advance outstanding is unlikely. For cases that have not exhibited any specific negative collection indicators, the Company establishes reserves based on the historical collection rates of the Company’s fundings. Fee income on advances is reserved for on all cases where a specific reserve is established on the initially funded amount. In addition, management also monitors its historical collection rates on fee income and establishes reserves on fee income consistent with the historically experienced collection rates. Management regularly analyzes and updates the historical collection rates of its initially funded cases as well as its fee income.
[11] Commissions and fees:
Commissions and fees are the contractual commissions earned by third party collection agencies and attorneys, and direct costs associated with the collection effort- generally court costs. The Company expects to continue to purchase portfolios and utilize third party collection agencies and attorney networks.
[12] Furniture and equipment:
Furniture, equipment and software are stated at cost, less accumulated depreciation and amortization. Depreciation is provided using the straight-line method over the estimated useful lives of the assets (3 to 7 years). An accelerated depreciation method is used for tax purposes.
[13] 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.
[14] Fair Value of Financial Instruments:
FASB ASC 825, Financial Instruments, (“ASC 825”), requires disclosure of fair value information about financial instruments, whether or not recognized on the balance sheet, for which it is practicable to estimate that value. Because there are a limited number of market participants for certain of the Company’s assets and liabilities, fair value estimates are based upon judgments regarding credit risk, investor expectation of economic conditions, normal cost of administration and other risk characteristics, including interest rate and prepayment risk. These estimates are subjective in nature and involve uncertainties and matters of judgment, which significantly affect the estimates.
The Company records its available-for-sale investments at estimated fair value on a recurring basis. The accompanying consolidated financial statements include estimated fair value information regarding its available-for-sale investments as of September 30, 2018, as required by FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s level within the fair value hierarchy is based on the lowest level of input significant to the fair value measurement.
Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to assess at the measurement date.
Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities in active markets; quoted prices in markets that are not active for identical or similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.
ASTA FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2018
and
2017
NOTE
1
- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Level 3 - Unobservable inputs that are supported by little or no market activity and significant to the fair value of the assets or liabilities that are developed using the reporting entities’ estimates and assumptions, which reflect those that market participants would use.
FASB ASC 825, Financial Instruments, (“ASC 825”), requires disclosure of fair value information about financial instruments, whether or not recognized on the balance sheet, for which it is practicable to estimate that value. Because there are a limited number of market participants for certain of the Company’s assets and liabilities, fair value estimates are based upon judgments regarding credit risk, investor expectation of economic conditions, normal cost of administration and other risk characteristics, including interest rate and prepayment risk. These estimates are subjective in nature and involve uncertainties and matters of judgment, which significantly affect the estimates.
[15] Discontinued Operations:
US GAAP requires the results of operations of a component of an entity that either has been disposed of or is classified as held for sale to be reported as discontinued operations in the consolidated financial statements if the sale or disposition represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.
[16] 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.
[17] Stock-based compensation:
The Company accounts for stock-based employee compensation under FASB ASC 718, Compensation - Stock Compensation , (“ASC 718”). ASC 718 requires that compensation expense associated with stock options and vesting of restricted stock awards be recognized in the statement of operations.
[18] Reclassification:
Certain prior period amounts in the accompanying consolidated financial statements have been reclassified to conform to the current year presentation. These reclassifications had no effect on previously reported net income or stockholders' equity.
[19] Foreign Currency Translation
:
Most of the Company's operations use their local currency as their functional currency. Financial statements of subsidiaries are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and a weighted average exchange rate for each period for revenues, expenses, gains and losses. Translation adjustments for subsidiaries whose local currency is their functional currency are recorded as a component of accumulated other comprehensive income (loss) within equity. Transaction gains and losses resulting from fluctuations in currency exchange rates on transactions denominated in currencies other than the functional currency are recognized as incurred in the accompanying consolidated statements of operations.
[
20
] Impact of Recently Issued Accounting Standards:
In May 2014, the FASB issued an update to ASC 606, “Revenue from Contracts with Customers,” that will supersede virtually all existing revenue guidance. Under this update, an entity is required to recognize revenue upon transfer of promised goods or services to customers, in an amount that reflects the entitled consideration received in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from the customer contracts. This update is effective for annual reporting periods beginning after December 15, 2017 including interim periods within that reporting period. Early application is permitted for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period.
ASTA FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2018
and
2017
NOTE
1
- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
The Company has completed its initial assessment of the new standard, including a detailed review of the Company’s revenue streams to identify potential differences in accounting as a result of the new standard, and selected the modified retrospective method. Based on the Company’s initial assessment, we do not believe that the adoption of the standard and related amendments will have a significant impact on our revenue recognition patterns, assuming that our revenue streams will be similar to those currently in place are in effect at the time of our adoption. Through the date of adoption, we will continue to evaluate the impacts of the standard to ensure that our preliminary conclusions continue to remain accurate. Additionally, we will continue our assessment of the impact of the standard on our financial statement disclosures which are expected to be more extensive based on the requirements of the new standard.
In January 2016, the FASB issued Update No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The main objective in developing this update is enhancing the reporting model for financial instruments to provide users of financial statements with more decision-useful information. The amendments in this update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The effective date for this update is for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Upon adoption of this ASU, the Company's investments will no longer be classified as available for sale, and any changes in fair value will be reflected in the Company's consolidated statement of operations.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) which requires lessees to recognize right-of-use assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. For a lease with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize a right-of-use asset and lease liability. Additionally, when measuring assets and liabilities arising from a lease, optional payments should be included only if the lessee is reasonably certain to exercise an option to extend the lease, exercise a purchase option or not exercise an option to terminate the lease. In January 2018, the FASB issued ASU 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842. ASU 2018-01 was issued to address concerns about the cost and complexity of complying with the transition provisions of ASU 2018-01. The standard becomes effective in for fiscal years beginning after December 15, 2019 and interim periods within those years and early adoption is permitted. The Company is in the process of reviewing its existing leases, including service contracts for embedded leases to evaluate the impact of this standard on its consolidated financial statements and the impact on regulatory capital.
In March 2016, the FASB issued ASU No. 2016-07,
Simplifying the Transition to the Equity Method of Accounting, which eliminates the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains significant influence over a previously held investment. The amendments in ASU 2016-07 are effective for public companies for fiscal years beginning after December 15, 2016 including interim periods therein. Early adoption is permitted. The new standard should be applied prospectively for investments that qualify for the equity method of accounting after the effective date. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.
In March 2016, the FASB issued Update No. 2016-09, Improvements to Employee Share Based Payment Accounting, to simplify and improve areas of generally accepted accounting principles for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The effective date for this update is for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The adoption of this update did not have a material impact on the Company's consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For the Company, this update will be effective for interim periods and annual periods beginning after December 15, 2019. Upon adoption, the Company expects that it will accelerate the recording of its credit losses in its financial statements.
ASTA FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 201
8
and
201
7
NOTE
1
- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
[
20
] Impact of Recently Issued Accounting Standards
(continued)
:
In August 2016 the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments." This ASU will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The new standard is effective for fiscal years beginning after December 15, 2017. Early adoption is permitted. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case the Company would be required to apply the amendments prospectively as of the earliest date practicable. The Company is in the process of evaluating the provisions of the ASU, but does not expect it to have a material effect on the Company’s consolidated statements of cash flows.
In January 2017, the FASB issued ASU No. 2017-01, Financial Instruments - Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities. The main objective in developing this update is enhancing the reporting model for financial instruments to provide users of financial statements with more decision-useful information. The amendments in this update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The effective date for this update is for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The adoption of this update will not have a material impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04 Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The objective of this update is to simplify the subsequent measurement of goodwill, by eliminating step 2 from the goodwill impairment test. The amendments in this update are effective for annual periods beginning after December 15, 2019, and interim periods within those fiscal years. The Company does not believe this update will have a material impact on its consolidated financial statements.
In March 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718) Improvements to Employee Share Based Payment Accounting, to simplify and improve areas of generally accepted accounting principles for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The effective date for this update is for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The adoption of this update will not have a material impact on the Company's consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, Reclassification
of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income (loss) to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act enacted on December 22, 2017, and requires certain disclosures about stranded tax effects. ASU 2018-02 will be effective for the Company's fiscal year beginning October 1, 2019, with early adoption permitted, and should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Act is recognized. The adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements on fair value measurements. The ASU removes the requirement to disclose: the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 3 fair value measurements. The ASU requires disclosure of changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.
ASTA FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 201
8
and
201
7
NOTE
2
- DISCONTINUED OPERATIONS
On December 31, 2013, the Company acquired 80% ownership of CBC and its affiliate, CBC Management Services, LLC for approximately $5.9 million.
On December 31, 2015, the Company acquired the remaining 20% ownership of CBC for $1,800,000, through the issuance of restricted stock valued at approximately $1.0 million and $0.8 million in cash. Each of the two original principals received 61,652 shares of restricted stock at a fair market value of $7.95 per share and $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 Purchase Agreement with CBC Holdings LLC, a Delaware limited liability company (the “Buyer”). Under the Purchase Agreement, the Company sold all of the issued and outstanding equity capital of CBC for an aggregate purchase price of approximately $10.3 million. Of the aggregate purchase price, approximately $4.5 million was paid in cash, and $5.8 million was paid under a promissory note at an annual interest rate of 7% to be paid quarterly to the Company and secured by a first priority security interest in and lien on such Buyer’s affiliates’ rights to certain servicing fees. See Note 9 - 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 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 historical 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 September 30, 2018, the Company had no assets or liabilities designated as discontinued operations. As of September 30, 2017, the components of the Company designated as discontinued operations had assets and liabilities of $92.2 million and $81.8 million, respectively. For the years ended September 30, 2018 and 2017, the Company designated as discontinued operations reported loss, net of income tax benefit of $0.0 million and $3.4 million, respectively, of $0.1 million and $4.6 million, respectively.
The major components of assets and liabilities of the discontinued operations are as follows:
|
|
September 30,
|
|
|
|
2018
|
|
|
201
7
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
—
|
|
|
$
|
1,617,000
|
(1)
|
Restricted cash
|
|
|
—
|
|
|
|
499,000
|
|
Structured settlements
|
|
|
—
|
|
|
|
86,971,000
|
|
Furniture and equipment (net of accumulated depreciation of $111,000 at September 30, 2017)
|
|
|
—
|
|
|
|
34,000
|
|
Goodwill
|
|
|
—
|
|
|
|
—
|
|
Other assets
|
|
|
—
|
|
|
|
3,114,000
|
|
|
|
|
|
|
|
|
|
|
Total assets related to discontinued operations
|
|
$
|
—
|
|
|
$
|
92,235,000
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS’ EQUITY
|
|
|
|
|
|
|
|
|
Other debt - CBC
|
|
$
|
—
|
|
|
$
|
78,935,000
|
|
Other liabilities
|
|
|
—
|
|
|
|
2,816,000
|
|
|
|
|
|
|
|
|
|
|
Total liabilities related to discontinued operations
|
|
|
|
|
|
$
|
81,751,000
|
|
(1) Cash balance with one bank at September 30, 2017 that exceeded the balance insured by the FDIC by approximately $0.5 million.
ASTA FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2018
and
2017
NOTE
2
- DISCONTINUED OPERATIONS (CONTINUED):
The following table presents the operating results, for the years ended September 30, 2018 and 2017
,
for the components of the Company designated as discontinued operations:
|
|
201
8
|
|
|
201
7
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Unrealized gain on structured settlements
|
|
$
|
244,000
|
|
|
$
|
4,326,000
|
|
Interest income on structured settlements
|
|
|
2,005,000
|
|
|
|
8,224,000
|
|
Loss on sale of structured settlements
|
|
|
—
|
|
|
|
(5,353,000
|
)
|
Total revenues
|
|
|
2,249,000
|
|
|
|
7,197,000
|
|
Other income
|
|
|
11,000
|
|
|
|
58,000
|
|
|
|
|
2,260,000
|
|
|
|
7,255,000
|
|
Expenses:
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
1,560,000
|
|
|
|
9,954,000
|
|
Interest expense
|
|
|
824,000
|
|
|
|
3,927,000
|
|
Impairment
|
|
|
—
|
|
|
|
1,405,000
|
|
|
|
|
2,384,000
|
|
|
|
15,286,000
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations before income tax
|
|
|
(124,000
|
)
|
|
|
(8,031,000
|
)
|
Income tax benefit from discontinued operations
|
|
|
(44,000
|
)
|
|
|
(3,411,000
|
)
|
Net loss from discontinued operations, net of income tax
|
|
$
|
(80,000
|
)
|
|
$
|
(4,620,000
|
)
|
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 in the fiscal year ended September 30, 2018, approximately $0.2 million is due to day one gains on new structured settlements financed during the period. There were no other changes in assumptions during the period. Of the
$4.3 million of unrealized gains recognized in the fiscal year ended
September 30, 2017
,
approximately
$6.9 million is due to day
one gains on new structured settlements financed during the period,
$0.2 million due to a change in the discount rate, offset by a decrease of $2.1 million in realized gains recognized as realized interest income on structured settlements during the period and a fair value adjustment of
$0.7 million. There were
no other changes in assumptions during the period.
We elected the fair value treatment under ASC
825-10-50-28 through
50-32 to be transparent to the user regarding the underlying fair value of the structured settlement which collateralizes the debt of CBC. The Company believes any change in fair value is driven by market risk as opposed to credit risk associated with the underlying structured settlement annuity issuer.
The purchased personal injury structured settlements result in payments over time through an annuity policy. Most of the annuities acquired involve guaranteed payments with specific defined ending dates. CBC also purchases a small number of life contingent annuity payments with specific ending dates but the actual payments to be received could be less due to the mortality risk associated with the measuring life. CBC records a provision for loss each period. The life contingent annuities were not a material portion of assets at September 30, 2017.
CBC purchased structured settlement and annuity policies through privately negotiated direct consumer purchases and brokered transactions across the United States. CBC funds the purchases primarily from cash, its revolving line of credit, and its securitized debt, issued through its Blue Bell Receivables (“BBR”) subsidiaries.
On April 7, 2017, CBC, through its subsidiary BBRVII, LLC, issued approximately $18.3 million of fixed rate asset backed notes with a yield of 5.0% and a stated maturity date of January 15, 2069.
On April 28, 2017, CBC entered into an Assignment Agreement (the “Assignment Agreement”) by and among CBC and an unrelated third party (“Assignee”). The Assignment Agreement provided for the sale of a portion of the Company’s life contingent asset portfolio included in the Company’s structured settlements to the Assignee for a purchase price of $7.7 million. The Company realized a loss from the sale of $5.4 million in the year ended September 30, 2017.
ASTA FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2018
and
2017
NOTE
2
- DISCONTINUED OPERATIONS (CONTINUED):
On April 28, 2017, CBC entered into the Tenth Amendment, extending the line of credit to June 30, 2017. Other terms and conditions of the Ninth Amendment, in effect as of March 31, 2017, remained unchanged.
Structured settlements consist of the following as of September 30, 2018 and 2017:
|
|
September 30, 201
8
|
|
|
September 30, 2017
|
|
Maturity (1) (2)
|
|
$
|
—
|
|
|
$
|
139,107,000
|
|
Unearned income
|
|
|
—
|
|
|
|
(52,136,000
|
)
|
Structured settlements, net
|
|
$
|
—
|
|
|
$
|
86,971,000
|
|
(
1
)
|
The maturity value represents the aggregate unpaid principal balance at
September 30, 2018 and 2017.
|
|
|
(
2
)
|
There is approximately
$0.3 million of structured settlements that are past due, or in non-accrual status at
September 30, 2017
.
|
Encumbrances on structured settlements as of September 30, 2018 and 2017 are as follows:
|
|
Interest Rate
|
|
|
September 30, 2018
|
|
|
September 30, 2017
|
|
Notes payable secured by settlement receivables with principal and interest outstanding payable until June 2025
|
|
|
8.75
|
%
|
|
$
|
—
|
|
|
$
|
1,607,000
|
|
Notes payable secured by settlement receivables with principal and interest outstanding payable until August 2026
|
|
|
7.25
|
%
|
|
|
—
|
|
|
|
3,612,000
|
|
Notes payable secured by settlement receivables with principal and interest outstanding payable until April 2032
|
|
|
7.125
|
%
|
|
|
—
|
|
|
|
3,891,000
|
|
Notes payable secured by settlement receivables with principal and interest outstanding payable until February 2037
|
|
|
5.39
|
%
|
|
|
—
|
|
|
|
17,390,000
|
|
Notes payable secured by settlement receivables with principal and interest outstanding payable until March 2034
|
|
|
5.07
|
%
|
|
|
—
|
|
|
|
13,389,000
|
|
Notes payable secured by settlement receivables with principal and interest outstanding payable until February 2043
|
|
|
4.85
|
%
|
|
|
—
|
|
|
|
13,001,000
|
|
Notes payable secured by settlement receivables with principal and interest outstanding payable until January 2069
|
|
|
5.00
|
%
|
|
|
—
|
|
|
|
17,456,000
|
|
$25,000,000 revolving line of credit
|
|
|
4.25
|
%
|
|
|
—
|
|
|
|
8,589,000
|
|
Encumbered structured settlements
|
|
|
|
|
|
|
—
|
|
|
|
78,935,000
|
|
Structured settlements not encumbered
|
|
|
|
|
|
|
—
|
|
|
|
8,036,000
|
|
Total structured settlements
|
|
|
|
|
|
$
|
—
|
|
|
$
|
86,971,000
|
|
ASTA FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2018
and
2017
NOTE
2
- DISCONTINUED OPERATIONS (CONTINUED):
The Company assumed $25.9 million of debt related to the CBC acquisition on December 31, 2013, including a $12.5 million line of credit with an interest rate floor of 5.5%. Between March 27, 2014 and September 29, 2014, CBC entered into three amendments (Sixth Amendment through Eighth Amendment), resulting in the line of credit increasing to $22.0 million and the interest rate floor reduced to 4.75%. On March 11, 2015, CBC entered into the Ninth Amendment. This amendment, effective March 1, 2015, extended the maturity date on its credit line from February 28, 2015 to March 1, 2017. Additionally, the credit line was increased from $22.0 million to $25.0 million and the interest rate floor was decreased from 4.75% to 4.1%. Other terms and conditions were materially unchanged. In March 2017, the credit line was extended to April 28, 2017. On April 28, 2017, CBC entered into the Tenth Amendment, extending the credit line maturity date to June 30, 2017. On July 27, 2017 CBC entered into the Eleventh Amendment, extending the credit line maturity date to June 30, 2019.
On November 26, 2014, CBC completed its fourth private placement, backed by structured settlement and fixed annuity payments. CBC issued, through its subsidiary, BBR IV, LLC, approximately $21.8 million of fixed rate asset-backed notes with a yield of 5.4%. On September 25, 2015, CBC completed its fifth private placement, backed by structured settlements and fixed annuity payments. CBC issued, through its subsidiary, BBR V, LLC, approximately $16.6 million of fixed rate asset-backed notes with a yield of 5.1%. On July 8, 2016, CBC issued, through its subsidiary, BBR VI, approximately $14.8 million of fixed rate asset-backed notes with a yield of 4.85%. On April 7, 2017, CBC issued approximately $18.3 million of fixed rate asset-backed notes with a yield of 5.0%.
As of September 30, 2017, the remaining debt amounted to $78.9 million, which consisted of $8.6 million drawdown from a line of credit from an institutional source and $70.3 million notes issued by entities 100%-owned and consolidated by CBC. These entities are bankruptcy-remote entities created to issue notes secured by structured settlements. During December 2017, the debt associated with CBC was sold along with CBC's other assets and liabilities.
CBC leased its facility in Conshocken, PA. The lease was an operating lease, and the Company incurred related rent expense in the amount of $163,000, for the year ended September 30, 2017. This lease was transferred to the buyer of CBC in December 2017, and the Company was released from all future obligations under the lease.
NOTE
3
- AVAILABLE - FOR - SALE INVESTMENTS
Investments classified as available-for-sale at
September 30, 2018 and 2017 consist of the following:
|
|
Amortized
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
2018
|
|
$
|
38,069,000
|
|
|
$
|
1,000
|
|
|
$
|
(16,000
|
)
|
|
$
|
38,054,000
|
|
2017
|
|
$
|
5,500,000
|
|
|
$
|
11,000
|
|
|
$
|
—
|
|
|
$
|
5,511,000
|
|
The available-for-sale investments, excluding U.S. treasury bills, do
not have any contractual maturities. The Company did not sell any investments during the year ended September 30, 2018. The Company sold six investments during the year ended
September 30, 2017
,
with an aggregate realized loss of
$1.0 million
.
Additionally, the Company received
$0.2 million in capital gains distributions during fiscal year
2017
.
At
September 30, 2018
,
the Company had three investments in mutual funds,
in addition to investments in U.S. Treasury Bills of $30.5 million which are carried at fair value, and are deemed to be level 1 assets, none of which were in an unrealized loss position that had existed for
12 months or more. At September 30, 2017 there was one investment, which was in unrealized gain position. Based on the evaluation of the available evidence at that time, including changes in market rates and credit rating information, management believed that any decline in fair value for these instruments would be temporary. In addition, management had the ability but did not believe it would be required to sell those investment 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 securities are included in other comprehensive income (loss) within stockholders’ equity. Realized gains (losses) on available-for-sale securities are included in other income (loss) and, when applicable, are reported as a reclassification adjustment in other comprehensive income (loss).
ASTA FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2018
and
2017
NOTE
4
- CONSUMER RECEIVABLES ACQUIRED FOR LIQUIDATION:
Accounts acquired for liquidation are stated at cost and consist primarily of defaulted consumer loans to individuals primarily throughout the United States and South America
The Company
may account for its investments in consumer receivable portfolios, using either:
|
•
|
the interest method; or
|
|
•
|
the cost recovery method.
|
The Company uses the cost recovery method. Although the Company uses the cost recovery method on its current inventory of portfolios, the Company must still analyze a portfolio upon acquisition to ensure which method is appropriate, and once a static pool is established for a quarter, individual receivable accounts are not added to the pool (unless replaced by the seller) or removed from the pool (unless sold or returned to the seller).
The Company uses the cost recovery method when collections on a particular pool of accounts cannot be reasonably predicted. Under the cost recovery method, no income is recognized until the cost of the portfolio has been fully recovered. A pool can become fully amortized (zero carrying balance on the balance sheet) while still generating cash collections. In this case, all cash collections are recognized as revenue when received.
The Company aggregates portfolios of receivables acquired sharing specific common characteristics which were acquired within a given quarter. In addition, the Company uses a variety of qualitative and quantitative factors to estimate collections and the timing thereof. The Company obtains and utilizes, as appropriate, input, including but not limited to, monthly collection projections and liquidation rates, from third party collection agencies and attorneys, as further evidentiary matter, to assist in evaluating and developing collection strategies and in evaluating and modeling the expected cash flows for a given portfolio. For the year ended September 30, 2018, the Company impaired one domestic and two international portfolios which resulted in a charge to expense of $0.1 million and $0.2 million, respectively. For the year ended September 30, 2017, the Company impaired one domestic and four international portfolios which resulted in a charge to expense of $0.1 million and $1.0 million, respectively.
The following tables summarize the changes in the balance sheet account of consumer receivables acquired for liquidation during the following periods:
|
|
For the Year Ended September 30,
|
|
|
|
201
8
|
|
|
201
7
|
|
Balance, beginning of period
|
|
$
|
6,841,000
|
|
|
$
|
13,427,000
|
|
Acquisitions of receivable portfolio
|
|
|
—
|
|
|
|
2,213,000
|
|
Net cash collections from collection of consumer receivables acquired for liquidation
|
|
|
(18,551,000
|
)
|
|
|
(23,331,000
|
)
|
Net cash collections represented by account sales of consumer receivables acquired for liquidation
|
|
|
(3,000
|
)
|
|
|
(197,000
|
)
|
Impairment
|
|
|
(310,000
|
)
|
|
|
(1,129,000
|
)
|
Effect of foreign currency translation
|
|
|
(91,000
|
)
|
|
|
(62,000
|
)
|
Finance income recognized
|
|
|
15,863,000
|
|
|
|
15,920,000
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
3,749,000
|
|
|
$
|
6,841,000
|
|
|
|
|
|
|
|
|
|
|
Finance income as a percentage of collections
|
|
|
85.5
|
%
|
|
|
67.7
|
%
|
ASTA FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2018
and
2017
NOTE
4
- CONSUMER RECEIVABLES ACQUIRED FOR LIQUIDATION (CONTINUED):
During the year ended September 30, 2018, the Company did not purchase any portfolios. During the year ended September 30, 2017, the Company purchased $35.0 million in face value receivables at a cost of $2.2 million.
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 foreign 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 3 individual portfolios comprise 20%, 11% and 11% of the overall asset balance at September 30, 2018
As of September 30, 2017, the Company held consumer receivables acquired for liquidation from Peru and Colombia of $3.3 million and $2.9 million, respectively. The total amount of foreign consumer receivables acquired for liquidation was $6.2 million, or 89.9% of the total consumer receivables held of $6.8 million at September 30, 2017. Of the total consumer receivables 3 individual portfolios comprise 18%, 10% and 10% of the overall asset balance at September 30, 2017.
As of September 30, 2018 and 2017, 5.9% and 5.0% of the Company's total assets were related to its international operation, respectively. For the years ended September 30, 2018 and 2017, 3.6% and 2.6% of the Company's total revenue related to its international operation, respectively.
The following table summarizes collections received by the Company’s third-party collection agencies and attorneys, less commissions and direct costs for the years ended September 30, 2018 and 2017, respectively.
|
|
201
8
|
|
|
201
7
|
|
Gross collections(1)
|
|
$
|
35,512,000
|
|
|
$
|
42,456,000
|
|
Less: commissions and fees(2)
|
|
|
16,958,000
|
|
|
|
18,928,000
|
|
|
|
|
|
|
|
|
|
|
Net collections
|
|
$
|
18,554,000
|
|
|
$
|
23,528,000
|
|
(1)
|
Gross collections include collections from
third-party collection agencies and attorneys, collections from in-house efforts and collections represented by account sales.
|
(2)
|
Commissions are earned by
third party collection agencies and attorneys, and include direct costs associated with the collection effort, generally court costs. In
December 2007 an arrangement was consummated with one servicer who also received a
3% fee on gross collections received by the Company in connection with the related portfolio purchase. The fee is charged for asset location, skip tracing and ultimately suing debtors in connection with this portfolio purchase.
|
NOTE
5
–
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. Pegasus purchases interests in claims from claimants who are a party to personal injury litigation. Pegasus advances, to each claimant, funds, on a non-recourse basis at an agreed upon interest rate, in anticipation of a future settlement. The interest in each claim purchased by Pegasus consists of the right to receive, from such claimant, part of the proceeds or recoveries which such claimant receives by reason of a settlement, judgment or award with respect to such claimant’s claims. Pegasus while accounted for as an equity method investment, earned $5.1 million in interest and fees for the three months ended June 30, 2017, and earned $0.8 million and $9.8 million in interest and fees for the period from October 1, 2017 to January 12, 2018, compared to the nine months ended June 30, 2017, respectively. The Company had a net equity method investment in personal injury claims of $50.5 million on September 30, 2017 and $52.7 million immediately prior to acquisition, which included loans due to Asta of $32.7 million and $31.7 million, respectively, settled in conjunction with the acquisition.
On November 8, 2016, the Company entered into a binding Term Sheet (the “Term Sheet”) with ASFI Pegasus Holdings, LLC, Fund Pegasus, LLC, Pegasus Funding, LLC, Pegasus Legal Funding, LLC, Max Alperovich and Alexander Khanas. The Company and PLF decided not to renew the Pegasus joint venture that, by its terms, was scheduled to terminate on December 28, 2016. The Term Sheet amended certain provisions to Pegasus’ operating agreement dated as of December 28, 2011 (as amended, the “Operating Agreement”) and governed the terms relating to the collection of its existing Pegasus portfolio (the “Portfolio”).
ASTA FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2018
and
2017
NOTE
5
– EQUITY METHOD INVESTMENTS (CONTINUED):
Pursuant to the Term Sheet, the parties thereto have agreed that Pegasus would continue in existence in order to collect advances on its existing Portfolio. The Company would fund overhead expenses relating to the collection of its Portfolio based on a budget agreed upon by the Company and PLF. Any cash received by Pegasus would be distributed to its members in the order provided for in the Operating Agreement. The Company would be repaid an amount equal to 20% of all principal collected on each investment paid back beginning October 1, 2016 and continuing through the collection of the Portfolio, which would be applied against the outstanding balance of overhead expenses previously advanced by the Company to Pegasus. After January 2, 2017, additional overhead expenses advanced would be paid back monthly as incurred by the Company prior to the calculation and distribution of any profits.
In connection with the Term Sheet, the parties thereto have also entered into a customary mutual release and non-disparagement agreement as well as a release from the non-competition obligations under the Operating Agreement.
The Company filed for arbitration with the American Arbitration Association ("AAA") against Pegasus in April 2017 for breaches in the Operating Agreement and Term Sheet. On April 18, 2017, the Company was granted an Emergent Award restraining the cash in Pegasus, until a formal arbitration panel was confirmed and could review the case.
On July 17, 2017, an arbitration panel was confirmed, and a hearing date was scheduled for August 25, 2017 on the Company's motion to have PLF removed from managing Pegasus and replacing them with Company designated representatives, and to permit disbursements to the Company in accordance with the Operating and Liquidation Agreements.
On January 12, 2018, the Company, ASFI and Fund Pegasus entered into a Settlement Agreement and Release (the “Settlement Agreement”) by and among the Company, ASFI, Fund Pegasus, Pegasus, the Seller, Max Alperovich, Alexander Khanas, Larry Stoddard, III, Louis Piccolo and A.L. Piccolo & Co., Inc., a New York corporation. The Settlement Agreement releases certain claims in exchange for, among other things, the parties' entry into the Purchase Agreement.
Additionally, on January 12, 2018, ASFI Pegasus Holdings, LLC (“ASFI”), a Delaware limited liability company and a subsidiary of Asta Funding, Inc. (the “Company” or “Asta”), a Delaware corporation, entered into a Membership Interest Purchase Agreement (the “Purchase Agreement) with Pegasus Legal Funding, LLC, a Delaware limited liability company (the “Seller”). Under the Purchase Agreement, ASFI bought the Seller’s ownership interests of Pegasus Funding, LLC (“Pegasus”), which was 20% of the issued and outstanding limited liability company interests of Pegasus, for an aggregate purchase price of $1.8 million. As a result of the execution of the Purchase Agreement, ASFI became the owner of 100% of the limited liability company interests of Pegasus, and recognized a loss on acquisition of $1.4 million, which is recorded in the Company’s consolidated financial statements. Immediately on acquisition, the Company changed the name from Pegasus to Sylvave.
The fair values of the assets acquired and liabilities assumed at the acquisition date are as follows:
|
|
Fair Value
|
|
Cash
|
|
$
|
5,748,000
|
|
Personal injury claim advances portfolio
|
|
|
14,571,000
|
|
Accounts payable and accrued expenses
|
|
|
(664,000
|
)
|
|
|
|
|
|
Total net assets acquired
|
|
$
|
19,655,000
|
|
As a result of the purchase of the Seller’s 20% interest in Pegasus on January 12, 2018 under the Purchase Agreement, beginning on January 13, 2018, the Company will consolidate the financial statements of Sylvave.
ASTA FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2018
and
2017
NOTE
5
– EQUITY METHOD INVESTMENTS (CONTINUED):
The results of operations and financial position of the Company’s equity investment in Pegasus are summarized below:
|
|
Condensed Statement of Operations Information
|
|
|
|
201
8
|
|
|
201
7
|
|
Personal injury claims income
|
|
$
|
671,000
|
|
|
$
|
11,554,000
|
|
Operating expenses
|
|
|
(386,000
|
)
|
|
|
5,780,000
|
|
Income from operations
|
|
$
|
1,057,000
|
|
|
$
|
5,774,000
|
|
|
|
|
|
|
|
|
|
|
Earnings from equity method investment
|
|
$
|
845,000
|
|
|
$
|
4,619,000
|
|
|
|
Condensed
Balance Sheet
I
nformation
|
|
|
|
September 30, 2018
|
|
|
September 30,
2017
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
—
|
|
|
$
|
35,631,000
|
(1)
|
Investment in personal injury claims
|
|
|
—
|
|
|
|
16,855,000
|
|
Other assets
|
|
|
—
|
|
|
|
109,000
|
|
Total Assets
|
|
$
|
—
|
|
|
$
|
52,595,000
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
—
|
|
|
$
|
31,677,000
|
|
Non-current liabilities
|
|
|
—
|
|
|
|
1,952,000
|
|
Equity
|
|
|
—
|
|
|
|
18,966,000
|
|
Total Liabilities and Equity
|
|
$
|
—
|
|
|
$
|
52,595,000
|
|
(
1
) Included in cash is
$35.4 million in restricted cash. The restriction was been put in place during the Company’s arbitration with PLF.
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 $0.4 million and $0.6 million in performance fees for the years ended September 30, 2018 and 2017, respectively.
The carrying value of the investment in Serlefin Peru was $0.2 million as of September 30, 2018 and September 30, 2017. The Company has included the carrying value of this investment in other assets on its consolidated balance sheets. The cumulative net loss from our investment in Serlefin Peru through September 30, 2018 was approximately $0.2 million, and was not significant to the Company's consolidated statement of operations.
ASTA FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2018
and
2017
NOTE 6 - 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, and conducts its business solely in the United States. As of September 30, 2018, Simia had a personal injury claims portfolio of $2.4 million, and recognized revenue for the year then ended of $0.4 million. As of September 30, 2017, Simia had a personal injury claims portfolio of $3.4 million, and recognized revenue for the year then ended of $0.4 million.
As noted in Note 5 - Equity Method Investments, effective January 12, 2018, the Company now 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.
Practical Funding
The Company formed a new wholly owned subsidiary, Practical Funding on March 16, 2018 to continue in the personal injury claims funding business. To date, Practical Funding has not funded any advances on personal injury claims.
The following tables summarize the changes in the balance sheet account of personal injury claim portfolios held by Simia and Sylvave for the following periods:
|
|
For the Year Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Balance, beginning of period
|
|
$
|
3,704,000
|
|
|
$
|
—
|
|
Acquisition of personal injury funding portfolio (1)
|
|
|
14,571,000
|
|
|
|
—
|
|
Personal claim advances
|
|
|
60,000
|
|
|
|
4,077,000
|
|
Provision for losses
|
|
|
(516,000
|
)
|
|
|
(7,000
|
)
|
(Write offs) recoveries
|
|
|
17,000
|
|
|
|
(15,000
|
)
|
Personal injury claims income
|
|
|
1,084,000
|
|
|
|
434,000
|
|
Personal injury claims receipts
|
|
|
(8,175,000
|
)
|
|
|
(785,000
|
)
|
Balance, end of period
|
|
$
|
10,745,000
|
|
|
$
|
3,704,000
|
|
(1) Fully acquired through the acquisition of Pegasus.
The Company recognized personal injury claims income of $1.1 million and $0.4 million for the years ended September 30, 2018, respectively. The Company has recorded a net reserve against its investment in personal injury claims of $7.1 million and $7,000 as of September 30, 2018 and 2017, respectively.
NOTE
7
- MATRIMONIAL CLAIMS
On May 8, 2012, EMIRIC entered into a joint venture with California-based Balance Point Divorce Funding, LLC (“BP Divorce Funding”) to create the operating subsidiary BP Case Management, LLC (“BPCM”). BPCM is 60% owned by the Company and 40% owned by BP Divorce Funding. BPCM provides non-recourse funding to a spouse in a matrimonial action. The Company provided a $1.0 million revolving line of credit to partially fund BPCM’s operations, with such loan bearing interest at the prevailing prime rate, with an initial term of twenty-four months. In September 2014, the agreement was revised to extend the term of the loan to August 2016, increase the credit line to $1.5 million and include a personal guarantee of the principal of BP Divorce Funding. Effective August 14, 2016, the Company extended its revolving line of credit with BP Divorce Funding until March 31, 2017, at substantially the same terms as the September 2014 amendment. On April 1, 2017, BP Divorce Funding defaulted on this agreement, and as such, the loan balance of approximately $1.5 million was deemed uncollectible and was written off to general and administrative expenses on the consolidated statement of operations during the year ended September 30, 2017.
ASTA FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2018
and
2017
NOTE
7
- MATRIMONIAL CLAIMS (CONTINUED):
As of September 30, 2018 and 2017, BPCM had fully reserved against its invested amount of $2.5 million, in cases managed by this Venture. A net loss of approximately $4.0 million was recognized during the year ended September 30, 2017, when the remaining assets were fully impaired. There was no income recognized for the fiscal years ended September 30, 2018 and 2017.
NOTE
8
- FURNITURE AND EQUIPMENT
Furniture and equipment as of
September 30, 2018 and 2017 consist of the following:
|
|
201
8
|
|
|
201
7
|
|
Furniture
|
|
$
|
273,000
|
|
|
$
|
273,000
|
|
Equipment
|
|
|
252,000
|
|
|
|
241,000
|
|
Software
|
|
|
1,396,000
|
|
|
|
1,369,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,921,000
|
|
|
|
1,883,000
|
|
Less accumulated depreciation and amortization
|
|
|
1,821,000
|
|
|
|
1,759,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
100,000
|
|
|
$
|
124,000
|
|
Depreciation and amortization expense for the years ended
September 30, 2018 and 2017 was $62,000, and $97,000
,
respectively.
NOTE 9
- NOTE RECEIVABLE
Pursuant to Purchase Agreement, dated as of December 13, 2017, between the Purchaser and CBC, CBC sold to the Purchaser all of the issued and outstanding equity capital of CBC for $10.3 million. In conjunction with this sale the Company received $4.5 million in cash, and a Promissory Note (the “Note”) for $5.8 million from the Purchaser. The Note bears interest at 7% per annum, payable in quarterly installments of principle and interest through December 13, 2020, and is secured pursuant to a Security Agreement (the “Security Agreement”) with an affiliate of the Purchaser. Under the Security Agreement the Company has a first priority security interest and lien on all servicing fees received by the affiliate. As of September 30, 2018, the Purchaser is current on all its obligations under the Note, and the principle amount outstanding on this Note is $4.3 million. For the year ended September 30, 2018, the Company recorded $0.3 million in interest income, which has been classified as other income in the Company’s consolidated statement of operations, associated with this note. See Note 2 – Discontinued Operations.
NOTE
10
- SETTLEMENT
S
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 September 30, 2018, the Company has a settlement receivable due from this third party servicer of $3.3 million. During fiscal year 2018, the Company received $0.6 million in payments from this third party servicer. For the year ended September 30, 2018, the Company recorded a gain on settlement of $3.4 million, and $0.1 million in interest income, which is included in other income on the Company's consolidated statement of operations.
Additionally, the Company also recorded a gain on settlement of $0.6 million from a third party financial institution associated with the Company's prior purchase of a consumer debt portfolio.
ASTA FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2018
and
2017
NOTE
11
- NON RECOURSE DEBT
Non-Recourse Debt - Bank of Montreal (“BMO”)
In March 2007, Palisades XVI borrowed approximately $227 million under the Receivables Financing Agreement, as amended in July 2007, December 2007, May 2008, February 2009, October 2010 and August 2013 ( the “RFA”) from Bank of Montreal (“BMO”), in order to finance the Portfolio Purchase which had a purchase price of $300 million. The original term of the agreement was three years. This term was extended by each of the Second, Third, Fourth and Fifth Amendments and the most recent agreement signed in August 2013.
On August 7, 2013, Palisades XVI, a 100% owned bankruptcy remote subsidiary, entered into a Settlement Agreement and Omnibus Amendment (the “Settlement Agreement”) with BMO as an amendment to the RFA. In consideration for a $15 million prepayment funded by the Company, BMO agreed to significantly reduce minimum monthly collection requirements and the interest rate. If and when BMO receives the next $15 million of collections from the Portfolio Purchase or from voluntary prepayments by Asta Funding, Inc., less certain credits for payments made prior to the consummation of the Settlement Agreement (the “Remaining Amount”), Palisades XVI and its affiliates would be automatically released from liability in connection with the RFA (subject to customary exceptions). A condition to the release was Palisade XVI’s agreement to grant BMO, as of the time of the payment of the Remaining Amount, the right to receive 30% of net collections from the Portfolio Purchase once Palisades XVI has received from future net collections, the sum of $15 million plus voluntary prepayments included in the payment of the Remaining Amount (the “Income Interest”). On June 3, 2014, Palisades XVI paid the Remaining Amount. The final principal payment of $2.9 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
September 30, 2018 and
2017
,
the Company recorded a liability to BMO of approximately $117,000 and $148,000, respectively. The funds were subsequently remitted to BMO in
October 2018 and 2017, respectively. The liability to BMO is recorded when actual collections are received.
Bank Hapoalim B.M. (“Bank Hapoalim”) Line of Credit
On May 2, 2014, the Company obtained a $20 million line of credit facility from Bank Hapoalim, pursuant to a Loan Agreement (the “Loan Agreement”) among the Company and its subsidiary, Palisades Collection, LLC, as borrowers (“the Borrowers”), and Bank Hapoalim, as agent and lender. The Loan Agreement 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 was for a term of three years at an interest rate of either LIBOR plus 275 basis points or prime, at the Company’s option. The Loan Agreement included covenants that required the Company to maintain a minimum net worth of $150 million and pay an unused line fee. The facility was secured pursuant to a Security Agreement among the parties to the Loan Agreement, with property of the borrowers serving as collateral. On March 30, 2016, the Company signed the First Amendment to the Loan Agreement (the “First Amendment”) with Bank Hapoalim which amended certain terms of their banking arrangement. The First Amendment included (a) the reduction of the interest rate to LIBOR plus 225 basis points; (b) a decrease in the Net Equity requirement by $50 million, to $100 million and (c) modified the Net Loss requirement from a quarterly to an annual basis. All other terms of the original agreement remained in effect. The Company borrowed $9.6 million in February 2017 against the facility. There was a $10.0 million aggregate balance on deposit at Bank Hapoalim which served as collateral for the line of credit, and was reflected as restricted cash. On April 28, 2017, the Company renewed the line of credit facility with the new maturity date of August 2, 2017, under the existing terms and conditions. On August 2, 2017, the $9.6 million line of credit expired and the Company satisfied the debt with cash that was held in deposit as collateral with the bank. As of September 30, 2018 and 2017, there was no outstanding facility.
NOTE
1
2
- OTHER LIABILITIES
Other liabilities as of
September 30, 2018 and
2017 are as follows:
|
|
201
8
|
|
|
201
7
|
|
Accounts payable and accrued expenses
|
|
$
|
2,281,000
|
|
|
$
|
1,835,000
|
|
Lawsuit reserve (see Note 15 - Commitments and Contingencies -
Legal Matters
)
|
|
|
—
|
|
|
|
3,145,000
|
|
|
|
|
|
|
|
|
|
|
Total other liabilities
|
|
$
|
2,281,000
|
|
|
$
|
4,980,000
|
|
ASTA FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2018
and
2017
NOTE
1
3
- INCOME TAXES
The components of the provision for income taxes for the years ended
September 30, 2018 and 2017 are as follows:
|
|
201
8
|
|
|
201
7
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
3,709,000
|
|
|
$
|
(5,065,000
|
)
|
State
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,709,000
|
|
|
|
(5,065,000
|
)
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
1,525,000
|
|
|
|
2,322,000
|
|
State
|
|
|
224,000
|
|
|
|
409,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,749,000
|
|
|
|
2,731,000
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
5,458,000
|
|
|
|
(2,334,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: income tax benefit on discontinued operations
|
|
|
(44,000
|
)
|
|
|
(3,411,000
|
)
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
5,502,000
|
|
|
$
|
1,077,000
|
|
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. As of September 30, 2018, the Company has completed the accounting for the tax effects of the enactment of the Tax Act.
The difference between the statutory federal income tax rate on the Company’s pre-tax income and the Company’s effective income tax rate is summarized for the years ended
September 30, 2018 and 2017 as follows:
|
|
201
8
|
|
|
201
7
|
|
Statutory federal income tax rate
|
|
|
24.5
|
%
|
|
|
35.0
|
%
|
State income tax, net of federal benefit
|
|
|
2.3
|
|
|
|
(2.7
|
)
|
Permanent difference in municipal interest
|
|
|
(1.1
|
)
|
|
|
1.3
|
|
Permanent difference other
|
|
|
—
|
|
|
|
(4.1
|
)
|
Change in valuation allowance
|
|
|
(12.1
|
)
|
|
|
(14.0
|
)
|
Impact of the Tax Act (1)
|
|
|
46.3
|
|
|
|
—
|
|
Other
|
|
|
(2.5
|
)
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
57.4
|
%
|
|
|
15.2
|
%
|
(1) The revaluation of the Company's deferred tax assets and liabilities due to the lower corporate tax rate established by the Tax Act resulted in $4.4 million of tax expense during the year ended September 30, 2018.
ASTA FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2018
and
2017
NOTE
1
3
- INCOME TAXES
(CONTINUED):
The Company recognized a net deferred tax asset of
$10,940,000 and $12,696,000 as of September 30, 2018 and 2017, respectively. The components are as follows:
|
|
September 30,
201
8
|
|
|
September 30,
201
7
|
|
Impairments/bad debt reserves
|
|
$
|
328,000
|
|
|
$
|
4,380,000
|
|
Revenue recognition pertaining to the cost over estimated collections method
|
|
|
6,312,000
|
|
|
|
8,572,000
|
|
State tax net operating loss carry forward
|
|
|
7,421,000
|
|
|
|
9,603,000
|
|
Stock based compensation
|
|
|
2,367,000
|
|
|
|
3,520,000
|
|
Unrealized gain on structured settlements
|
|
|
—
|
|
|
|
(5,187,000
|
)
|
Capital loss carry forward
|
|
|
1,724,000
|
|
|
|
2,597,000
|
|
Foreign currency
|
|
|
404,000
|
|
|
|
472,000
|
|
Depreciation, amortization and other
|
|
|
215,000
|
|
|
|
193,000
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
18,771,000
|
|
|
|
24,150,000
|
|
Deferred tax valuation allowance
|
|
|
(7,831,000
|
)
|
|
|
(11,454,000
|
)
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
$
|
10,940,000
|
|
|
$
|
12,696,000
|
|
The Company files consolidated Federal and state income tax returns. Substantially all of the Company’s subsidiaries are single member limited liability companies and, therefore, do not file separate tax returns. Majority and minority owned subsidiaries file separate partnership tax returns. The expiration date for state net operating loss (“NOL”) carry forwards (from September 30, 2009) is September 30, 2029. The New Jersey NOL carry forward balance as of September 30, 2018 is approximately $73.2 million. In addition, the Company has New York State and City NOL of approximately $16.5 million and $3.5 million as of September 30, 2018, respectively. The Company has generated approximately $2.2 million of foreign NOL’s, all of which are fully reserved with a valuation allowance, due to cumulative losses in those jurisdictions. The Company has a federal capital loss carry forward of $6.1 million expiring in 2022 that has been fully reserved.
The Company accounts for income taxes using the asset and liability method which requires the recognition of deferred tax assets and, if applicable, deferred tax liabilities, for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and, if applicable, liabilities. Additionally, the Company would adjust deferred taxes to reflect estimated tax rate changes, if applicable. The Company conducts periodic evaluations to determine whether it is more likely than not that some or all of its deferred tax assets will be realized. Among the factors considered in this evaluation are estimates of future earnings, the future reversal of temporary differences and the impact of tax planning strategies that the Company can implement, if warranted. The Company is required to provide a valuation allowance for any portion of our deferred tax assets that, more likely than not, will not be realized at September 30, 2018. Based on this evaluation, the Company has recorded a deferred tax asset valuation allowance on their state NOL’s and capital loss carry forwards of approximately $7.8 million as of September 30, 2018 as compared to $11.5 million reported on September 30, 2017. Although the carry forward period for state income tax purposes is up to twenty years, given the economic conditions, such economic environment could limit growth over a reasonable time period to realize the deferred tax asset. The Company determined the time period allowance for carry forward is outside a reasonable period to forecast full realization of the deferred tax asset, therefore recognized the deferred tax asset valuation allowance. The Company continually monitors forecast information to ensure the valuation allowance is at the appropriate value. As required by FASB ASC 740, Income Taxes, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than- not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.
The Company's amended federal tax return for the year ended September 30, 2014 and 2015 is currently being audited by the Internal Revenue Service. The tax returns for the 2016 fiscal year are subject to examination. The Company does not have any uncertain tax positions.
ASTA FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2018
and
2017
NOTE
1
4
- NET INCOME PER SHARE
:
The following table presents the computation of basic and diluted per share data for the fiscal years ended
September 30, 2018 and
2017
:
|
|
201
8
|
|
|
201
7
|
|
Income (loss) from continuing operations
|
|
$
|
4,137,000
|
|
|
$
|
(8,382,000
|
)
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
(80,000
|
)
|
|
|
(4,620,000
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
4,057,000
|
|
|
$
|
(13,002,000
|
)
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share from continuing operations
|
|
$
|
0.62
|
|
|
$
|
(0.97
|
)
|
Basic loss per common share from discontinued operations
|
|
|
(0.01
|
)
|
|
|
(0.53
|
)
|
Basic earnings (loss) per share
|
|
$
|
0.61
|
|
|
$
|
(1.50
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share from continuing operations
|
|
$
|
0.62
|
|
|
$
|
(0.97
|
)
|
Diluted loss per common share from discontinuing operations
|
|
|
(0.01
|
)
|
|
|
(0.53
|
)
|
Diluted earnings (loss) per share
|
|
$
|
0.61
|
|
|
$
|
(1.50
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
6,662,600
|
|
|
|
8,692,668
|
|
Dilutive effect of stock options
|
|
|
2,241
|
|
|
|
—
|
|
Diluted
|
|
|
6,664,841
|
|
|
|
8,692,668
|
|
NOTE
1
5
- COMMITMENTS AND CONTINGENCIES
Leases
The Company leases its facilities in (i) Englewood Cliffs, New Jersey, (ii) Houston, Texas, and (iii) Louisville, Kentucky. The leases are operating leases, and the Company incurred related rent expense in the amounts of
$324,000, and
$360,000 during the years ended
September 30, 2018 and
2017
,
respectively. The future minimum lease payments are as follows:
|
|
Year Ending September 30,
|
|
2019
|
|
$
|
265,000
|
|
2020
|
|
|
224,000
|
|
|
|
$
|
489,000
|
|
The Company’s lease of its Louisville, Kentucky facility expires in December 2018.
Employment Agreement
On March 10, 2016, the Company entered into an employment agreement with an executive of the Company. Under this Agreement, he will receive a base salary of $275,000, subject to annual increases, and will be eligible to receive cash and non-cash bonuses. The Agreement has an 18 month non-compete and non-solicitation provision and has a one ( 1 ) year term, and the term will be extended by one year on each anniversary date of the Agreement.
Effective November 11, 2016, the Company entered into a five year employment agreement with Mr. Preece that could be terminated with or without “cause” (as defined in the Employment Agreement) and could resign with or without “good reason” (as defined in the Employment Agreement). If Mr. Preece was terminated without “cause” or resigned for “good reason” he would have received severance equal to two years of his base salary.
As of July 17, 2017, Mr. Preece was no longer employed as Chief Executive Officer of Simia. On an interim basis Gary Stern, Chairman, Chief Executive Officer and President of the Company, assumed the responsibilities of Simia’s Chief Executive Officer. No amounts were paid for any severance or bonus under his contract.
ASTA FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2018
and
2017
NOTE
1
5
- COMMITMENTS AND CONTINGENCIES (CONTINUED):
The employment contracts of the original two CBC principals expired at the end of December 2016. The Company did not renew those contracts. Ryan Silverman was appointed CEO/General Counsel, effective January 1, 2017. The Company is no longer contractually obligated on any CBC employment agreements, as they were sold with the entity.
Legal Matters
In June 2015, a putative class action complaint was filed against the Company, and one of its third-party law firm servicers, alleging violation of the federal Fair Debt Collection Practices Act and Racketeer Influenced and Corrupt Organizations Act (“RICO”) and state law arising from debt collection activities and default judgments obtained against certain debtors.
The Company filed a motion to strike the class action allegations and compel arbitration or, to the extent the court declines to order arbitration, to dismiss the RICO claims. On or about March 31, 2015, the court denied the Company’s motion. The Company filed an appeal with the United States Court of Appeals for the Second Circuit. A mediation session was held in July 2015, at which the Company agreed to settle the action on an individual basis for a payment of $13,000 to each named plaintiff, for a total payment of $39,000. Payment was made on or about July 24, 2015. The third-party law firm servicer has not yet settled and remains a defendant in the case.
The plaintiffs’ attorneys advised that they were contemplating the filing of another putative class action complaint against the Company alleging substantially the same claims as those that were asserted in this matter. In anticipation of such an eventuality, the Company agreed to non-binding mediation in order to reach a global settlement with other putative class members, which would avert the possibility of further individual or class actions with respect to the affected accounts. To date, the parties have attended two mediation sessions and are continuing to discuss a global settlement. In connection with such discussions, the parties agreed in principle to settle the action for a payment of $3.9 million (which would be split equally between the Company and the law firm servicer). The Company and law firm servicer have also agreed to cease collection activity on the affected accounts. Accordingly, the Company set up a reserve for settlement costs of $2.0 million during the three months ended March 31, 2017, which was included in general and administrative expenses in the Company's consolidated statement of operations.
The Company reassessed the situation at September 30, 2016 and deemed that an additional $0.3 million was necessary to account for legal expenses, which was made during the three month period ended September 30, 2016. On January 23, 2018, the Company paid $2.3 million as a global settlement in conjunction with the putative class action complaint filed against the Company, and one of its third-party law firm servicers. This payment represented the Company's portion of the total settlement of $4.6 million, which was split with the third-party law firm.
The Company was a defendant in a lawsuit filed in Montana state court alleging fraud and abuse of process arising from the Company’s business relationship with an entity that finances divorce litigation proceedings. On November 24, 2017, the Company paid $0.8 million as a settlement in conjunction with the lawsuit filed against the Company in Montana state court alleging, fraud and abuse of process arising from the Company's business relationship with an entity that finances divorce proceedings. As of September 30, 2017, the $0.8 million settlement was accrued for in the Company's consolidated balance sheet.
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.
NOTE
1
6
- CONCENTRATIONS
At September 30, 2018, approximately 31% of the Company’s portfolio face value was serviced by 5 collection organizations. The Company has servicing agreements in place with these 5 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 5 collection organizations represent only 31% of the Company’s portfolio face value, it does represent approximately 87% of the Company’s portfolio face value at all third party collection agencies and attorneys.
ASTA FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2018
and
2017
NOTE
1
6
– CONCENTRATIONS (CONTINUED):
At September 30, 2017, approximately 35% of the Company’s portfolio face value was serviced by 5 collection organizations. The Company has servicing agreements in place with these 5 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 5 collection organizations represent only 35% of the Company’s portfolio face value, it does represent approximately 90% of the Company’s portfolio face value at all third party collection agencies and attorneys. In the current year the Company has three consumer receivable portfolios that comprise over 10% of asset balance (20%, 11% and 11%), and one portfolio which generated greater than 10%, at 24% of asset balance.
NOTE
1
7
- STOCK OPTION PLANS
2012 Stock Option and Performance Award Plan
On February 7, 2012, the Board of Directors adopted the Company’s 2012 Stock Option and Performance Award Plan (the “2012 Plan”), which was approved by the stockholders of the Company on March 21, 2012. The 2012 Plan replaces the Equity Compensation Plan (as defined below).
The 2012 Plan provides the Company with flexibility with respect to equity awards by also 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. As of September 30, 2018, the Company has granted 540,800 options and 245,625 shares of restricted stock since inception of the 2012 Plan. Additionally, 109,768 options have been cancelled during that time period, leaving 1,323,343 shares available as of September 30, 2018. As of September 30, 2018, approximately 60 of the Company’s employees were eligible to participate in the 2012 Plan.
Equity Compensation Plan
On December 1, 2005, the board of directors adopted the Company’s Equity Compensation Plan (the “Equity Compensation Plan”), which was approved by the stockholders of the Company on March 1, 2006. The Equity Compensation Plan was adopted to supplement the Company’s 2002 Stock Option Plan (as defined below).
In addition to permitting the grant of stock options, as are permitted under the 2002 Stock Option Plan, the Equity Compensation Plan allows the Company flexibility with respect to equity awards by also providing for grants of stock awards (i.e., restricted or unrestricted), stock purchase rights and stock appreciation rights.
The Company authorized 1,000,000 shares of Common Stock for issuance under the Equity Compensation Plan. As of March 21, 2012, no additional awards could be issued under this plan.
2002 Stock Option Plan
On March 5, 2002, the board of directors adopted the Company’s 2002 Stock Option Plan (the “2002 Plan”), which was approved by the Company’s stockholders 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 for issuance under the 2002 Plan. As of March 5, 2012, no additional awards could be issued under this plan.
ASTA FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2018
and
2017
NOTE
1
7
- STOCK OPTION PLANS (CONTINUED):
Stock Based Compensation
The Company accounts for stock-based employee compensation under ASC 718, Compensation - Stock Compensation (“ASC 718”). ASC 718 requires that compensation expense associated with stock options and other stock based awards be recognized in the income statement rather than a disclosure in the notes to the Company’s consolidated financial statements.
On June 8, 2017, the Compensation Committee granted 56,600 stock options to an officer and employees of the Company, of which 10,000 options vested immediately, 10,000 options vested on January 1, 2018, 10,000 options vest on January 1, 2019 and the remaining 26,600 stock options vest in three equal annual installments and accounted for as one graded vesting award. The exercise price of these options was at the market price on that date. The weighted average assumptions used in the option pricing model were as follows:
Risk-free interest rate
|
|
|
1.86
|
%
|
Expected term (years)
|
|
|
5.97
|
|
Expected volatility
|
|
|
26.27
|
%
|
Forfeiture rate
|
|
|
3.49
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
Summary Of The Plan
Compensation expense for stock options and restricted stock is recognized over the vesting period. Compensation expense for restricted stock is based upon the market price of the shares underlying the awards on the grant date.
The following table summarizes stock option transactions under the 2012 Plan, the 2002 Plan and the Equity Compensation Plan (the “Plans”):
|
|
Year Ended September 30,
|
|
|
|
201
8
|
|
|
201
7
|
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding options at the beginning of year
|
|
|
880,567
|
|
|
$
|
8.05
|
|
|
|
949,667
|
|
|
$
|
8.47
|
|
Options granted
|
|
|
—
|
|
|
|
—
|
|
|
|
56,600
|
|
|
|
6.55
|
|
Options forfeited/cancelled
|
|
|
(90,100
|
)
|
|
|
8.11
|
|
|
|
(125,700
|
)
|
|
|
10.59
|
|
Options exercised
|
|
|
(61,600
|
)
|
|
|
6.48
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at the end of year
|
|
|
728,867
|
|
|
$
|
8.17
|
|
|
|
880,567
|
|
|
$
|
8.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable options at the end of year
|
|
|
710,694
|
|
|
$
|
8.18
|
|
|
|
796,962
|
|
|
$
|
8.14
|
|
ASTA FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2018
and
2017
NOTE
1
7
- STOCK OPTION PLANS (CONTINUED):
Summary Of The Plan (Continued):
The following table summarizes information about the plans’ outstanding options as of
September 30, 2018:
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
Range of
Exercise Price
|
|
|
Number
Outstanding
|
|
|
Weighted
Average
Remaining
Contractual
Life (In Years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
$2.8751
|
-
|
$5.7500
|
|
|
|
1,200
|
|
|
|
0.6
|
|
|
$
|
2.95
|
|
|
|
1,200
|
|
|
$
|
2.95
|
|
$5.7501
|
-
|
$8.6250
|
|
|
|
618,167
|
|
|
|
3.7
|
|
|
|
7.97
|
|
|
|
599,994
|
|
|
|
7.97
|
|
$8.6251
|
-
|
$11.5000
|
|
|
|
109,500
|
|
|
|
4.3
|
|
|
|
9.37
|
|
|
|
109,500
|
|
|
|
9.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
728,867
|
|
|
|
3.8
|
|
|
$
|
8.17
|
|
|
|
710,694
|
|
|
$
|
8.18
|
|
The Company recognized $106,000 and $58,000 of compensation expense related to stock options, for the fiscal years ended September 30, 2018 and 2017 respectively. As of September 30, 2018, there was $7,000 of unrecognized compensation cost related to unvested stock options. The weighted average remaining period over which such costs are expected to be recognized is 0.2 years.
The intrinsic value of the outstanding and exercisable options as of September 30, 2018 was approximately $1,200 and $1,200 respectively. The intrinsic value of the options exercised during fiscal year 2018 was approximately $265,000.There were no options exercised during the fiscal year 2017. The fair value of the options exercised during the fiscal year ended September 30, 2018 was $664,000. The proceeds from the exercise of stock options during the fiscal years ended September 30, 2018 were approximately $399,000. The weighted average remaining contractual life of exercisable options as of September 30, 2018 is 3.8 years. The fair value of the stock options that vested during the 2018 and 2017 fiscal years was approximately $258,000 and $685,000, respectively. The fair value of options granted during the fiscal year ended September 30, 2017 was approximately $371,000. There were no options granted during the year ended September 30, 2018.
The Company did not grant any restricted stock awards during the years ended September 30, 2018 and 2017. As of September 30, 2018 and 2017, there was no unrecognized compensation cost related to restricted stock awards.
NOTE
1
8
- STOCKHOLDERS’ EQUITY
The Company has 30,000,000 authorized preferred shares with a par value of $0.01 per share. The Board of Directors are authorized to divide the authorized shares of Preferred Stock into one or more series, each of which shall be so designated as to distinguish the shares thereof from the shares of all other series and classes.
There were no shares of preferred stock issued and outstanding as of September 30, 2018 and 2017.
Dividends are declared at the discretion of the Board of Directors and depend upon the Company’s financial condition, operating results, capital requirements and other factors that the Board of Directors deems relevant. In addition, agreements with the Company’s lenders may, from time to time, restrict the ability to pay dividends. As of September 30, 2018, there were no such restrictions, as there were no lending agreements in place.
On February 5, 2018, the Board of Directors of the Company declared a special cash dividend in the amount of $5.30 per share with respect to its Common Stock, payable on February 28, 2018 to holders of record of the Company’s Common Stock at the close of business on February 16, 2018, with an ex-dividend date of March 1, 2018. The aggregate payment to shareholders was approximately $35.4 million.
ASTA FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2018
and
2017
NOTE
1
8
- STOCKHOLDERS’ EQUITY (CONTINUED):
Stockholder Rights Agreement
On May 5, 2017, the Board of the Company adopted a stockholder rights plan (the “Rights Agreement”), pursuant to which the Company declared a dividend of one right (a “Right”) for each of the Company’s issued and outstanding shares of common stock. The dividend was declared to the stockholders of record at the close of business on May 15, 2017. Each Right entitled the holder, subject to the terms of the Rights Agreement, to purchase from the Company one one-thousandth of a share of the Company’s Series A Junior Participating Preferred Stock (the “Preferred Stock”) at a price of $28.60, subject to certain adjustments.
The Rights generally became exercisable on the earlier of (i) ten business days after any person or group obtains beneficial ownership of 10% or more of the Company’s outstanding common stock (an “Acquiring Person”), or (ii) ten business days after commencement of a tender or exchange offer resulting in any person or group becoming an Acquiring Person.
The exercise price payable and the number of shares of Preferred Stock or other securities or property issuable, upon exercise of the Rights were subject to adjustment from time to time to prevent dilution. In the event that, after a person or a group has become an Acquiring Person, the Company is acquired in a merger or other business combination transaction (or 50% or more of the Company’s assets or earning power are sold), proper provision would be made so that each holder of a Right will thereafter have had the right to receive, upon the exercise thereof at the then-current exercise price of the Right, that number of shares of common stock of the acquiring company having a market value at the time of that transaction equal to two times the exercise price. The Company had the right to redeem the Rights at any time before a person or group becomes an Acquiring Person at a price of $0.01 per Right, subject to adjustment. At any time after any person or group became an Acquiring Person, the Company could generally exchange each Right in whole or in part at an exchange ratio of one shares of common stock per outstanding Right, subject to adjustment.
Unless terminated on an earlier date pursuant to the terms of the Rights Agreement, the Rights was set to expire on June 1, 2018, or such later date as may have been established by the Board as long as any such extension is approved by a vote of the stockholders of the Company by June 1, 2018. The Company concluded any value associated with the Right given to shareholders as a dividend was deemed deminimus.
The Rights and Rights Agreement expired unexercised on June 1, 2018.
NOTE
1
9
- RETIREMENT PLAN
The Company maintains a 401(k) Retirement Plan covering all of its eligible employees. Matching contributions made by the employees to the plan are made at the discretion of the board of directors each plan year. Contributions for the years ended September 30, 2018 and 2017 were $127,000 and $139,000, respectively.
ASTA FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2018
and
2017
NOTE
20
- FAIR VALUE OF FINANCIAL MEASUREMENTS AND DISCLOSURES:
Disclosures about Fair Value of Financial Instruments
The estimated fair value of the Company’s financial instruments is summarized as follows:
|
|
September 30, 201
8
|
|
|
September 30, 201
7
|
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents (Level 1)
|
|
$
|
1,786,000
|
|
|
$
|
1,786,000
|
|
|
$
|
68,000
|
|
|
$
|
68,000
|
|
Available-for-sale investments (Level 1)
|
|
|
38,054,000
|
|
|
|
38,054,000
|
|
|
|
5,511,000
|
|
|
|
5,511,000
|
|
Consumer receivables acquired for liquidation (Level 3)
|
|
|
3,749,000
|
|
|
|
27,574,000
|
|
|
|
6,841,000
|
|
|
|
32,603,000
|
|
The following assets have been reclassified to discontinued operations as of
September 30, 2017:
|
|
September 30, 2017
|
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
Financial asset
|
|
|
|
|
|
|
|
|
Structured settlements (Level 3)
|
|
$
|
86,971,000
|
|
|
$
|
86,971,000
|
|
Disclosure of the estimated fair values of financial instruments often requires the use of estimates. The Company uses the following methods and assumptions to estimate the fair value of financial instruments:
Cash equivalents - The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. The carrying amount of cash equivalents approximates fair value.
Available-for-sale investments - The available-for-sale securities consist of mutual funds and U.S. treasury bills that are valued based on quoted prices in active markets. The U.S. treasury bills have been classified as available for sale by the Company, as they are deemed to be short term investments, and can be liquidated as needed by the Company.
The Company’s available-for-sale investments are classified as Level 1 financial instruments based on the classifications described above. The Company did not have any transfers into (out of) Level 1 investments during the fiscal year ended September 30, 2017. The Company had no Level 2 or Level 3 available-for-sale investments during the fiscal year ended September 30, 2017.
Consumer receivables acquired for liquidation - The Company computed the fair value of the consumer receivables acquired for liquidation using its proprietary forecasting model. The Company’s forecasting model utilizes a discounted cash flow analysis. The Company’s cash flows are an estimate of collections for consumer receivables based on variables fully described in Note
4 - Consumer Receivables Acquired for Liquidation. These cash flows are discounted to determine the fair value.
Structured settlements (included in discontinued operations) - The Company determined the fair value based on the discounted forecasted future collections of the structured settlements. Unrealized gains on structured settlements is comprised of both unrealized gains resulting from fair market valuation at the date of acquisition of the structured settlements and the subsequent fair value adjustments resulting from the change in the discount rate. The $0.2 million of unrealized gains recognized in the fiscal year ended September 30, 2018, are due to day one gains. Of the $4.3 million of unrealized gains recognized in the fiscal year ended September 30, 2017, approximately $6.9 million is due to day one gains on new structured settlements financed during the period, $0.2 million due to a change in the discount rate, offset by a decrease of $2.1 million in realized gains recognized as realized interest income on structured settlements during the period and fair value adjustment of $0.7 million.
A significant unobservable input used in the fair value measurement of structured settlements is the discount rate. Significant increases and decreases in the discount rate used to estimate the fair value of structured settlements could decrease or increase the fair value measurement of the structured settlements. The discount rate could be affected by factors, which include, but are not limited to, creditworthiness of insurance companies, market conditions, specifically competitive factors, credit quality of receivables purchased, the diversity of the payers of the receivables purchased, the weighted average life of receivables, current benchmark rates (i.e.
10 year treasury or swap rate) and the historical portfolio performance of the originator and/or servicer.
ASTA FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2018
and
2017
NOTE
20
- FAIR VALUE OF FINANCIAL MEASUREMENTS AND DISCLOSURES (CONTINUED):
Disclosures about Fair Value of Financial Instruments (Continued)
:
The changes in structured settlements at fair value using significant unobservable inputs (Level
3) during the year ended
September 30, 2018 were as follows:
Balance at September 30, 2017
|
|
$
|
86,971,000
|
|
Structured settlements sold in conjunction with sale of CBC on December 13, 2017
|
|
|
(86,971,000
|
)
|
Structured settlements as of September 30, 2018
|
|
$
|
—
|
|
Realized and unrealized gains and losses on structured settlements included in earnings in the accompanying consolidated statements of operations for the year ended
September 30, 2018 are reported in the following revenue categories:
Total gains included in the year ended September 30, 2018
|
|
$
|
244,000
|
|
|
|
|
|
|
Change in unrealized gains (losses) relating to assets held at September 30, 2018
|
|
$
|
—
|
|
NOTE
2
1
- RELATED PARTY TRANSACTIONS
On September 17, 2015, the Company and Piccolo agreed to terms to a new two-year, $80,000 contract, pursuant to which Piccolo would provide consulting services. The compensation was to be paid quarterly. The consulting agreement with Piccolo terminated on September 30, 2017, and was not renewed. During fiscal 2018, the Company did not pay Piccolo any amounts under this agreement. For the year ended September 30, 2017, the Company paid Piccolo $80,000 for such services.
In addition, A. L. Piccolo & Co., Inc. (“ALP”), which is also owned by Louis Piccolo, received a fee from Pegasus, prior to acquisition, which was calculated based on amounts loaned to Pegasus by Fund Pegasus up to maximum of $700,000. The fee was payable over nine years including interest at 4% per annum from Pegasus during the term of the Pegasus Operating Agreement that expired on December 28, 2016. Thereafter, it was payable by PLF and its affiliates. For the years ended September 30, 2018 and 2017, Pegasus paid ALP $33,000 and $133,000, which includes fees and interest paid during the period. As of September 30, 2018 and 2017, the Company owed Piccolo $0 and $66,000, respectively, which was recorded in other liabilities on the Company’s consolidated balance sheet at September 30, 2017.
In June 2015, CBC entered into an asset purchase agreement with Fortress Funding, LLC (“Fortress”) to acquire an interest in certain tangible and intangible assets of Fortress, which included customer lists, equipment and other intellectual property. In consideration for these assets CBC agreed to pay Fortress $0.5 million, as well as up to an additional $1.2 million based on conversion of customers from the acquired lists obtained in the transaction. Fortress is owned by Michelle Silverman, the wife of Ryan Silverman, who in connection with the agreement was offered employment as General Counsel of CBC.
For the years ended September 30, 2018 and 2017, the Company made payments of $0 and $203,000, respectively, to Fortress. As of September 30, 2018 and 2017, the Company had no liability due to Fortress. Subsequent to the sale of CBC, on December 13, 2017, Fortress is no longer considered a related party.
ASTA FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2018
and
2017
NOTE
2
2
- SEGMENT REPORTING
The Company operates through strategic business units that are aggregated into three reportable segments: Consumer receivables, personal injury claims and Social security disability advocacy. The three reportable segments consist of the following:
|
•
|
Consumer receivables -
This segment is engaged in the business of purchasing, managing for its own account and servicing distressed consumer receivables, including judgment receivables, charged off receivables and semi-performing receivables. Judgment receivables are accounts where outside attorneys have secured judgments directly against the consumer. Primary charged-off receivables are accounts that have been written-off by the originators and may have been previously serviced by collection agencies. Semi-performing receivables are accounts where the debtor is currently making partial or irregular monthly payments, but the accounts may have been written-off by the originators. Distressed consumer receivables are the unpaid debts of individuals to banks, finance companies and other credit providers. A large portion of our distressed consumer receivables are MasterCard ® , Visa ® and other credit card accounts which were charged-off by the issuers or providers for non-payment. We acquire these and other consumer receivable portfolios at substantial discounts to their face values. The discounts are based on the characteristics (issuer, account size, debtor location and age of debt) of the underlying accounts of each portfolio. Recently, the Company's efforts have been in the international areas (mainly South America), as we have curtailed our active purchasing of consumer receivables in the United States. The Company holds consumers receivable acquired for liquidation in both Colombia and Peru of approximately $3.3 million. The business conducts its activities primarily under the name Palisades Collection, LLC.
|
|
•
|
Personal injury claims
- This segment is comprised of purchased interests in personal injury claims from claimants who are a party in personal injury litigation or claim. The Company advances to each claimant funds on a non-recourse basis at an agreed upon interest rate, in anticipation of a future settlement. The interest in each claim purchased consists of the right to receive, from such claimant, part of the proceeds or recoveries which such claimant receives by reason of a settlement, judgment or award with respect to such claimant’s claim. 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. To date, Practical Funding has not funded any advances on personal injury claims.
Simia commenced operations in January 2017, and conducts its business solely in the United States. Simia obtained its business from external brokers and internal sales professionals soliciting attorneys and law firms who represent claimants who have personal injury claims. Business was also obtained from its website and through attorneys. The Company accounted for its investment in Sylvave under the equity method of accounting through January 12, 2018, for subsequent periods the Company includes the financial results of Sylvave in its consolidated statement of operations. Simia and Sylvave are not funding any new advances, but continue to collect on outstanding personal injury claim advances in the ordinary course.
|
|
•
|
Social security disability advocacy
- GAR Disability and Five Star are 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.
|
Certain non-allocated administrative costs, interest income, interest expense and various other non-operating income and expenses are reflected in Corporate. Corporate assets include cash and cash equivalents, available-for-sale investments, a note receivable, property and equipment, goodwill, deferred taxes and other assets.
ASTA FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2018
and
2017
NOTE
22
- SEGMENT REPORTING
(CONTINUED)
The following table shows results for continuing operations by reporting segment for the years ended September 30, 2018 and 2017.
(Dollars in millions)
|
|
Consumer
Receivables
|
|
|
Social security
disability
advocacy
|
|
|
Personal
Injury
Claims (2)
|
|
|
Corporate (3)
|
|
|
Total
|
|
Fiscal Year Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
15.9
|
|
|
$
|
4.6
|
|
|
$
|
1.1
|
|
|
$
|
-
|
|
|
$
|
21.6
|
|
Other income (5)
|
|
|
4.0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0.5
|
|
|
|
4.5
|
|
Segment profit (loss)
|
|
|
17.8
|
|
|
|
1.1
|
|
|
|
1.1
|
|
|
|
(10.4
|
)
|
|
|
9.6
|
|
Segment Assets (1)
|
|
|
12.4
|
|
|
|
1.0
|
|
|
|
11.9
|
|
|
|
61.0
|
|
|
|
86.3
|
|
2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
15.9
|
|
|
|
5.1
|
|
|
|
0.4
|
|
|
|
-
|
|
|
|
21.4
|
|
Other income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
Segment profit (loss)
|
|
|
12.5
|
|
|
|
(1.7
|
)
|
|
|
4.1
|
|
|
|
(22.2
|
)
|
|
|
(7.3
|
)
|
Segment Assets (1) (4)
|
|
20.4
|
|
|
|
3.9
|
|
|
|
55.0
|
|
|
|
122.2
|
|
|
|
201.5
|
|
The Company does
not have any intersegment revenue transactions.
(1)
|
Includes other amounts in other line items on the consolidated balance sheet.
|
(2)
|
The Company recorded Pegasus as an equity investment in its consolidated financial statements through January 12, 2018. Commencing on January 13, 2018, Sylvave is consolidated in the Company’s financial statements. For segment reporting the Company has included its pro-rated share of the earnings and losses from its investment under the Personal Injury Claims segment.
|
(3)
|
Corporate is
not part of the
three reportable segments, as certain expenses and assets are
not earmarked to any specific operating segment.
|
(4)
(5)
|
Included in Corporate are approximately
$92.8 million of assets related to discontinued operations as of
September 30, 2017.
Included in other income is approximately $4.0 million in gain on settlements. See Note 10 - Settlements.
|
ASTA FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2018
and
2017
NOTE
2
3
- ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss) consists of:
|
|
Year Ended September 30,
|
|
|
|
201
8
|
|
|
201
7
|
|
|
|
Unrealized
gain on
marketable
securities
|
|
|
Foreign
currency
translation, net
|
|
|
Total
|
|
|
Unrealized
gain on
marketable
securities
|
|
|
Foreign
currency
translation, net
|
|
|
Total
|
|
Beginning Balance
|
|
$
|
7,000
|
|
|
$
|
11,000
|
|
|
$
|
18,000
|
|
|
$
|
624,000
|
|
|
$
|
179,000
|
|
|
$
|
803,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses) on foreign currency translation, net
|
|
|
-
|
|
|
|
34,000
|
|
|
|
34,000
|
|
|
|
-
|
|
|
|
(168,000
|
)
|
|
|
(168,000
|
)
|
Change in unrealized gains (losses) on marketable securities
|
|
|
(17,000
|
)
|
|
|
-
|
|
|
|
(17,000
|
)
|
|
|
(10,000
|
)
|
|
|
-
|
|
|
|
(10,000
|
)
|
Amount reclassified from accumulated other comprehensive income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(607,000
|
)
|
|
|
-
|
|
|
|
(607,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive income
|
|
|
(17,000
|
)
|
|
|
34,000
|
|
|
|
17,000
|
|
|
|
(617,000
|
)
|
|
|
(168,000
|
)
|
|
$
|
(785,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
(10,000
|
)
|
|
$
|
45,000
|
|
|
$
|
35,000
|
|
|
$
|
7,000
|
|
|
$
|
11,000
|
|
|
$
|
18,000
|
|