Table of Contents

 



 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 


 

FORM 10-Q /A  

 


 

Amendment # 2

 

 

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

 

For the quarterly period ended December 31, 2016

 

OR

 

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

 

For the transition period from                      to                     

 

Commission file number: 001-35637

 


 

ASTA FUNDING, INC.

(Exact name of registrant as specified in its charter)

 


 

 

Delaware

22-3388607

(State or other jurisdiction
of incorporation or organization)

(IRS Employer
Identification No.)

 

 

210 Sylvan Ave., Englewood Cliffs, New Jersey

07632

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number: (201) 567-5648

 


 

Former name, former address and former fiscal year, if changed since last report: N/A

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ☐     No   ☒

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ☐     No   ☒

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

☐     (Do not check if a smaller reporting company)

  

Smaller reporting company

 

Emerging growth company

 

       

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes   ☐     No   ☒

 

As of September 14, 2018, the registrant had 6,685,415 common shares outstanding.

 



 

 

 

EXPLANATORY NOTE

 

As previously disclosed in the Current Report on Form 8-K filed by Asta Funding, Inc. (“Asta” or the “Company”) with the Securities and Exchange Commission (the “SEC”) on January 18, 2018, the Board of Directors (the “Board”) of the Company, upon the recommendation of the Audit Committee of the Board (the “Audit Committee”), determined that the Company’s previously issued financial statements for each of the years ended September 30, 2016, 2015 and 2014, and the interim periods contained therein, as well as the Company’s unaudited consolidated financial statements for the quarters ended December 31, 2016, March 31, 2017 and June 30, 2017, could no longer be relied upon. 

 

On September 17, 2018, the Company filed an Annual Report on Form 10-K/A (the “Form 10-K/A”) to amend and restate the Company’s previously issued financial statements for each of the years ended September 30, 2016, 2015 and 2014, as well as the interim periods contained therein. The Company is filing this Amendment No. 2 on Form 10-Q/A (this “Amendment”) to amend and restate the Company’s previously issued financial statements contained in its Quarterly Report on Form 10-Q for the quarter ended December 31, 2016 (the “Non-Reliance Period”), which was originally filed with the SEC on February 9, 2017 (the “Original Form 10-Q”), and restated on May 26, 2017 (the “Restated Form 10-Q/A”). The Company expects to file, at a later time, amendments to its Quarterly Reports on Form 10-Q for the quarters ended March 31, 2017 and June 30, 2017.

 

Prior period amounts have already been restated in the Company's Form 10-K/A and, accordingly have not been restated in this Amendment.

 

 

Restatement Background

 

On January 11, 2018, after discussions with the Audit Committee, management re-evaluated the Company's historical conclusion to consolidate Pegasus Funding, LLC (“Pegasus”). Management has determined that the Company lacked the requisite control to consolidate Pegasus in its historical periods in accordance with Accounting Standards Codification (“ASC”) 810 “ Consolidation .” Management also determined that the Company's previous treatment for certain foreign currency matters under ASC 830 “ Foreign Currency Matters ” was not appropriate. As such, the Company has subsequently revised its investment in Pegasus to the equity method, including the underlying reserve methodology; and has adjusted its financial statements to reflect the proper accounting for certain foreign currency transactions. Additionally, the Company corrected the financial statements for additional known errors consisting of (i) the adjustment of various accruals, (ii) the fair value of structured settlements, (iii) accounting for unallocated payments, and (iv) the tax effects of the adjustments mentioned above.

 

The following errors were identified as part of the restatement. See Note 1 – Restatement of Financial Statements in the Company’s notes to consolidated financial statements for further details.

 

 

1.

In connection with the Company determining it lacked the requisite control to consolidate Pegasus during the Non-Reliance Period, the Company has now accounted for its investment in Pegasus under the equity method in accordance with accounting principles generally accepted in the United States (“US GAAP”).

 

 

2.

The Company determined that it had not previously accounted for certain foreign currency gains/losses on intercompany balances and transactions in accordance with US GAAP. The Company improperly accounted for the foreign currency effect of certain transactions as if they were long-term investments by including the foreign currency effect in accumulated other comprehensive income instead of properly recording the effect as operating expenses as required under ASC 830.

 

 

3.

Prior to the sale of its structured settlement business, the Company purchased periodic payments under structured settlements and annuity policies from individuals in exchange for a lump sum payment. The Company did not reflect the quarterly increase in certain underlying benchmark interest rates used in determining fair value of the Company's structured settlements. The Company has elected to carry the structured settlements at fair value in accordance with the guidance of FASB ASC, Recognition and Measurement of Financial Assets and Financial Liabilities (ASC 822-10-50-28 through 50-22).

 

 

4.

The Company determined that it had not accounted for certain unallocated payments reported on its consolidated balance sheet properly.

 

 

5.

The Company discovered that it did not properly record an amortizable asset and related liability in conjunction with an asset purchase agreement entered into in June 2015 with a related party.

 

 

6.

The Company identified other transactions that had not been properly accounted for in the correct period and/or for improper amounts and/or improper accounts.

 

 

7.

The Company identified the personal injury claims asset balance of Pegasus was determined to be understated.

 

 

8.

Some of the corrections noted above impacted earnings (loss) before taxes which, in turn, required a calculation of the tax impact.

 

2

 

Internal Control and Disclosure Controls Considerations

 

In connection with this restatement, our Chief Executive Officer and Chief Financial Officer determined that there were deficiencies in the Company’s internal control over financial reporting that constituted material weaknesses at December 31, 2016. Accordingly, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective at December 31, 2016, as discussed in Item 4 of this Amendment.

 

Items Amended in This Amendment

 

For the convenience of the reader, this Amendment sets forth the Original Form 10-Q in its entirety, as amended and restated by the Restated Form 10-Q/A, and as further modified and adjusted to reflect the restatement described above. In addition to such changes, this Amendment also includes: (i) revisions in presentation for the discontinued operations of the Company’s structured settlement business, which was sold on December 13, 2017; and (ii) updates to the Company’s subsequent events disclosure included in Note 20 to the Consolidated Financial Statements (collectively, with (i) above, the “Subsequent Events”).

 

In accordance with applicable SEC rules, this Amendment also includes new certifications required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, as amended, from our Chief Executive Officer and Chief Financial Officer, dated as of the filing date of this Amendment. Aside from the foregoing items, this Amendment has not modified the Original Form 10-Q, as amended by the Restated Form 10-Q/A, other than to correct immaterial items and certain errors in the exhibit index, and the disclosures contained in this Amendment have not been updated to reflect events occurring subsequent to the date of the Original Form 10-Q, February 9, 2017, except as noted above with respect to the Subsequent Events.

 

Accordingly, this Amendment amends and restates the following items of the Original Form 10-Q, as amended and restated by the Restated Form 10-Q/A:

 

 

Part I – Item 1. Financial Information.

  Part I – Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 

Part I – Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Part I – Item 4. Controls and Procedures.

  Part II – Item 1A. Risk Factors.
  Part II – Item 6. Exhibits.

 

3

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q /A

 

 

 

Part I-FINANCIAL INFORMATION

5

 

 

Item 1. Consolidated Financial Statements

5

 

 

Consolidated Balance Sheets as of December 31, 2016 (restated) (unaudited) and September 30, 2016

5

 

 

Consolidated Statements of Operations for the three months ended December 31, 2016 (restated) (unaudited) and 2015 (unaudited)

6

 

 

Consolidated Statements of Comprehensive Income (Loss) for the three months ended December 31, 2016 (restated) (unaudited) and 2015 (unaudited)

7

 

 

Consolidated Statements of Stockholders’ Equity for the three months ended December 31, 2016 (restated) (unaudited) and 2015 (unaudited)

8

 

 

Consolidated Statements of Cash Flows for the three months ended December 31, 2016 (restated) (unaudited) and 2015 (unaudited)

9

 

 

Notes to Consolidated Financial Statements (restated) (unaudited)

10

  

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (restated)

43

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk (restated)

53

 

 

Item 4. Controls and Procedures (restated)

54

 

 

Part II-OTHER INFORMATION

56

 

 

Item 1. Legal Proceedings

56

 

 

Item 1A. Risk Factors (restated)

56

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

56

 

 

Item 3. Defaults Upon Senior Securities

56

 

 

Item 4. Mine Safety Disclosures

56

 

 

Item 5. Other Information

56

 

 

Item 6. Exhibits (restated)

 

57

 

 

Signatures

58

   

4

 

P ART I. FINANCIAL INFORMATION

Item  1. Financial Statements (restated)

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

( rounded to the nearest thousands, except share data)

 

 

   

December 31,
2016

(Unaudited)

(Restated)

   

September 30,
2016

 

ASSETS

               

Cash and cash equivalents

  $ 3,696,000     $ 6,282,000  

Restricted cash

    8,165,000       10,000,000  

Available for sale investments (at fair value)

    55,045,000       56,763,000  

Consumer receivables acquired for liquidation (at net realizable value)

    13,462,000       13,427,000  

Other investments, net

    3,354,000       3,590,000  

Due from third party collection agencies and attorneys

    1,004,000       1,050,000  

Prepaid and income taxes receivable

    4,896,000       714,000  

Furniture and equipment, net

    176,000       196,000  

Equity method investment

    49,141,000       48,582,000  

Deferred income taxes

    15,327,000       14,903,000  

Goodwill

    1,410,000       1,410,000  

Other assets

    6,281,000       6,585,000  

Assets related to discontinued operations

    94,526,000       91,506,000  

Total assets

  $ 256,483,000     $ 255,008,000  

LIABILITIES

               

Other liabilities

  $ 4,731,000     $ 3,987,000  

Liabilities related to discontinued operations

    74,169,000       69,238,000  

Total liabilities

    78,900,000       73,225,000  

Commitments and contingencies

               

STOCKHOLDERS’ EQUITY

               

Preferred stock, $.01 par value; authorized 5,000,000 shares; issued and outstanding — none

           

Common stock, $.01 par value, authorized 30,000,000 shares; issued 13,336,508 at December 31, 2016 and September 30, 2016; and outstanding 11,876,224 at December 31, 2016 and September 30, 2016

    133,000       133,000  

Additional paid-in capital

    67,028,000       67,034,000  

Retained earnings

    123,792,000       126,738,000  

Accumulated other comprehensive (loss) income

    (445,000

)

    803,000  

Treasury stock (at cost) 1,460,284 shares at December 31, 2016 and September 30, 2016

    (12,925,000

)

    (12,925,000

)

Total stockholders’ equity

    177,583,000       181,783,000  

Total liabilities and stockholders’ equity

  $ 256,483,000     $ 255,008,000  

 

See accompanying notes to consolidated financial statements

 

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited)

( rounded to the nearest thousands, except share data)

 

   

Three Months

Ended

December 31,

2016

(Restated)

   

Three Months

Ended

December 31,

2015

 

Revenues:

               

Finance income, net

  $ 4,095,000     $ 5,106,000  

Disability fee income

    1,354,000       659,000  

Total revenues

    5,449,000       5,765,000  

Other income — includes ($45,000) and ($31,000) during the three month periods ended December 31, 2016 and 2015, respectively, of accumulated other comprehensive income reclassification for unrealized net (losses) / gains on available for sale securities

    451,000       392,000  
      5,900,000       6,157,000  

Expenses:

               

General and administrative

    7,295,000       5,729,000  

Earnings from equity method investment

    (404,000

)

    (1,494,000

)

      6,891,000       4,235,000  
                 

(Loss) income from continuing operations before income tax

    (991,000

)

    1,922,000  

Income tax expense — includes tax benefit of $18,000 and $11,000 during the three month periods ended December 31, 2016 and 2015, respectively, of accumulated other comprehensive income reclassifications for unrealized net (losses) / gains on available for sale securities

    697,000       631,000  

Net (loss) income from continuing operations

    (1,688,000

)

    1,291,000  
                 

Net (loss) income from discontinued operations, net of income tax

    (1,258,000

)

    272,000  
                 

Net (loss) income

  $ (2,946,000

)

  $ 1,563,000  
                 

Net (loss) income per basic shares:

               

Continuing operations

  $ (0.14

)

  $ 0.11  

Discontinued operations

    (0.11

)

    0.02  
      (0.25

)

    0.13  

Net (loss) income per diluted shares:

               

Continuing operations

    (0.14

)

    0.11  

Discontinued operations

    (0.11

)

    0.02  
    $ (0.25

)

  $ 0.13  
                 

Weighted average number of common shares outstanding:

               

Basic

    11,876,224       12,155,421  

Diluted

    11,876,224       12,431,886  

 

See accompanying notes to consolidated financial statements

 

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss)

December 31, 2016 and 2015

(Unaudited)

( rounded to the nearest thousands)

 

   

Three Months
Ended
December 31,

2016

(Restated)

   

Three Months
Ended
December 31,

2015

 

Comprehensive (loss) income is as follows:

               

Net (loss) income

  $ (2,946,000

)

  $ 1,563,000  

Net unrealized securities (loss) gain, net of tax benefit/ (expense) of $826,000 and ($190,000) during the three month periods ended December 31, 2016 and 2015, respectively.

    (1,239,000

)

    330,000  

Reclassification adjustments for securities sold, net of tax benefit of $18,000 and $11,000 during the three month periods ended December 31, 2016 and 2015, respectively.

    (27,000

)

    (20,000

)

Foreign currency translation, net of tax benefit (expense) of ($12,000) and ($9,000) during the three month periods ended December 31, 2016 and 2015, respectively.

    18,000       14,000  

Other comprehensive (loss) income

    (1,248,000

)

    324,000  

Total comprehensive (loss) income

  $ (4,194,000

)

  $ 1,887,000  

 

See accompanying notes to consolidated financial statements

 

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

(Unaudited)

( rounded to the nearest thousands, except share data)

 

Three months ended December 31, 2016 (restated):

 

   

Common Stock

   

Additional

           

Accumulated
Other

           

Non-

   

Total

 
   

Issued
Shares

   

Amount

   

Paid-in
Capital

   

Retained
Earnings

   

Comprehensive
Income
(Loss)

   

Treasury
Stock

   

Controlling
Interests

   

Stockholders’
Equity

 

Balance, September 30, 2016 , as previously reported

    13,336,508     $ 133,000     $ 67,034,000     $ 126,738,000     $ 803,000     $ (12,925,000

)

  $     $ 181,783,000  

Stock based compensation expense

                (6,000

)

                            (6,000

)

Net loss

                      (2,946,000

)

                      (2,946,000

)

Amount reclassified from other comprehensive loss

                            (27,000

)

                (27,000

)

Unrealized (loss) on marketable securities, net

                            (1,239,000

)

                (1,239,000

)

Foreign currency translation, net

                            18,000                   18,000  

Balance, December 31, 2016, restated

    13,336,508     $ 133,000     $ 67,028,000     $ 123,792,000     $ (445,000

)

  $ (12,925,000

)

  $     $ 177,583,000  

  

 

Three months ended December 31, 2015:

 

   

Common Stock

   

Additional

           

Accumulated
Other

           

Non-

   

Total

 
   

Issued
Shares

   

Amount

   

Paid-in
Capital

   

Retained
Earnings

   

Comprehensive
Income
(Loss)

   

Treasury
Stock

   

Controlling
Interests

   

Stockholders’
Equity

 

Balance, September 30, 2015

    13,061,673     $ 131,000     $ 65,049,000     $ 119,165,000     $ 20,000     $ (1,751,000

)

  $ 793,000     $ 183,407,000  

Stock based compensation expense

                278,000                               278,000  

Restricted stock

    5,000                                            

Net income

                      1,563,000                         1,563,000  

Amount reclassified from other comprehensive loss

                            (20,000

)

                (20,000

)

Unrealized gain on marketable securities, net

                            330,000                   330,000  

Purchase of treasury stock

                                  (7,180,000

)

          (7,180,000

)

Foreign currency translation, net

                            14,000                   14,000  

Purchase of subsidiary shares from non-controlling interest

                (903,000

)

                      (793,000

)

    (1,696,000

)

Issuance of restricted stock to purchase subsidiary shares from non-controlling interest

    123,304       1,000       999,000                               1,000,000  

Balance, December 31, 2015

    13,189,977     $ 132,000     $ 65,423,000     $ 120,728,000     $ 344,000     $ (8,931,000

)

  $     $ 177,696,000  

 

See accompanying notes to consolidated financial statements

 

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

( rounded to the nearest thousands)

 

   

Three Months Ended

 
   

December 31,

2016

(Restated)

   

December 31,

2015

 

Cash flows from operating activities:

               

Net (loss) income from continuing operations

  $ (1,688,000

)

  $ 1,291,000  

Net (loss) income from discontinued operations

    (1,258,000

)

    272,000  

Net (loss) income

  $ (2,946,000

)

  $ 1,563,000  

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

               

Depreciation and amortization

    26,000       90,000  

Deferred income taxes

    420,000       95,000  

Stock based compensation

    (6,000

)

    278,000  

Loss on sale of available-for-sale securities

    45,000       31,000  

Unrealized gain on other investments

    (18,000

)

    (62,000

)

Unrealized foreign exchange loss on other investments

    254,000       118,000  

Earnings from equity method investment

    (404,000

)

    (1,494,000

)

Changes in:

               

Prepaid and income taxes receivable

    (4,182,000

)

    819,000  

Due from third party collection agencies and attorneys

    40,000       352,000  

Other assets

    307,000       (2,360,000

)

Other liabilities

    761,000       (493,000

)

Net cash provided by (used in) operating activities of discontinued operations

    369,000       (479,000

)

Net cash used in operating activities

    (5,334,000

)

    (1,542,000

)

Cash flows from investing activities:

               

Purchase of consumer receivables acquired for liquidation

    (2,213,000

)

    (6,051,000

)

Principal collected on receivables acquired for liquidation

    2,129,000       2,299,000  

Purchase of available-for-sale securities

    (7,568,000

)

    (7,136,000

)

Proceeds from sale of available-for-sale securities

    7,132,000       12,303,000  

Purchase of non-controlling interest

          (800,000

)

(Increase) decrease in equity method investment

    (155,000

)

    5,827,000  

Capital expenditures

    (6,000

)

     

Net cash used in investing activities of discontinued operations

    (2,632,000

)

    (2,544,000

)

Net cash (used in) provided by investing activities

    (3,313,000

)

    3,898,000  

Cash flows from financing activities:

               

Purchase of treasury stock

          (7,180,000

)

Net cash provided by financing activities of discontinued operations

    4,131,000       4,306,000  

Net cash provided by (used in) financing activities

    4,131,000       (2,874,000

)

Foreign currency effect on cash

    52,000        
Net decrease in cash, cash equivalents and restricted cash including cash, cash equivalents classified within assets related to discontinued operations     (4,464,000 )     (518,000 )
Less: net increase (decrease) in cash, cash equivalents and restricted cash classified within assets related to discontinued operations     43,000       (312,000 )

Net decrease in cash , cash equivalents and restricted cash

    (4,421,000

)

    (830,000

)

Cash, cash equivalents and restricted cash at beginning of period

    16,282,000       19,947,000  

Cash , cash equivalents and restricted cash at end of period

  $ 11,861,000     $ 19,117,000  

Supplemental disclosure of cash flow information :

               

Continuing operations:

               

Cash paid for: Income taxes

  $ 6,200,000        

Discontinued operations:

               

Cash paid for: Interest

  $ 914,000       763,000  

Supplemental disclosure of non-cash flow investing activities :

               

Discontinued operations:

               

Issuance of restricted stock to purchase subsidiary shares from non-controlling interest

  $     $ 1,000,000  

 

See accompanying notes to consolidated financial statements

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) (Restated)

 

 

Note 1— Restatement of Financial Statements

 

The following tables summarize the effects of the restatements on the specific items presented in the Company’s consolidated financial statements previously included in the Restated Form 10 -Q/A:

 

    Consolidated Balance Sheet  
   

December 31, 2016

 
   

As Reported

   

De-Consolidation of

Pegasus ( 1 )

   

Adjustments

     

Restated

 

ASSETS

                                 

Cash and cash equivalents

  $ 4,770,000     $ (1,065,000

)

  $ (9,000

)

(2)(6)

  $ 3,696,000  

Restricted cash

    8,165,000                     8,165,000  

Available for sale investments (at fair value)

    55,045,000                     55,045,000  

Consumer receivables acquired for liquidation (at net realizable value)

    13,243,000             219,000  

(2)

    13,462,000  

Investment in personal injury claims, net

    47,875,000       (47,875,000

)

             

Other investments, net

    3,354,000                     3,354,000  

Due from third party collection agencies and attorneys

    1,035,000             (31,000

)

(2)

    1,004,000  

Prepaid and income taxes receivable

    5,267,000             (371,000

)

(8)

    4,896,000  

Furniture and equipment, net

    176,000                     176,000  

Equity method investment

          48,720,000       421,000  

(7)

    49,141,000  

Deferred income taxes

    16,585,000             (1,258,000

)

(2)(8)

    15,327,000  

Goodwill

    1,410,000                     1,410,000  

Other assets

    6,203,000       (109,000

)

    187,000  

(2)

    6,281,000  

Assets related to discontinued operations

    94,335,000             191,000  

(5)(6)

    94,526,000  

Total assets

  $ 257,463,000     $ (329,000

)

  $ (651,000

)

    $ 256,483,000  

LIABILITIES

                                 

Other liabilities

    5,666,000       (1,133,000

)

    198,000  

(2)

    4,731,000  

Liabilities related to discontinued operations

    73,516,000             653,000  

(5)

    74,169,000  

Total liabilities

    79,182,000       (1,133,000

)

    851,000         78,900,000  

Commitments and contingencies

                                 

STOCKHOLDERS’ EQUITY

                                 

Preferred stock

                         

Common stock

    133,000                     133,000  

Additional paid-in capital

    67,020,000             8,000  

(6)

    67,028,000  

Retained earnings

    126,406,000             (2,614,000

)

(2)(3) (4)(5) (6)(7)(8)

    123,792,000  

Accumulated other comprehensive loss

    (1,549,000

)

          1,104,000  

(2)

    (445,000

)

Treasury stock (at cost)

    (12,925,000

)

                  (12,925,000

)

Non-controlling interest

    (804,000

)

    804,000                

Total stockholders’ equity

    178,281,000       804,000       (1,502,000

)

      177,583,000  
                                   

Total liabilities and stockholders’ equity

  $ 257,463,000     $ (329,000

)

  $ (651,000

)

    $ 256,483,000  

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) (Restated)

 

Note 1— Restatement of Financial Statements (continued)

 

Consolidated Statement of Operations

For the Three Months Ended December 31, 2016

 

 

   

 

As Reported

   

De-Consolidation

of Pegasus ( 1 )

   

Adjustments

     

Restated

 

Revenues:

                                 

Finance income, net

  $ 4,001,000     $     $ 94,000  

(2)

  $ 4,095,000  

Personal injury claims income

    2,302,000       (2,302,000

)

               

Disability fee income

    1,354,000                     1,354,000  

Total revenues

    7,657,000       (2,302,000

)

    94,000         5,449,000  
                                   
                                   

Other income

    544,000             (93,000

)

(2)

    451,000  
      8,201,000       (2,302,000

)

    1,000         5,900,000  
                                   

General and administrative

    9,556,000       (2,195,000

)

    (66,000

)

(2)(6)

    7,295,000  

Interest

    2,000       (2,000

)

             

Earnings from equity method investment

          (84,000

)

    (320,000

)

(7)

    (404,000

)

      9,558,000       (2,281,000

)

    (386,000

)

      6,891,000  
                                   

(Loss) from continuing operations before income tax

    (1,357,000

)

    (21,000

)

    387,000         (991,000

)

Income tax (benefit)/expense

    (555,000

)

          1,252,000  

(8)

    697,000  

Net (loss) income from continuing operations

    (802,000

)

    (21,000

)

    (865,000

)

      (1,688,000 )
                                   

Net loss from discontinued operations, net of income tax

    (834,000

)

          (424,000

)

(3)(5)(8)

    (1,258,000

)

                                   

Less: net income attributable to non-controlling interests

    21,000       (21,000

)

                 

Net loss attributable to Asta Funding, Inc.

  $ (1,657,000

)

  $     $ (1,289,000

)

    $ (2,946,000

)

                                   

Basic and diluted loss per share:

                                 

Continuing operations

  $ (0.07

)

                    $ (0.14

)

Discontinued operations

    (0.07

)

                      (0.11

)

    $ (0.14

)

                    $ (0.25

)

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) (Restated)

Note 1— Restatement of Financial Statements (continued)

 

            Consolidated Statement of Comprehensive Loss  
           

For the Three Months Ended December 31, 2016

 
   

 

As Reported

   

De-Consolidation

of Pegasus (1 )

   

Adjustments

     

Restated

 

Comprehensive income (loss) is as follows:

                                 
                                   

Net loss

  $ (1,657,000

)

  $     $ (1,289,000

)

    $ (2,946,000

)

                                   

Net unrealized securities (loss) gain, net of tax

    (1,239,000

)

                  (1,239,000

)

                                   

Reclassification adjustments for securities sold, net of tax

    (27,000

)

                  (27,000

)

                                   

Foreign currency translation, net of tax

    (369,000

)

          387,000  

(2)(6)

    18,000  

Other comprehensive loss

    (1,635,000

)

          387,000         (1,248,000

)

Total comprehensive loss

  $ (3,292,000

)

  $     $ (902,000

)

    $ (4,194,000

)

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) (Restated)

Note 1— Restatement of Financial Statements (continued)

 

  Consolidated Statement of Cash Flows

For the Three Months Ended December 31, 2016

 
                            
    

As Reported

   

Adjustments

     

Restated

 

Cash flows from operating activities:

                         

Net loss from continuing operations

  $ (823,000

)

  $ (865,000

)

    $ (1,688,000

)

Net loss from discontinued operations

    (834,000

)

    (424,000

)

      (1,258,000

)

       (1,657,000

)

    (1,289,000

)

      (2,946,000

)

Adjustments to reconcile net loss to net cash used in operating activities:

                         

Depreciation and amortization

    105,000       (79,000 )       26,000  

Deferred income taxes

    (211,000

)

    631,000  

(2)(8)

    420,000  

Stock based compensation

    (6,000

)

            (6,000

)

Loss on sale of available-for-sale securities

    45,000               45,000  

Unrealized gain on other investments

    (18,000

)

            (18,000

)

Unrealized foreign exchange loss on other investments

    254,000               254,000  

Earnings from equity method investment

          (404,000

)

(7)

    (404,000

)

Changes in:

                         

Prepaid and income taxes receivable

    (4,387,000

)

    205,000  

(8)

    (4,182,000

)

Due from third party collection agencies and attorneys

    (30,000

)

    70,000  

(2)

    40,000  

Other assets

    498,000

 

    (191,000 )

(2)

    307,000  

Income tax payable

    (252,000

)

    252,000  

(8)

     

Other liabilities

    373,000       388,000

 

(2)

    761,000  

Non-controlling interest

    21,000       (21,000

)

(1)

     

Net cash used in operating activities of discontinued operations

    (391,000

)

    760,000  

(3)(5)

    369,000  

Net cash used in operating activities

    (5,656,000

)

    322,000         (5,334,000

)

Cash flows from investing activities:

                         

Purchase of consumer receivables acquired for liquidation

    (2,213,000

)

            (2,213,000

)

Principal collected on receivables acquired for liquidation

    2,641,000       (512,000

)

(2)(4)(5)(6)

    2,129,000  

Purchase of available-for-sale securities

    (7,568,000

)

            (7,568,000

)

Proceeds from sales of available-for-sale securities

    7,132,000               7,132,000  

Investments in personal injury claims — advances

    (5,178,000

)

    5,178,000  

(1)

     

Investments in personal injury claims — receipts

    5,592,000       (5,592,000

)

(1)

     

Increase in equity method investment

          (155,000

)

(1)

    (155,000

)

Capital expenditures

    (6,000

)

            (6,000

)

Cash flows from investing activities related to discontinued operations

    (2,632,000

)

            (2,632,000

)

Net cash used in investing activities

    (2,232,000

)

    (1,081,000

)

      (3,313,000

)

Cash flows from financing activities:

                         

Distributions to non-controlling interest

    (180,000

)

    180,000  

(1)

     

Cash flows from financing activities related to discontinued operations

    4,131,000               4,131,000  

Net cash used in financing activities

    3,951,000       180,000         4,131,000  
                             

Foreign currency effect on cash

          52,000  

(2)

    52,000  
Net decrease in cash, cash equivalents and restricted cash including cash, cash equivalents classified within assets related to discontinued operations     (3,937,000 )     (527,000 )       (4,464,000 )
Less: net increase in cash, cash equivalents and restricted cash classified within assets related to discontinued operations     43,000               43,000  

Net decrease in cash , cash equivalents and restricted cash

    (3,894,000

)

    (527,000

)

(1)(2)(3)(4)(5)(6)(7)(8)

    (4,421,000

)

Cash , cash equivalents and restricted cash at beginning of period

    16,829,000       (547,000

)

      16,282,000  

Cash , cash equivalents and restricted cash at end of period

  $ 12,935,000     $ (1,074,000

)

    $ 11,861,000  

 

 

43,000

 

 

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) ( R estated)

 

Note 1— Restatement of Financial Statements (continued)  

 

As previously disclosed in the Current Report on Form  8 -K filed by Asta Funding, Inc. (“Asta” or the “Company”) with the Securities and Exchange Commission (the “SEC”) on January 18, 2018, the Board of Directors (the “Board”) of the Company, upon the recommendation of the Audit Committee of the Board (the “Audit Committee”), determined that the Company’s previously issued financial statements for each of the years ended September 30, 2016, 2015 and 2014, and the interim periods contained therein, as well as the Company’s unaudited consolidated financial statements for the quarters ended December 31, 2016, March 31, 2017 and June 30, 2017, could no longer be relied upon. 

 

On September 17, 2018, the Company filed an Annual Report on Form 10 -K/A (the “Form 10-K/A”) to amend and restate the Company’s previously issued financial statements for each of the years ended September 30, 2016, 2015 and 2014, as well as the interim periods contained therein. The Company is filing this Amendment No. 2 on Form 10 -Q/A (this “Amendment”) to amend and restate the Company’s previously issued financial statements contained in its Quarterly Report on Form 10 -Q for the quarter ended December 31, 2016 ( the “Non-Reliance Period”), which was originally filed with the SEC on February 9, 2017 ( the “Original Form 10 -Q”), and restated on May 26, 2017 ( the “Restated Form 10 -Q/A”). The Company expects to file, at a later time, amendments to its Quarterly Reports on Form 10 -Q for the quarters ended March 31, 2017 and June 30, 2017.

 

Prior period amounts have already been restated in the Company's Form 10-K/A, and, accordingly have not been restated in this Amendment.

 

This Amendment

 

On January 11, 2018, after discussions with the Audit Committee, management re-evaluated the Company's historical conclusion to consolidate Pegasus Funding, LLC (“Pegasus”). Management has determined that the Company lacked the requisite control to consolidate Pegasus in its historical periods in accordance with Accounting Standards Codification (“ASC”) 810 Consolidation .” Management also determined that the Company's previous treatment for certain foreign currency matters under ASC 830 Foreign Currency Matters ” was not appropriate. As such, the Company has subsequently revised its investment in Pegasus to the equity method, including the underlying reserve methodology; and has adjusted its financial statements to reflect the proper accounting for certain foreign currency transactions. Additionally, the Company corrected the financial statements for additional known errors consisting of (i) the adjustment of various accruals, (ii) the fair value of structured settlements, (iii) accounting for unallocated payments, and (iv) the tax effects of the adjustments mentioned above.

 

The “As Reported” amounts in the tables above represent the amounts reported in the Restated Form 10 -Q/A, adjusted in its presentation for the discontinued operations of the Company's wholly-owned subsidiary CBC Settlement Funding, LLC (“CBC”), which was sold on December 13, 2017 ( see Note 8 – Discontinued Operations and Note 20 – Subsequent events).

 

 

The following errors were identified as part of the restatement:

 

      1.

In connection with the Company determining it lacked the requisite control to consolidate Pegasus during the Non-Reliance Period, the Company has now accounted for its investment in Pegasus under the equity method in accordance with US GAAP. On the Company’s December 31, 2016 consolidated balance sheet, this resulted in (i) a decrease in cash of $1,065,000; (ii) a decrease in the investment in personal injury claims of $47,875,000; (iii) a decrease in other assets of $109,000; (iv) a decrease in other liabilities of $1,133,000; and, (v) a decrease in non-controlling interest of $804,000, offset by a corresponding increase in the equity method investment of $48,720,000. On the Company’s consolidated statement of operations, this resulted in (i) a reduction in total revenues of $2,302,000; (ii) a reduction in expenses of $2,197,000; (iii) a decrease in the income attributable to the non-controlling interest of $21,000; and (iv) a decrease in earnings from equity method investment of $84,000 for the three months ended December 31, 2016. This change to the equity method of accounting had no effect on net (loss) income attributable to Asta Funding, Inc. during the Non-Reliance Period.

 

      2.

The Company determined that it had not previously accounted for certain foreign currency gains/losses on intercompany balances and transactions in accordance with US GAAP. The Company improperly accounted for the foreign currency effect of certain transactions as if they were long-term investments by including the foreign currency effect in accumulated other comprehensive income instead of properly recording the effect as operating expenses as required under ASC 830. The correction to properly apply US GAAP to these foreign currency matters resulted in increased revenue of $94,000, a decrease in other income of $93,000, and a increase in general and administrative expenses of $204,000 for the three months ended December 31, 2016.

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) ( R estated)

 

Note 1— Restatement of Financial Statements (continued)  

 

 

The correction of foreign currency transaction on the consolidated balance sheet are as follows:

 

Increase (decrease) in:

 

Impact from September

30, 2016 10K/A filing

   

Current period impact

   

Cumulative net impact

 

Cash and cash equivalents

  $ 3,000     $ (10,000 )   $ (7,000 )

Consumer receivables acquired for liquidation

    (245,000 )     464,000       219,000  

Due from third party collection agencies and attorneys

    45,000       (76,000 )     (31,000 )

Deferred income taxes

    (722,000 )     (199,000 )     (921,000 )

Other assets

    (33,000 )     220,000       187,000  

Other liabilities

    (18,000 )     216,000       198,000  

Accumulated other comprehensive loss

    718,000       386,000       1,104,000  
                         

Retained earnings

    (1,653,000 )     (203,000 )     (1,856,000 )

 

 

 

3.

Prior to the sale of its structured settlement business, the Company purchased periodic payments under structured settlements and annuity policies from individuals in exchange for a lump sum payment. The Company has elected to carry the structured settlements at fair value in accordance with the guidance of FASB ASC, Recognition and Measurement of Financial Assets and Financial Liabilities (ASC 822 - 10 - 50 - 28 through 50 - 22 ).

 

 

As previously disclosed in the Restated Form 10 -Q/A, the Company did not reflect the quarterly increase in certain underlying benchmark interest rates used in determining fair value of the Company’s structured settlements for the quarter ended December 31, 2016 which resulted in a decrease in the fair value of the Company's structured settlements of approximately $2.6 million (reflected in assets related to discontinued operations in this restated consolidated balance sheet) with an associated increase in prepaid income taxes and deferred tax assets of approximately $1.0 million (reflected in the loss from discontinued operations in this consolidated statement of operations).

 

 

In connection with the Company’s filing of its Form 10 -K/A, the Company adjusted the fair value of its structured settlements to reflect the appropriate benchmark interest rates at September 30, 2016, which resulted in an decrease in net loss attributable to discontinued operations and an increase in assets related to discontinued operations of $727,000. As this increase in fair value was originally recorded during the three month period ended December 31, 2016, this Amendment includes an increase in both the retained earnings and the net loss attributable to discontinued operations of $727,000.

 

 

4.

The Company determined that it had not accounted for certain unallocated payments reported on its consolidated balance sheet properly during the Non-Reliance Period. The correction of this error resulted in a decrease to consumer receivables acquired for liquidation of $648,000 and retained earnings of $648,000 as of September 30, 2016 and is therefore included in the net adjustment to retained earnings as of December 31, 2016.

 

      5.

The Company discovered that it did not properly record an amortizable asset and related liability in conjunction with an asset purchase agreement entered into in June 2015 with a related party. The correction of this error resulted in a decrease in income from discontinued operations of $60,000 for the three months ended December 31, 2016.

 

 

The correction of these errors on the consolidated balance sheet are as follows:

 

Increase (decrease) in:

 

Impact from September 30 ,

2016 10K/A filing

   

Current period impact

   

Cumulative net impact

 

Assets related to discontinued operations

  $ 307,000     $ (161,000 )   $ 146,000  

Liabilities related to discontinued operations

    756,000       (103,000 )     653,000  

Retained earnings

    (442,000 )     (60,000 )     (502,000 )

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) ( R estated)

 

Note 1— Restatement of Financial Statements (continued)  

 

      6.

The Company identified other transactions that had not been properly accounted for in the correct period and/or for improper amounts and/or improper accounts. The adjustments of these errors were immaterial on an individual basis. The correction of these errors resulted in decreased general and administrative expense of $270,000 for the three months ended December 31, 2016.

 

The correction of these errors on the consolidated balance sheet are as follows:

 

Increase (decrease) in:

 

Impact from September

30, 2016 10K/A filing

   

Current period impact

   

Cumulative net impact

 

Cash and cash equivalents

  $ -     $ (2,000 )   $ (2,000 )
Other liabilities     269,000       (269,000 )     -  

Retained earnings

    (137,000 )     270,000       133,000  

Assets related to discontinued operations

    45,000       -       45,000  

Additional paid in capital

    8,000       -       8,000  

 

 

      7.

The Company identified the personal injury claims asset balance of Pegasus was determined to be understated at December 31, 2016 by $400,000. The correction of these error resulted in an increase in equity method investment of $320,000, representing the Company’s 80% financial interest, as of December 31, 2016. As a result of the correction of this error, earnings from the equity investment in Pegasus and income from continuing operations increased $320,000 for the three months ended December 31, 2016. Additionally the equity method investment was increased $101,000 to reflect the impact of related accruals in the Form 10-K/A.

 

    8.

Some of the corrections noted above impacted earnings (loss) before taxes which, in turn, required a calculation of the tax impact. The net impact to the Company’s consolidated balance sheet was a (i) decrease to prepaid and income taxes receivable of $371,000; and (ii) decrease to deferred tax assets of $337,000. On the Company’s consolidated statement of operations, there was (i) a net increase to income tax expense of $1,252,000; and (ii) an increase to income tax benefit from discontinued operations of $363,000 for the three months ended December 31, 2016.

 

All of the following notes to consolidated financial statements have been revised to reflect the effects of the above mentioned restatements.

 

 

 

Note 2 —Business and Basis of Presentatio n

 

Business  

 

Asta Funding, Inc., 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 XIX”), VATIV Recovery Solutions LLC (“VATIV”), EMIRIC, LLC (“EMIRIC”), ASFI Pegasus Holdings, LLC (“APH”), Fund Pegasus, LLC (“Fund Pegasus”), GAR Disability Advocates, LLC (“GAR Disability Advocates”), Five Star Veterans Disability, LLC (“Five Star”), Simia Capital, LLC (“Simia”) and other subsidiaries, which are not all wholly owned (the “Company,” “we” or “us”), is engaged in several business segments in the financial services industry including funding of personal injury claims, through our 80% owned, 50% controlled equity investment in Pegasus Funding, LLC (“Pegasus”) and our wholly owned subsidiary Simia, social security and disability advocacy through our 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. 

 

Consumer receivables

 

The Company started out in the consumer receivable business in 1994. 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 define consumer receivables as primary charged-off, semi-performing and distressed depending on their collectability. We acquire these consumer receivables at substantial discounts to their face values, based on the characteristics of the underlying accounts of each portfolio.

 

Personal injury claims

   

Simia and our equity method investment in Pegasus conduct their business solely in the United States. These companies obtain their business from external brokers and internal sales professionals soliciting individuals with personal injury claims. Business is also obtained from the their websites and through attorneys.

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) ( R estated)

 

Note 2—Business and Basis of Presentation (continued)

 

Business   (continued)

 

Social security benefit advocacy

 

GAR Disability Advocates provides its disability advocacy services throughout the United States. It relies upon search engine optimization (“SEO”) to bring awareness to its intended market.

 

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.

 

On December 13, 2017, the Company sold all of the issued and outstanding equity capital of CBC, its wholly owned subsidiary engaging in structured settlements. As a result of this sale all prior periods presented in the Company’s consolidated financial statements will account for CBC as a discontinued operation. This determination resulted in the reclassification of assets and liabilities comprising the structured settlements 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.

 

Basis of Presentation  

 

The consolidated balance sheet as of December 31, 2016, the consolidated statements of operations for the three month periods ended December 31, 2016 and 2015, the consolidated statements of comprehensive (loss) income for the three month periods ended December 31, 2016 and 2015, the consolidated statements of stockholders’ equity as of and for the three months ended December 31, 2016 and 2015, and the consolidated statements of cash flows for the three month periods ended December 31, 2016 and 2015, are unaudited. The September  30, 2016 financial information included in this Amendment was derived from our audited financial statements included in our Annual Report on Form 10 -K/A for the fiscal year ended September  30, 2016. In the opinion of management, all adjustments necessary to present fairly our financial position at December 31, 2016, the results of operations for the three month periods ended December 31, 2016 and 2015 and cash flows for the three month periods ended December 31, 2016 and 2015 have been made. The results of operations for the three month periods ended December 31, 2016 and 2015 are not necessarily indicative of the operating results for any other interim period or the full fiscal year. The consolidated financial statements are prepared in accordance with US GAAP and industry practices.

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with Rule  10 - 01 of Regulation S- X promulgated by the Securities and Exchange Commission and therefore do not include all information and note disclosures required under generally accepted accounting principles. The Company suggests that these financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10 -K/A for the fiscal year ended September  30, 2016 filed with the SEC.

 

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

 

Principles of Consolidation  

 

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

 

Concentration of Credit Risk – Cash and Restricted Cash

 

The Company considers all highly liquid investments with a maturity date of three months or less at the date of purchase to be cash equivalents.  

 

Cash balances are maintained at various depository institutions and are insured by the Federal Deposit Insurance Corporation (“FDIC”). The Company had cash balances with five banks at December 31, 2016 that exceeded the balance insured by the FDIC by approximately $1.4 million. Additionally, three foreign banks with an aggregate balance of $0.5 million are not FDIC insured. There is an $8.2 million and $10 million aggregate balance in a domestic bank as of December 31, 2016 and September 30, 2016, respectively, that is also not FDIC insured and has been reclassified to restricted cash in the balance sheets since these assets serve as collateral for the line of credit (see Note 7 – Non Recourse Debt). The Company does not believe it is exposed to any significant credit risk due to concentration of cash.

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) ( R estated)

 

Note 2—Business and Basis of Presentation (continued)

 

Equity method investment  

 

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.

 

Pegasus is the Company's 50% controlled equity investment with Pegasus Legal Funding (“PLF”). Under the operating agreement, the Company and PLF, each maintain 50% voting rights of the entity, and the Company is 80% owned by Asta. Based on these shared voting rights with PLF, the Company lacks requisite control of Pegasus, and therefore accounts for its investment in Pegasus under the equity method of accounting.

 

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

 

Additionally, the Company and Serlefin jointly purchase international consumer debt portfolios under a purchase agreement. The Company and Serlefin purchase the portfolios on a pro-rata basis of 80% and 20%, respectively. The purchased portfolios are transferred to an administrative and payment trust, where the Company and Serlefin are trustees. Serlefin provides collection services to the trust, and receives a performance fee determined by the parties for each loan portfolio acquired. Serlefin received approximately $0.2 million and $0 in performance fees for the three months ended December 31, 2016 and 2015, respectively.

 

The carrying value of the investment in Serlefin Peru was $0.2 million as of December 31, 2016 and September 30, 2016. 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 December 31, 2016 was approximately $0.1 million, and was not significant to the Company's consolidated statement of operations.

 

When the Company's carrying value in an equity method investee company is reduced to zero, no further losses are recorded in the Company's consolidated financial statements unless the Company guaranteed obligations of the investee company or has committed additional funding. When the investee company subsequently reports income, the Company will not record its share of such income until it equals the amount of its share of losses not previously recognized. There were no impairment losses recorded on our equity method investments for the three months ended  December  31, 2016 and 2015.

 

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.

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) ( R estated)

 

Note 2—Business and Basis of Presentation (continued)

 

Goodwill

 

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

 

Reclassifications

 

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 loss or shareholders’ equity.

 

Recent Accounting Pronouncements   

 

In May 2014, the FASB issued an update to ASC 606, Revenue from Contracts with Customers, that will supersede virtually all existing revenue guidance. Under this update, an entity is required to recognize revenue upon transfer of promised goods or services to customers, in an amount that reflects the entitled consideration received in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from the customer contracts. This update is effective for annual reporting periods beginning after December  15, 2017 including interim periods within that reporting period. Early application is permitted for annual reporting periods beginning after December  15, 2016, including interim periods within that reporting period. Given the changes in the Company's business management is continuing to assess this new standard and the impact it will have on accounting for its revenues. 

 

In January 2016, the FASB issued ASU No.   2016 - 01, Financial Instruments-Overall (Subtopic 825 - 10 ): Recognition and Measurement of Financial Assets and Financial Liabilities. The main objective in developing this update is enhancing the reporting model for financial instruments to provide users of financial statements with more decision-useful information. The amendments in this update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The effective date for this update is for annual reporting periods beginning after December  15, 2017, including interim periods within that reporting period. The Company is currently evaluating the impact this update will have on its consolidated financial statements. 

 

In February 2016, the FASB issued ASU No. 2016 - 02 Leases (Topic 842 ) to amend lease accounting requirements and requires entities to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets. The new standard will require significant additional disclosures about the amount, timing and uncertainty of cash flows from leases. The standard update is effective for fiscal years beginning after December  15, 2018 and interim periods within those years and early adoption is permitted. The standard is to be applied using a modified retrospective approach and includes a number of optional practical expedients that entities may elect to apply. The Company is currently evaluating the impact of adopting this update on its consolidated financial statements and expects that most of its operating leases will be subject to the accounting standard update and will recognize as operating lease liabilities and right-of-use assets upon adoption.  

 

In March 2016, the FASB issued ASU No.   2016 - 09, Compensation-Stock Compensation (Topic 718 ): Improvements to Employee Share Based Payment Accounting, to simplify and improve areas of generally accepted accounting principles for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The effective date for this update is for annual reporting periods beginning after December  15, 2016, including interim periods within that reporting period. The Company is currently evaluating the impact this update will have on its consolidated financial statements.  

 

In June 2016, the FASB issued ASU 2016 - 13, Financial Instruments-Credit Losses (Topic 326 ): Measurement of Credit Losses on Financial Instruments.  The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.  For the Company, this update will be effective for interim periods and annual periods beginning after December 15, 2019. Upon adoption, the Company will accelerate the recording of its credit losses in its financial statements. 

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) ( R estated)

 

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 November 2016, the FASB issued ASU No. 2016 - 18, Restricted Cash ("ASU 2016 - 18" ), to require that restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total cash amounts shown on the statement of cash flows. Consequently, transfers between cash and restricted cash will not be presented as a separate line item in the operating, investing or financing sections of the cash flow statement. ASU 2016 - 18 does not provide a definition of restricted cash or restricted cash equivalents. The new guidance will only be applicable to amounts described by the Company as restricted cash. We adopted ASU 2016 - 18 on October 1, 2016, the effect of which was a change in presentation on our consolidated statement of cash flows, but not on our consolidated financial results.

 

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.

 

 

Note 3—Available -for-Sale Investments

 

Investments classified as available-for-sale at December 31, 2016 and September  30, 2016, consist of the following:

 

   

Amortized
Cost

   

Unrealized
Gains

   

Unrealized
Losses

   

Fair Value

 

December 31, 2016

  $ 56,115,000     $ 29,000     $ (1,099,000

)

  $ 55,045,000  

September 30, 2016

  $ 55,723,000     $ 1,089,000     $ (49,000

)

  $ 56,763,000  

 

The available-for-sale investments do not have any contractual maturities. The Company sold two investments during the three months ended December 31, 2016, with a realized loss of $45,000. The Company received $177,000 in capital gains distributions during the three months ended December 31, 2016. For the three months ended December 31, 2015, the Company sold two investments with a realized loss of $31,000 and also received $47,000 in capital gains distributions during that period. The Company recorded an aggregate realized gain of $132,000 and $16,000 related to its available-for-sale securities for the three months ended December 31, 2016 and 2015, respectively.

 

At December 31, 2016, there were seven investments, five of which were in unrealized loss positions that had existed for 12 months or more. All of these securities are considered to be acceptable credit risks. Based on the evaluation of the available evidence, including recent changes in market rates and credit rating information, management believes the aggregate decline in fair value for these instruments is temporary. In addition, management has the ability to hold these investment securities for a period of time sufficient to allow for an anticipated recovery or maturity. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period in which the other-than-temporary impairment is identified.  

 

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

 

 

Note 4—Consumer Receivables Acquired for Liquidation

 

Accounts acquired for liquidation are stated at their net estimated realizable value and consist primarily of defaulted consumer loans of individuals primarily throughout the United States and South America.

 

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

 

 

the interest method; or

 

 

the cost recovery method.

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) ( R estated)

 

Note 4—Consumer Receivables Acquired for Liquidation (continued)

 

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

 

Although the Company has switched to the cost recovery method on its current inventory of portfolios, the Company must still analyze a portfolio upon acquisition to ensure which method is appropriate, and once a static pool is established for a quarter, individual receivable accounts are not added to the pool (unless replaced by the seller) or removed from the pool (unless sold or returned to the seller).

 

The Company uses the cost recovery method when collections on a particular pool of accounts cannot be reasonably predicted. Under the cost recovery method, no income is recognized until the cost of the portfolio has been fully recovered. A pool can become fully amortized ( zero carrying balance on the balance sheet) while still generating cash collections. In this case, all cash collections are recognized as revenue when received.

 

The Company has extensive liquidating experience in the field of distressed credit card receivables, telecommunication receivables, consumer loan receivables, retail installment contracts, consumer receivables, and auto deficiency receivables.

  

The Company aggregates portfolios of receivables acquired sharing specific common characteristics which were acquired within a given quarter. In addition, the Company uses a variety of qualitative and quantitative factors to estimate collections and the timing thereof. The Company obtains and utilizes, as appropriate, input, including but not limited to, monthly collection projections and liquidation rates, from third party collection agencies and attorneys, as further evidentiary matter, to assist in evaluating and developing collection strategies and in evaluating and modeling the expected cash flows for a given portfolio.

 

The following tables summarize the changes in the consolidated balance sheet account of consumer receivables acquired for liquidation during the following periods:

 

   

For the Three Months Ended

December 31,

 
   

2016 (restated)

   

2015

 

Balance, beginning of period

  $ 13,427,000     $ 15,056,000  
                 

Acquisitions of receivable portfolios

    2,213,000       6,051,000  

Net cash collections from collection of consumer receivables acquired for liquidation

    (6,015,000

)

    (7,377,000

)

Net cash collections represented by account sales of consumer receivables acquired for liquidation

    (190,000

)

     

Effect of foreign currency translation

    (68,000

)

    (27,000

)

Finance income recognized

    4,095,000       5,106,000  

Balance, end of period

  $ 13,462,000     $ 18,809,000  

Finance income as a percentage of collections

    66.00

%

    69.22

%

 

 During the three month periods ended December 31, 2016, the Company purchased $35.0  million of face value portfolios at a cost of $2.2 million. During the three months ended December 31, 2015, the Company purchased $97.7 million of face value portfolios, at a cost of $6.1 million.

 

As of December 31, 2016, the Company held consumer receivables acquired for liquidation from Peru and Colombia of $5.0 million and $4.6 million, respectively. The total amount of foreign consumer receivables acquired for liquidation was $9.6 million, or 71.1% of the total consumer receivables held of $13.5 million at December 31, 2016.

 

As of December 31, 2015, the Company held consumer receivables acquired for liquidation from Peru and Colombia of $4.7 million and $4.0 million, respectively. The total amount of foreign consumer receivables acquired for liquidation was $8.7 million, or 46.3% of the total consumer receivables held of $18.8 million at December 31, 2015. 

 

 

  ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)   ( R estated)

 

Note 4—Consumer Receivables Acquired for Liquidation (continued)

 

The following table summarizes collections received by the Company’s third party collection agencies and attorneys, less commissions and direct costs, for the three month periods ended December 31, 2016 and 2015, respectively.

 

   

For the Three Months Ended

December 31 ,

 
   

2016 (restated)

   

2015

 

Gross collections (1)

  $ 11,400,000     $ 12,245,000  

Commissions and fees (2)

    5,195,000       4,868,000  

Net collections

  $ 6,205,000     $ 7,377,000  

 

 

( 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 receives 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 —Litigation Funding

 

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 has an 80% non-controlling interest in the joint venture. 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 earned $2.3 million and $3.1 million in interest and fees during the first quarter of fiscal years 2017 and 2016, respectively. The Company had a net invested balance in personal injury claims of $49.1 million and $48.6 million on December  31, 2016 and September  30, 2016, respectively.

 

Equity method investments as of December 31, 2016 and September 30, 2016 are as follows:

 

   

December 31, 2016

   

September 30, 2016

 
   

Carrying Value

   

Ownership

Percentage

   

Carrying Value

   

Ownership

Percentage

 

Pegasus Funding, LLC

  $ 49,141,000       80 %   $ 48,582,000       80 %

 

The carrying value of the Company's equity investment at December 31, 2016 was $49,141,000, an increase of $559,000 over the prior year's carrying value of $48,582,000. The increase in carrying value was attributed to the Company's equity earnings of $404,000 for the three months ended December 31, 2016, plus loan advances made to Pegasus classified on its balance sheet as due to Asta of $155,000 for the three months ended December 31, 2016.

 

The carrying value of the Company's equity investment at September 30, 2016 was $48,582,000, an increase of $7,831,000 over the prior year's carrying value of $40,751,000. The increase in carrying value was attributed to the Company's current year equity earnings of $10,551,000, less loan repayments made to Asta which are classified on its balance sheet as due to Asta of $2,720,000 during fiscal 2016.

 

On November 8, 2016, the Company entered into a binding Term Sheet (the “Term Sheet”) with ASFI Pegasus Holdings, LLC, Fund Pegasus, LLC, Pegasus Funding, LLC, Pegasus Legal Funding, LLC, Max Alperovich and Alexander Khanas. Pegasus is currently the Company’s personal injury claims funding business and is a joint venture that is 80% owned by the Company and 20% owned by PLF. The Company and PLF have decided not to renew the Pegasus joint venture that, by its terms, terminated on December 28, 2016. The Term Sheet amends certain provisions to Pegasus’ operating agreement dated as of December 28, 2011 ( as amended, the “Operating Agreement”) and governs the terms relating to the collection of its existing Pegasus portfolio (the “Portfolio”).

 

Pursuant to the Term Sheet, the parties thereto have agreed that Pegasus will continue in existence in order to collect advances on its existing Portfolio. The Company will fund overhead expenses relating to the collection of its Portfolio based on a budget agreed upon by the Company and PLF. Any cash received by Pegasus will be distributed to its members in the order provided for in the Operating Agreement. The Company will be repaid an amount equal to 20% of all principal collected on each investment paid back beginning October 1, 2016 and continuing through the collection of the Portfolio, which will be applied against the outstanding balance of overhead expenses previously advanced by the Company to Pegasus. After January 2, 2017, additional overhead expenses advanced will be paid back monthly as incurred by the Company prior to the calculation and distribution of any profits. 

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) ( R estated)

 

Note 5—Litigation Funding (continued)

 

Equity Method Investment (continued)

 

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. See Note 20 - Subsequent Events. 

 

The results of operations and financial position of the Company’s equity investment in Pegasus are summarized below:

 

   

Condensed S tatement of O perations I nformation

 
   

Three months ended

 
   

December 31, 2016

   

December 31 , 201 5

 

Personal injury claims income

  $ 2,302,000     $ 3,085,000  

Operating expenses

    1,797,000       1,218,000  

Income from operations

  $ 505,000     $ 1,867,000