Table of Contents


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 


 

FORM 10-Q /A

 


Amendment # 1

 

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

 

For the quarterly period ended March 31, 20 17

 

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, smaller reporting company, or an 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. (Check one):

 

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 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 “Form 10-K/A”), and a Quarterly Report on Form 10-Q/A to amend and restate the Company's previously issued financial statements for the quarter ended December 31, 2016. The Company is filing this Amendment No. 1 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 March 31, 2017 (the “Non-Reliance Period”), which was originally filed with the SEC on May 26, 2017 (the “Original Form 10-Q”). The Company expects to file, at a later time, an amendment to its Quarterly Report on Form 10-Q for the quarter ended 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 principle 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 settelements. 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 overstated.

 

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

 

 

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 March 31, 2017. Accordingly, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective at March 31, 2017, 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 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 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, May 26, 2017, except as noted above with respect to the Subsequent Events.

 

 

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

 

 
 

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 March 31, 2017 (restated) (unaudited) and September 30, 2016

5

   

Consolidated Statements of Operations for the three and six months ended March 31, 2017(restated)(unaudited) and 2016 (unaudited)

6

   

Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended March 31, 2017 (restated)(unaudited) and 2016 (unaudited)

7

   

Consolidated Statements of Stockholders’ Equity for the six months ending March 31, 2017 (restated)(unaudited) and 2016 (unaudited)

8

   

Consolidated Statements of Cash Flows for the six months ended March 31, 2017 (restated)(unaudited) and 2016 (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)

45

   

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

56

   

Item 4. Controls and Procedures (restated)

56

   

Part II-OTHER INFORMATION

59

   

Item 1. Legal Proceedings

59

   

Item 1A. Risk Factors (restated)

59

   

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

59

   

Item 3. Defaults Upon Senior Securities

59

   

Item 4. Mine Safety Disclosures

59

   

Item 5. Other Information

59

   

Item 6. Exhibits (restated)

60

   

Signatures

61

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

( rounded to the nearest thousands, except share data)

 

 

   

(Unaudited)

       
   

March 31,
201
7 (restated)

   

September 30,
201
6

 

ASSETS

               

Cash and cash equivalents

  $ 8,545,000     $ 6,282,000  

Restricted cash

    9,565,000       10,000,000  

Available for sale investments (at fair value)

    5,397,000       56,763,000  

Consumer receivables acquired for liquidation (at net realizable value)

    11,590,000       13,427,000  

Investment in personal injury claims, net

    3,178,000        

Other investments, net

          3,590,000  

Due from third party collection agencies and attorneys

    1,096,000       1,050,000  

Prepaid and income taxes receivable

    7,560,000       714,000  

Furniture and equipment, net

    158,000       196,000  

Equity method investment

    45,924,000       48,582,000  

Deferred income taxes

    13,981,000       14,903,000  

Goodwill

    1,410,000       1,410,000  

Other assets

    4,771,000       6,585,000  

Assets related to discontinued operations

    95,180,000       91,506,000  
                 

Total assets

  $ 208,355,000     $ 255,008,000  
                 

LIABILITIES

               

Line of credit

  $ 9,600,000     $  

Other liabilities

    6,415,000       3,987,000  

Liabilities related to discontinued operations

    76,306,000       69,238,000  
                 

Total liabilities

    92,321,000       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 March 31, 2017 and at September 30, 2016; and outstanding 6,562,215 at March 31, 2017 and 11,876,224 at September 30, 2016

    133,000       133,000  

Additional paid-in capital

    67,042,000       67,034,000  

Retained earnings

    115,818,000       126,738,000  

Accumulated other comprehensive income (loss)

    169,000       803,000  

Treasury stock (at cost) 6,774,293 shares at March 31, 2017 and 1,460,284 shares at September 30, 2016

    (67,128,000

)

    (12,925,000

)

                 

Total stockholders’ equity

    116,034,000       181,783,000  
                 

Total liabilities and stockholders’ equity

  $ 208,355,000     $ 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

   

 

   

Six Months

   

 

 
   

Ended

   

Three Months

   

Ended

   

Six Months

 
   

March 31, 201 7

(Restated)

   

Ended

March 31, 201 6

   

March 31, 201 7

(Restated)

   

Ended

March 31, 201 6

 

Revenues:

                               
                                 

Finance income, net

  $ 3,930,000     $ 4,879,000     $ 8,025,000     $ 9,985,000  

Personal injury claims income

    10,000             10,000        

Disability fee income

    1,502,000       872,000       2,856,000       1,531,000  
                                 

Total revenues

    5,442,000       5,751,000       10,891,000       11,516,000  

Other income (loss) - includes ($948,000) and $0 during the three month periods ended March 31, 2017 and 2016, and ($993,000) and ($31,000) during the six month periods ended March 31, 2017 and 2016, respectively, of accumulated other comprehensive loss reclassification for securities sold

    (667,000

)

    608,000       (216,000

)

    1,000,000  
                                 
      4,775,000       6,359,000       10,675,000       12,516,000  
                                 

Expenses:

                               

General and administrative

    12,251,000       10,222,000       19,546,000       15,951,000  

Interest

    32,000             32,000        

Impairment of consumer receivables acquired for liquidation

          124,000             124,000  

(Earnings) loss from equity method investment

    355,000       (333,000

)

    (49,000

)

    (1,827,000

)

                                 
      12,638,000       10,013,000       19,529,000       14,248,000  
                                 

Loss from continuing operations before income tax

    (7,863,000

)

    (3,654,000

)

    (8,854,000

)

    (1,732,000

)

Income tax (benefit) - includes tax expense of $379,000 and $0 during the three month periods ended March 31, 2017 and 2016 and $397,000 and $11,000 during the six month periods ended March 31, 2017 and 2016, respectively, of accumulated other comprehensive income reclassifications for unrealized net gains / (losses) on available for sale securities

    (947,000

)

    (1,269,000

)

    (250,000

)

    (638,000

)

                                 

Net loss from continuing operations

    (6,916,000

)

    (2,385,000

)

    (8,604,000

)

    (1,094,000

)

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

    (1,058,000

)

    555,000       (2,316,000

)

    827,000  
                                 

Net loss

  $ (7,974,000

)

  $ (1,830,000

)

  $ (10,920,000

)

  $ (267,000

)

                                 

(Net loss) income per share:

                               

Basic (loss) earnings per share from continuing operations

  $ (0.71

)

  $ (0.20

)

  $ (0.80

)

  $ (0.09

)

Basic (loss) earnings per share from discontinued operations

    (0.11

)

    0.05       (0.21

)

    0.07  

Basic (loss) earnings per share

  $ (0.82

)

  $ (0.15

)

  $ (1.01

)

  $ (0.02

)

                                 

Diluted (loss) earnings per share from continuing operations

  $ (0.71

)

  $ (0.20

)

  $ (0.80

)

  $ (0.09

)

Diluted(loss) earnings per share from discontinued operations

    (0.11

)

    0.05       (0.21

)

    0.07  

Diluted (loss) earnings per share

  $ (0.82

)

  $ (0.15

)

  $ (1.01

)

  $ (0.02

)

                                 

Weighted average number of common shares outstanding:

                               

Basic

    9,691,576       12,076,120       10,795,903       12,115,987  

Diluted

    9,691,576       12,076,120       10,795,903       12,115,987  

 

See accompanying notes to consolidated financial statements

 

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss)

March  31, 201 7 and 201 6

(Unaudited)

( rounded to the nearest thousands)

 

 

   

Three Months
Ended
March 31, 201
7

(Restated)

   

Three Months
Ended
March 31, 201
6

   

Six Months
Ended
March 31, 201
7

(Restated)

   

Six Months
Ended
March 31, 201
6

 

Comprehensive income (loss) is as follows:

                               

Net loss

  $ (7,974,000

)

  $ (1,830,000

)

  $ (10,920,000

)

  $ (267,000

)

                                 

Net unrealized securities gain (loss), net of tax (expense)/benefit of ($680,000) and ($94,000) during the three month periods ended March 31, 2017 and 2016, respectively, and $23,000 and ($283,000) during the six month periods ended March 31, 2017 and 2016, respectively.

    1,204,000       156,000       (35,000

)

    486,000  

Reclassification adjustments for securities sold, net of tax benefit of $379,000 and $0 during the three month periods ended March 31, 2017 and 2016, and $397,000 and $11,000 during the six month periods ended March 31, 2017 and 2016, respectively.

    (569,000

)

          (596,000

)

    (20,000

)

Foreign currency translation, net of tax (expense)/benefit of $16,000 and ($8,000) during the three month periods ended March 31, 2017 and 2016, respectively, and $1,000 and ($17,000) during the six month periods ended March 31, 2017 and 2016, respectively.

    (21,000

)

    12,000       (3,000

)

    26,000  
                                 

Other comprehensive income (loss)

    614,000       168,000       (634,000

)

    492,000  
                                 

Total comprehensive (loss) income

  $ (7,360,000

)

  $ (1,662,000

)

  $ (11,554,000

)

  $ 225,000  

 

See accompanying notes to consolidated financial statements

 

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity

(Unaudited)

( rounded to the nearest thousands, except share data)

 

Six months ended March 31, 2017 (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

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

)

          181,783,000  

Stock based compensation expense

                8,000                               8,000  

Net loss

                      (10,920,000

)

                      (10,920,000

)

Amount reclassified from other comprehensive (loss) income

                            (596,000

)

                (596,000

)

Unrealized (loss) gain on marketable securities, net

                            (35,000

)

                (35,000

)

Purchase of treasury stock

                                  (54,203,000

)

          (54,203,000

)

Foreign currency translation, net

                            (3,000

)

                (3,000

)

Balance, March 31, 2017 , as restated

    13,336,508     $ 133,000     $ 67,042,000     $ 115,818,000     $ 169,000     $ (67,128,000

)

  $     $ 116,034,000  

 

 

  Six months ended March 31, 2016:

 

 

   

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  

Exercise of options

    7,499             47,000                                       47,000  

Stock based compensation expense

                428,000                               428,000  

Restricted stock

    5,000                                            

Net (loss) income

                      (267,000

)

                      (267,000

)

Amount reclassified from other comprehensive income (loss)

                            (20,000

)

                (20,000

)

Unrealized gain on marketable securities, net

                            486,000                   486,000  

Purchase of treasury stock

                                  (8,363,000

)

          (8,363,000

)

Foreign currency translation, net

                            26,000                   26,000  

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, March 31, 2016

    13,197,476     $ 132,000     $ 65,620,000     $ 118,898,000     $ 512,000     $ (10,114,000

)

  $     $ 175,048,000  

 

See accompanying notes to consolidated financial statements

 

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

( rounded to the nearest thousands)

 

 

   

Six Months
Ended

March 31, 201 7 (restated)

   

Six Months
Ended

March 31, 201 6

 

Cash flows from operating activities :

               

Net loss from continuing operations

  $ (8,604,000

)

  $ (1,094,000

)

Net (loss) income from discontinued operations

    (2,316,000

)

    827,000  

Net loss

    (10,920,000

)

    (267,000

)

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

               

Depreciation and amortization

    51,000       186,000  

Deferred income taxes

    1,342,000       444,000  

Impairment of consumer receivables acquired for liquidation

          124,000  

Stock based compensation

    8,000       428,000  

Loss on sale of available-for-sale securities

    993,000       31,000  

Unrealized gain on other investments

          (152,000

)

Unrealized foreign exchange loss on other investments

          (26,000

)

Reserve for loss on other investments

          1,000,000  

Loss on other investments

    3,590,000        

Loss (Earnings) from equity method investment

    (49,000

)

    (333,000

)

Changes in:

               

Prepaid and income taxes receivable

    (6,846,000

)

    113,000  

Due from third party collection agencies and attorneys

    (41,000

)

    269,000  

Other assets

    1,821,000       (2,235,000

)

Other liabilities

    2,425,000       1,572,000  

Net cash used in operating activities of discontinued operations

    438,000       (3,951,000

)

Net cash used in operating activities

    (7,188,000

)

    (2,797,000

)

Cash flows from investing activities:

               

Purchase of consumer receivables acquired for liquidation

    (2,213,000

)

    (6,185,000

)

Principal collected on receivables acquired for liquidation

    4,064,000       4,677,000  

Principal collected on consumer receivable accounts represented by account sales

    190,000        

Purchase of available-for-sale securities

    (7,693,000

)

    (7,419,000

)

Proceeds from sale of available-for-sale securities

    57,016,000       12,303,000  

Purchase of non-controlling interest

          (800,000

)

Decrease in equity method investment

    2,707,000       3,471,000  

Investments in personal injury claims - advances

    (3,178,000

)

     

Capital expenditures

    (13,000

)

    (65,000

)

Net cash used in investing activities of discontinued operations

    (3,790,000

)

    (4,921,000

)

Net cash provided by investing activities

    47,090,000       1,061,000  

Cash flows from financing activities:

               

Proceeds from exercise of stock options

          47,000  

Purchase of treasury stock

    (54,203,000

)

    (8,363,000

)

Borrowings from line of credit

    9,600,000        

Net cash provided by financing activities of discontinued operations

    6,748,000       7,797,000  

Net cash used in financing activities

    (37,855,000

)

    (519,000

)

Foreign currency effect on cash

    (217,000

)

     
Net increase (decrease) in cash, cash equivalents and restricted cash including cash, cash equivalents classified within assets related to discontinued operations     1,830,000          (2,255,000 )
Less: net decrease in cash, cash equivalents and restricted cash classified within assets related to discontinued operations     (2,000 )     (159,000 )

Net increase (decrease) in cash and cash equivalents

    1,828,000       (2,414,000

)

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

  $ 18,110,000     $ 17,533,000  
                 

Supplemental disclosure of cash flow information :

               

Cash paid for:

               

Interest

  $ 1,879,000     $ 1,538,000  

Taxes

    6,200,000        

Supplemental disclosure of non-cash flow investing activities :

               

Continuing 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 Original Form 10 -Q:

 

    Consolidated Balance Sheet  
   

March 31, 201 7

 
   

As Reported

   

De-Consolidation of

Pegasus (1)

   

Adjustments

     

Restated

 

ASSETS

                                 

Cash and cash equivalents

  $ 9,326,000     $ (732,000

)

  $ (49,000

)

(2)(6)   $ 8,545,000  

Restricted cash

    9,565,000                     9,565,000  

Available for sale investments (at fair value)

    5,397,000                     5,397,000  

Consumer receivables acquired for liquidation (at net realizable value)

    11,651,000             (61,000

)

(2)     11,590,000  

Investment in personal injury claims, net

    47,888,000       (44,710,000

)

            3,178,000  

Due from third party collection agencies and attorneys

    1,044,000             52,000   (2)     1,096,000  

Prepaid and income taxes receivable

    7,609,000             (49,000

)

(8)     7,560,000  

Furniture and equipment, net

    158,000                     158,000  

Equity method investment

          45,823,000       101,000   (7)     45,924,000  

Deferred income taxes

    17,556,000             (3,575,000

)

(2)(8)     13,981,000  

Goodwill

    1,410,000                     1,410,000  

Other assets

    4,690,000       (109,000

)

    190,000  

(2)

    4,771,000  

Assets related to discontinued operations

    95,102,000             78,000   (5)(6)     95,180,000  

Total assets

  $ 211,396,000     $ 272,000     $ (3,313,000

)

    $ 208,355,000  

LIABILITIES

                                 

Line of credit

    9,600,000                     9,600,000  

Other liabilities

    6,940,000       (727,000

)

    202,000   (2)(6)     6,415,000  

Liabilities related to discontinued operations

    75,705,000             601,000   (5)     76,306,000  

Total liabilities

    92,245,000       (727,000

)

    803,000         92,321,000  

Commitments and contingencies

                                 

STOCKHOLDERS’ EQUITY

                                 

Preferred stock

                         

Common stock

    133,000                     133,000  

Additional paid-in capital

    67,034,000             8,000   (6)     67,042,000  

Retained earnings

    120,837,000             (5,019,000

)

(2)(3)(4)(5)(6)(7)(8)     115,818,000  

Accumulated other comprehensive income (loss)

    (726,000

)

          895,000   (2)     169,000  

Treasury stock (at cost)

    (67,128,000

)

                  (67,128,000

)

Non-controlling interest

    (999,000

)

    999,000                

Total stockholders’ equity

    119,151,000       999,000       (4,116,000

)

      116,034,000  
                                   

Total liabilities and stockholders’ equity

  $ 211,396,000     $ 272,000     $ (3,313,000

)

    $ 208,355,000  

 

 

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 March 31, 201 7

 
   

 

As Reported

   

De-Consolidation of

Pegasus (1)

   

Adjustments

     

Restated

 

Revenues:

                                 

Finance income, net

  $ 4,018,000     $     $ (88,000

)

(2)   $ 3,930,000  

Personal injury claims income

    2,146,000       (2,136,000

)

            10,000  

Disability fee income

    1,502,000                     1,502,000  

Total revenues

    7,666,000       (2,136,000

)

    (88,000

)

      5,442,000  
                                   

Other income

    (702,000

)

          35,000   (2)     (667,000

)

      6,964,000       (2,136,000

)

    (53,000

)

      4,775,000  

Expenses:

                                 

General and administrative

    14,546,000       (2,178,000

)

    (117,000

)

(2)     12,251,000  

Interest

    34,000       (2,000

)

            32,000  

Loss from equity method investment

          35,000       320,000   (7)     355,000  
      14,580,000       (2,145,000

)

    203,000         12,638,000  

(Loss) income from continuing operations before income tax

    (7,616,000

)

    9,000       (256,000

)

      (7,863,000

)

Income tax (benefit)/expense

    (2,813,000

)

          1,866,000   (8)     (947,000

)

Net (loss) income from continuing operations

    (4,803,000

)

    9,000       (2,122,000 )       (6,916,000

)

                                   

Net loss from discontinued operations, net of income tax

    (775,000

)

          (283,000

)

(5)(8)     (1,058,000

)

                                   

Less: net income attributable to non-controlling interests

    (9,000

)

    9,000                

Net loss attributable to Asta Funding, Inc.

  $ (5,569,000

)

  $     $ (2,405,000

)

    $ (7,974,000

)

                                   

Basic and diluted loss per share:

                                 

Continuing operations

  $ (0.49

)

                    $ (0.71

)

Discontinued operations

    (0.08

)

                      (0.11

)

    $ (0.57

)

                    $ (0.82

)

 

 

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 Six Months Ended March 31, 201 7

 
   

 

As Reported

   

De-Consolidation of

Pegasus (1)

   

Adjustments

     

Restated

 

Revenues:

                                 

Finance income, net

  $ 8,019,000     $     $ 6,000   (2)   $ 8,025,000  

Personal injury claims income

    4,448,000       (4,438,000

)

            10,000  

Disability fee income

    2,856,000                     2,856,000  

Total revenues

    15,323,000       (4,438,000

)

    6,000         10,891,000  
                                   

Other income.

    (158,000

)

          (58,000

)

(2)     (216,000

)

      15,165,000       (4,438,000

)

    (52,000

)

      10,675,000  

Expenses

                                 

General and administrative

    24,102,000       (4,373,000

)

    (183,000

)

(2)     19,546,000  

Interest

    36,000       (4,000

)

            32,000  

Earnings from equity method investment

          (49,000

)

            (49,000

)

      24,138,000       (4,426,000

)

    (183,000

)

      19,529,000  

(Loss) income from continuing operations before income tax

    (8,973,000

)

    (12,000

)

    131,000         (8,854,000

)

Income tax (benefit)/expense

    (3,368,000

)

          3,118,000   (8)     (250,000

)

Net (loss) income from continuing operations

    (5,605,000

)

    (12,000

)

    (2,987,000

)

      (8,604,000

)

                                   

Net loss from discontinued operations, net of income tax

    (1,609,000

)

          (707,000

)

(3)(5)(8)     (2,316,000

)

                                   

Less: net income attributable to non-controlling interests

    12,000       (12,000

)

             

Net loss attributable to Asta Funding, Inc.

  $ (7,226,000

)

  $     $ (3,694,000

)

    $ (10,920,000

)

                                   

Basic and diluted loss per share:

                                 

Continuing operations

  $ (0.52

)

                    $ (0.80

)

Discontinued operations

    (0.15

)

                      (0.21

)

    $ (0.67

)

                    $ (1.01

)

 

 

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 March 31, 201 7

 
   

 

As Reported

   

De-Consolidation of

Pegasus ( 1 )

   

Adjustments

     

Restated

 

Comprehensive income (loss) is as follows:

                                 

Net loss

  $ (5,569,000

)

  $     $ (2,405,000

)

    $ (7,974,000

)

                                   

Net unrealized securities (loss) gain, net of tax

    1,204,000                     1,204,000  
                                   

Reclassification adjustments for securities sold, net of tax

    (569,000

)

                  (569,000

)

                                   

Foreign currency translation, net of tax

    188,000             (209,000

)

(2)(6)     (21,000

)

Other comprehensive income (loss)

    823,000             (209,000

)

      614,000  

Total comprehensive loss

  $ (4,746,000

)

  $     $ (2,614,000

)

    $ (7,360,000

)

 

    Consolidated Statement of Comprehensive Loss  
   

For the Six Months Ended March 31, 201 7

 
   

 

As Reported

   

De-Consolidation of

Pegasus ( 1 )

   

Adjustments

     

Restated

 

Comprehensive income (loss) is as follows:

                                 

Net loss

  $ (7,226,000

)

  $     $ (3,694,000

)

    $ (10,920,000

)

                                   

Net unrealized securities (loss) gain, net of tax

    (35,000

)

                  (35,000

)

                                   

Reclassification adjustments for securities sold, net of tax

    (596,000

)

                  (596,000

)

                                   

Foreign currency translation, net of tax

    (181,000

)

          178,000   (2)(6)     (3,000

)

Other comprehensive (loss) income

    (812,000

)

          178,000         (634,000

)

Total comprehensive loss

  $ (8,038,000

)

  $     $ (3,516,000

)

    $ (11,554,000

)

 

 

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 Six Months Ended March 31, 201 7

 

   

As Reported

   

Adjustments

     

Restated

 

Cash flows from operating activities:

                         

Net loss from continuing operations

  $ (5,617,000

)

  $ (2,987,000

)

    $ (8,604,000

)

Net loss from discontinued operations

    (1,609,000

)

    (707,000

)

      (2,316,000

)

Net loss

    (7,226,000

)

    (3,694,000

)

      (10,920,000

)

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

                         

Depreciation and amortization

    130,000       (79,000

)

      51,000  

Deferred income taxes

    (1,606,000

)

    2,948,000   (8)(2)     1,342,000  

Stock based compensation

    8,000               8,000  

Loss on sale of available-for-sale securities

    993,000               993,000  

Loss on other investments

    3,590,000               3,590,000  

Loss from equity method investment

          (49,000

)

(7)     (49,000

)

Changes in:

                         

Prepaid and income taxes receivable

    (6,729,000

)

    (117,000

)

(8)     (6,846,000

)

Due from third party collection agencies and attorneys

    (39,000

)

    (2,000

)

(2)     (41,000

)

Other assets

    1,985,000

)

    (164,000

)

(2)     1,821,000  

Income tax payable

    (252,000

)

    252,000   (8)      

Other liabilities

    1,832,000       593,000   (2)(6)     2,425,000  

Non-controlling interest

    12,000       (12,000

)

(1)      

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

    (352,000

)

    790,000   (3) (5)     438,000  

Net cash (used in) provided by operating activities

    (7,654,000

)

    466,000         (7,188,000

)

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

    4,233,000       (169,000

)

(2)(4)(5)(6)     4,064,000  

Principal collected on consumer receivable accounts represented by account sales

          190,000   (2)     190,000  

Purchase of available-for-sale securities

    (7,693,000

)

            (7,693,000

)

Proceeds from sales of available-for-sale securities

    57,016,000               57,016,000  

Investments in personal injury claims — advances

    (9,194,000

)

    6,016,000   (1)     (3,178,000

)

Investments in personal injury claims — receipts

    9,595,000       (9,595,000

)

(1)      

Decrease in equity method investment

          2,707,000   (1)     2,707,000  

Capital expenditures

    (13,000

)

            (13,000

)

Net cash used in investing activities related to discontinued operations

    (3,792,000

)

    2,000   (4)     (3,790,000

)

Net cash provided by investing activities

    47,939,000       (849,000

)

      47,090,000  

Cash flows from financing activities:

                         

Purchase of treasury stock

    (54,203,000

)

            (54,203,000

)

Distributions to non-controlling interest

    (366,000

)

    366,000   (1)      

Borrowings from line of credit

    9,600,000               9,600,000  

Net cash provided by financing activities related to discontinued operations:

    6,748,000               6,748,000  

Net cash used in financing activities

    (38,221,000

)

    366,000         (37,855,000

)

Foreign currency effect on cash

          (217,000

)

(2)     (217,000

)

Net increase (decrease) in cash, cash equivalents and restricted cash including cash, cash equivalents classified within assets related to discontinued operations     2,064,000       (234,000 )       1,830,000  
Less: net decrease in cash, cash equivalents and restricted cash classified within assets related to discontinued operations     (2,000 )             (2,000 )

Net increase in cash , cash equivalents and restricted cash

    2,062,000       (234,000

)

(1)(2)(3)(4)(5)(6)(7)(8)     1,828,000  

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

  $ 18,891,000     $ (781,000

)

    $ 18,110,000  

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) (Restated)

 

Note 1— Restatement of Financial Statements  

 

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 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 “Form 10-K/A”), and a Quarterly Report on Form 10 -Q/A to amend and restate the Company's previously issued financial statements for the quarter ended December 31, 2016. The Company is filing this Amendment No. 1 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 March 31, 2017 ( the “Non-Reliance Period”), which was originally filed with the SEC on May 26, 2017 ( the “Original Form 10 -Q”). The Company expects to file, at a later time, an amendment to its Quarterly Report on Form 10 -Q for the quarter ended 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 “As Reported” amounts in the tables below 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 March 31, 2017 consolidated balance sheet, this resulted in (i) a decrease in cash of $732,000; (ii) a decrease in the investment in personal injury claims of $44,710,000; (iii) a decrease in other assets of $109,000; (iv) a decrease in other liabilities of $727,000; and (v) a decrease in non-controlling interest of $999,000, offset by a corresponding increase in the equity method investment of $45,823,000.
   
  On the Company’s consolidated statement of operations, this resulted in (i) a decrease in total revenues of $2,136,000; (ii) a decrease in expenses of $2,180,000; (iii) an increase in the income attributable to the non-controlling interest of $9,000; and (iv) an increase in earnings from equity method investment of $35,000 for the three months ended March 31, 2017. 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.
   
  On the Company’s consolidated statement of operations, this resulted in (i) a decrease in total revenues of $4,438,000; (ii) a decrease in expenses of $4,377,000; (iii) a decrease in the income attributable to the non-controlling interest of $12,000; and (iv) a decrease in earnings from equity method investment of $49,000 for the six months ended March 31, 2017. 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 decreased revenue of $88,000, an increase in other income of $35,000, and a decrease in general and administrative expenses of $117,000 for the three months ended March 31, 2017.

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) (Restated)

 

Note 1— Restatement of Financial Statements (continued)  

 

The correction to properly apply US GAAP to these foreign currency matters resulted in increased revenue of $6,000, a decrease in other income of $58,000, and an increase in general and administrative expenses of $86,000 for the six months ended March 31, 2017.

 

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

   

$(63,000)

   

$(60,000)

 
 

Consumer receivables acquired for liquidation