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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

Form 10-K

 

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

For the fiscal year ended September 30, 2015

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 Specified in its Charter)

 

Delaware   22-3388607

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

210 Sylvan Avenue, Englewood

Cliffs, NJ

 

07632

(Zip Code)

(Address of principal executive offices)  

Issuer’s telephone number, including area code: (201) 567-5648

Securities registered pursuant to Section 12(b) of the Exchange Act:

 

Title of each Class   Name of Exchange on Which Registered

Common Stock, par value $.01 per share

  NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Exchange Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act    Yes  ¨         No  þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act    Yes  ¨        No    þ

¨     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 for 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  þ        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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ        No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    þ

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

 

Large accelerated filer  ¨    Accelerated filer  þ    Non-accelerated filer  ¨    Smaller reporting company  ¨

                           (Do not check if a smaller reporting company)

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

The aggregate market value of voting and nonvoting common equity held by non-affiliates of the registrant was approximately $73,926,000 as of the last business day of the registrant’s most recently completed second fiscal quarter.

As of December 8, 2015, the registrant had 12,070,373 shares of Common Stock issued and outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

In accordance with General Instruction G (3) of Form 10-K, certain information required by Part III hereof will either be incorporated into this Form 10-K by reference to the registrant’s definitive proxy statement for registrant’s 2016 Annual Meeting of Stockholders filed within 120 days of September 30, 2015 or will be included in an amendment to this Form 10-K filed within 120 days of September 30, 2015.


Table of Contents

FORM 10-K

TABLE OF CONTENTS

 

     Page  
PART I   

Item 1.

   Business      3   

Item 1A.

   Risk Factors      14   

Item 1B.

   Unresolved Staff Comments      22   

Item 2.

   Properties      22   

Item 3.

   Legal Proceedings      22   

Item 4.

   Mine Safety Disclosures      22   
PART II   

Item 5.

   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      23   

Item 6.

   Selected Financial Data      25   

Item 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      27   

Item 7A.

   Quantitative and Qualitative Disclosures About Market Risk      41   

Item 8.

   Financial Statements and Supplementary Data      41   

Item 9.

   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      41   

Item 9A

   Controls and Procedures      41   

Item 9B.

   Other Information      44   
PART III   

Item 10.

   Directors, Executive Officers and Corporate Governance      44   

Item 11.

   Executive Compensation      44   

Item 12.

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      44   

Item 13.

   Certain Relationships and Related Transactions, and Director Independence      44   

Item 14.

   Principal Accounting Fees and Services      44   
PART IV   

Item 15.

   Exhibits and Financial Statement Schedules      44   

 

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Caution Regarding Forward Looking Statements

This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended . All statements other than statements of historical facts included or incorporated by reference in this Annual Report on Form 10-K, including without limitation, statements regarding our future financial position, business strategy, budgets, projected revenues, projected costs and plans and objectives of management for future operations, are forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expects,” “intends,” “plans,” “projects,” “estimates,” “anticipates,” or “believes” or the negative thereof or any variation there on or similar terminology or expressions.

We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are not guarantees and are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Important factors which could materially affect our results and our future performance include, without limitation, our ability to purchase defaulted consumer receivables at appropriate prices, changes in government regulations that affect our ability to collect sufficient amounts on our defaulted consumer receivables, our ability to employ and retain qualified employees, changes in the credit or capital markets, changes in interest rates, deterioration in economic conditions, negative press regarding the debt collection industry which may have a negative impact on a debtor’s willingness to pay the debt we acquire, and statements of assumption underlying any of the foregoing, as well as other factors set forth under “Item 1A. Risk Factors” beginning on page 19 of this report and “Item 7—Management’s Discussions and Analysis of Financial Condition and Results of Operation” below.

All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the foregoing. Except as required by law, we assume no duty to update or revise any forward-looking statements.

 

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Part I

 

Item 1. Business.

Overview

Asta Funding, Inc., together with its wholly owned significant operating subsidiaries Palisades Collection LLC, Palisades Acquisition XVI, LLC (“Palisades XVI”), VATIV Recovery Solutions LLC (“VATIV”), ASFI Pegasus Holdings, LLC (“APH”), Fund Pegasus, LLC (“Fund Pegasus”), GAR Disability Advocates, LLC (“GAR Disability Advocates”) and other subsidiaries, not all wholly owned (the “Company”, “we” or “us”), is engaged in several business segments in the financial services industry including structured settlements through our 80% owned subsidiary CBC Settlement Funding, LLC, funding of personal injury claims, through our 80% owned subsidiary Pegasus Funding, LLC social security and disability advocates through our wholly owned subsidiary GAR Disability Advocates , LCC and the business of purchasing, servicing and managing for its own account, distressed consumer receivables, including charged off receivables, and semi-performing receivables. The Company started out in the consumer receivable business in 1994 as a subprime auto lender. The primary charged-off receivables are accounts that have been written-off by the originators and may have been previously serviced by collection agencies. Semi-performing receivables are accounts where the debtor is currently making partial or irregular monthly payments, but the accounts may have been written-off by the originators. Our efforts in this area have been in the international arena as we have discontinued our active purchasing of consumer receivables in the United States. We acquire these and other consumer receivable portfolios at substantial discounts to their face values. The discounts are based on the characteristics (issuer, account size, debtor location and age of debt) of the underlying accounts of each portfolio.

GAR Disability Advocates is a social security disability advocacy firm. GAR Disability Advocates assists claimants in obtaining long term disability benefits from the Social Security Administration.

We own 80% of Pegasus Funding, LLC (“Pegasus”), which invests in funding personal injury claims and 80% of CBC Settlement Funding, LLC (“CBC”), which invests in structured settlements.

Pegasus provides funding for individuals in need of short term funds pending insurance settlements of their personal injury claims. The funds will be recouped when the underlying insurance settlements are paid. The long periods of time taken by insurance companies to settle and pay such claims resulting from lengthy litigation and the court process is fueling the demand for such funding.

CBC provides liquidity to consumers by purchasing certain deferred payment streams including, but not limited to, structured settlements and annuities. CBC generates business from direct marketing as well as through wholesale purchases from brokers or other third parties. CBC has its principal office in Conshohocken, Pennsylvania. CBC primarily warehouses the receivables it originates and periodically resells or securitizes those assets on a pooled basis. The structured settlement marketplace is regulated by federal and state law, requiring that each transaction is reviewed and approved by court order.

We operate principally in the United States in four reportable business segments.

Financial Information About Operating Segments

The Company operates through strategic business units that are aggregated into four reportable segments consisting of the following:

 

   

Consumer receivables segment is engaged in the business of purchasing, managing for its own account and servicing distressed consumer receivables, including charged off and semi-performing receivables, primarily in the international sector. The charged-off receivables are accounts that have been written-off by the originators and may have been previously serviced by collection agencies. Semi-performing receivables are accounts where the debtor is currently making partial or irregular monthly payments, but the accounts may have been written-off by the originators. Distressed consumer receivables are the unpaid debts of individuals to banks, finance companies and other credit providers. These receivables were acquired at substantial discounts to their face values. The discounts are based on the characteristics

 

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(issuer, account size, debtor location and age of debt) of the underlying accounts of each portfolio. Litigation related receivables are semi-performing investments whereby the Company is assigned the revenue stream from the proceeds received. The business conducts its activities primarily under the name Palisades Collection, LLC.

 

   

Personal injury claims – Pegasus Funding, LLC , an 80% owned subsidiary, purchases interests in personal injury 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 claim.

 

   

Structured settlements – On December 31, 2013 the Company purchased an 80% interest in CBC Settlement Funding, LLC. CBC purchases periodic structured settlements and annuity policies from individuals in exchange for a lump sum payment.

 

   

GAR Disability Advocates is a social security benefit and disability advocacy group, which obtains and represents individuals in their claims for social security disability and supplemental security income benefits from the Social Security Administration.

Three of the Company’s business lines accounted for 10% or more of consolidated net revenue during fiscal years 2015 and 2014. In fiscal year 2013 two of the Company’s business lines accounted for 10% or more of consolidated net revenue. The following table summarizes the net revenues by percentage from the four lines of business for the fiscal years 2015, 2014, and 2013:

 

     Years Ended September 30,  
     2015     2014     2013  

Finance income (consumer receivables)

     48.9 %     60.7 %     83.1 %

Personal injury claims

     20.0 %     22.1 %     16.9 %

Structured settlements

     27.8 %     16.0 %     %

GAR Disability Advocates

     3.3 %     1.2 %     %
  

 

 

   

 

 

   

 

 

 

Total revenues

     100.0 %     100.0 %     100.0 %
  

 

 

   

 

 

   

 

 

 

The Company has no segment information from international operations that needs to be reported.

Information about the results of each of the Company’s reportable segments for the last three fiscal years and total assets as of the end of the last three fiscal years, reconciled to the consolidated results, is set forth below. For additional information, refer to the information set forth under the caption “Segment Results from Continuing Operations” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” below.

 

(Dollars in millions)

   Fiscal
Year
     Consumer
Receivables
     Personal
Injury
Claims
     Structured
Settlements
     GAR
Disability
Advocates
    Corporate     Total
Company
 

Revenues

     2015       $ 20.8       $ 8.5       $ 11.8       $ 1.4      $      $ 42.5   
     2014         19.8         7.2         5.2         0.4               32.6   
     2013         31.8         6.4                               38.2   

Other income

     2015                                        1.7        1.7   
     2014         26.1                                1.4        27.5   
     2013                                        1.6        1.6   

Income before income taxes

     2015         13.8         0.1         3.5         (5.8     (6.7     4.9   
     2014         18.9         2.3         0.4         (2.7 )     (7.9     11.0   
     2013         10.1         2.0                 (1.2 )     (7.6     3.3   

 

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(Dollars in millions)

   Fiscal
Year
     Consumer
Receivables
     Personal
Injury
Claims
     Structured
Settlements
     GAR
Disability
Advocates
     Corporate      Total
Company
 

Total assets

     2015       $ 17.0       $ 39.6       $ 63.1       $ 2.6       $ 115.1       $ 237.4   
     2014         30.5         34.0         38.5         1.0         113.1         217.1   
     2013         65.4         36.8                 0.2         109.1         211.5   

Principal Markets and Methods of Distribution

All of the Company’s lines of business are principally conducted in the United States, with some investments overseas.

Consumer receivables

Prior to purchasing a portfolio, we perform a qualitative and quantitative analysis of the underlying receivables and calculate the purchase price which is intended to offer us an adequate return on our investment after servicing expenses. After purchasing a portfolio, we actively monitor performance and review and adjust our collection and servicing strategies accordingly.

We purchase receivables from credit grantors and others through privately negotiated direct sales, brokered transactions and auctions in which sellers of receivables seek bids from several pre-qualified debt purchasers. We fund portfolios through a combination of internally generated cash flow.

Our objective is to maximize our return on investment in acquired consumer receivable portfolios. As a result, before acquiring a portfolio, we analyze the portfolio to determine how to best maximize collections in a cost efficient manner and decide whether to use our internal servicing and collection department, third-party collection agencies, attorneys, or a combination of all three options.

When we outsource the servicing of receivables, our management typically determines the appropriate third-party collection agencies and attorneys based on the type of receivables purchased. Once a group of receivables is sent to third-party collection agencies and attorneys, our management actively monitors and reviews the third-party collection agencies’ and attorneys’ performance on an ongoing basis. Based on portfolio performance considerations, our management will either (i) move certain receivables from one third-party collection agency or attorney to another, or (ii) sell portions of the portfolio accounts. Our internal collection unit, which currently employs approximately five collection-related staff, including senior management, assists us in benchmarking our third-party collection agencies and attorneys, and provides us with greater flexibility for servicing a percentage of our consumer receivable portfolios in-house.

We have increased our focus on purchasing consumer receivables internationally from foreign banks via direct sales or auctions, similar to the domestic purchase process. We have established relationships with agencies and attorneys in our selected countries and we are committed to continue acquiring foreign consumer receivables to maximize our return on investment.

Personal injury claims

Pegasus conducts its business solely in the United States. Pegasus obtains its business from external brokers and internal sales professionals soliciting individuals with personal injury claims. Business is also obtained from the Pegasus web site and through attorneys.

Structured settlements

CBC purchases structured settlement and annuity policies through privately negotiated direct consumer purchases and brokered transactions across the United States. CBC funds the purchases primarily from cash, its line of credit and its securitized debt, issued through its BBR subsidiaries. Blue Bell Receivables I, LLC (“BBR I”), Blue Bells Receivables II, LLC (“BBR II”), Blue Bell Receivables III, LLC (“BBR III”), Blue Bell Receivables IV, LLC (“BBR IV”) and Blue Bell Receivables V, LLC (“BBR V”), collectively the “Blue Bell Entities”, are variable interest entities (“VIEs”). CBC is considered the primary beneficiary because it has the power to direct the significant activities of the VIEs via its ownership and service contract. It also has the rights to receive benefits from the collections that exceed the payments to the note holders.

 

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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.

Industry Overview

Consumer receivables

The purchasing, servicing and collection of charged-off, semi-performing and performing consumer receivables is an industry that is driven by:

 

   

increasing levels of consumer debt;

 

   

increasing defaults of the underlying receivables; and

 

   

increasing utilization of third-party providers to collect such receivables.

Personal injury claims

The funding of personal claims is driven by the growth of the market for financing personal injury claims. Individuals with personal injury claims incur current cash obligations which will not be recouped until insurance settlements are paid. The demand for providing financing to individuals in need of short term funds pending insurance settlements of their personal injury claims is driven by the long periods of time taken by the insurance industry to settle and pay such claims, due to lengthy litigation and the court process.

Structured settlements

The investment in structured settlements is driven by the direct-to-consumer model. The structured settlement market became organized under the Model Act in 2001 and now 49 states abide by the guidelines. The underlying basis for a structured settlement transaction is a court order.

Social security benefit advocacy

The disability advocate industry is driven by the increasing number of disability applicants who find it difficult to obtain such benefits without the aid of third party assistance.

Strategy

Consumer receivables

Our primary objective for our international sector is to utilize our management’s experience and expertise by identifying, evaluating, pricing and acquiring consumer receivable portfolios and maximizing collections of such receivables in a cost efficient manner. Our strategies include:

 

   

managing the collection and servicing of our consumer receivable portfolios, including outsourcing those activities to maintain low fixed overhead by partnering with experienced collection and debt buying firms;

 

   

selling accounts on an opportunistic basis, generally when our efforts have been exhausted through traditional collecting methods, or when we can capitalize on pricing during times when we feel the pricing environment is high; and

 

   

capitalizing on our strategic relationships to identify and acquire consumer receivable portfolios as pricing, financing and conditions permit.

Personal injury claims

Pegasus intends to maintain its business through its attorneys, brokers and sales contacts.

Structured settlements

The success of CBC is tied to its ability to efficiently deploy marketing expenditures, negotiate the purchase of deferred cash flows at attractive yields and obtain asset based financing at competitive rates.

 

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Social security benefit advocacy

GAR Disability Advocates intends to explore expansion into related businesses. In fiscal year 2015, GAR Disability Advocates began its Five Star Disability Department, assisting veterans in obtaining their benefits.

Operations

Consumer Receivables

The Operations Servicing Division of consumer receivables consists of the Collection Department, which handles disputes and correspondence, and the Accounting and Finance Department.

Collection Department

The Collection Department is responsible for making contact with and receiving calls from consumers for the purpose of collecting upon the accounts contained in our consumer receivables portfolios. Collection efforts are specific to accounts that are not yet being serviced by our network of external agencies and attorneys. The Collection Department uses a friendly, customer service approach to collect receivables and utilizes collection software, a dialer and telephone system to accomplish this goal. Each collector is responsible for:

Initiating outbound collection calls and handling incoming calls from the consumer;

Identifying the debt and iterating the benefits of paying the obligation;

Working with the customer to develop acceptable means of satisfying the obligation; and

Offering (if necessary, and based upon the individual situation) an obligor a discount on the overall obligation.

Accounting and Finance Department

In addition to the customary accounting activities, the Accounting and Finance Department is responsible for:

Making daily deposits of customer payments;

Posting payments to customers accounts; and

Providing senior management with daily, weekly and monthly receivable activity and performance reports.

Accounting and finance employees assist collection department employees in handling customer disputes relating to payment and balance information and handling the repurchase requests from companies to whom we have sold receivables.

Additionally, the Accounting Department reviews the results of the collection of consumer receivable portfolios that are being serviced by third party collection agencies and attorneys. The Accounting and Finance Department also participates in the internal auditing of all business segments.

Personal Injury Claims

The operations structure of the personal injury claims unit of Pegasus Funding, LLC includes:

Sales — the sales group is responsible for business development and generating leads for possible funding of personal injury cases.

Underwriting — The underwriting group is responsible for analyzing the merits of the personal injury claims presented for possible funding.

Accounting — The accounting group is responsible for the reporting of all the financial operations of the personal injury claims unit.

Structured Settlements

The operations structure of the structured settlements unit of CBC Settlement, LLC includes:

Operations — Underwriting/Collections — The Operations Department is responsible for underwriting, processing and collecting structured settlement and annuity transactions.

 

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Social security benefit advocacy

GAR Disability Advocates utilizes search engine optimization (“SEO”) to bring more awareness to prospective clients. In particular, through substantial use of the internet, it intends to increase consumer awareness of its existence on various government websites.

Marketing — The Marketing Group is responsible for researching various court records to secure information to follow up for possible structured settlement cases.

Sales — The Sales Group is responsible for the sales strategy and advertising campaigns of CBC.

Accounting — The accounting group is responsible for the reporting of all the financial operations of the structured settlement unit.

Social security benefit advocacy

GAR Disability Advocates consists of the following departments:

Intake — The Intake Department is responsible for client development, including screening leads and developing information on individual cases.

Case Management — The Case Management Department processes approved cases through the Social Security Disability process.

Marketing

Consumer receivables

Our consumer debt portfolio purchases were 12 portfolio purchases in fiscal year 2015. We have expanded relationship with credit providers internationally, as well as maintained our existing relationships domestically with brokers, finance companies and other credit providers. We utilize a sales team internationally to expand our name recognition by attending international conferences, utilizing email solicitations and attending face-to-face bank meetings.

Personal injury claims

Pegasus does not invest in a formal marketing program at this time. It relies on external brokers, internal sales professionals and attorneys to maintain its market share.

Structured settlements

CBC purchases deferred cash flow receivables through retail and wholesale channels. CBC invests in direct to consumer marketing, including, but not limited to, on line, television and direct mail.

Social security benefit advocacy

GAR Disability Advocates utilizes SEO to bring more awareness to prospective clients. In particular, through substantial use of the internet, it intends to increase consumer awareness of its existence on various government websites.

Competition

Consumer receivables

With the competitive nature of the domestic market, there are strategic advantages of acquiring portfolios internationally in specific foreign countries with less established competition. We feel our expertise in establishing alliances with third-party collection agencies and attorneys can be leveraged in the international sector to be successful against our competitors; however, we cannot assure that the competition will not increase internationally in the future, affecting our consumer receivables financial performance.

We compete with:

 

   

other purchasers of consumer receivables, including third-party collection companies; and

 

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other financial services companies who purchase consumer receivables.

Some of our competitors are larger and more established and may have substantially greater financial, technological, personnel and other resources than we have, including greater access to the credit and capital markets. We believe that no individual competitor or group of competitors has a dominant presence in the market.

We compete in the marketplace for consumer receivable portfolios based on many factors, including:

 

   

purchase price;

 

   

representations, warranties and indemnities requested;

 

   

timeliness of purchase decisions; and

• reputation.

Our strategy is designed to capitalize on the market’s lack of a dominant industry player. We believe that our management’s experience and expertise in identifying, evaluating, pricing and acquiring consumer receivable portfolios and managing collections, coupled with our strategic alliances with third-party collection agencies and attorneys and our sources of financing, give us a competitive advantage. However, we cannot assure that we will be able to compete successfully against current or future competitors or that competition will not increase in the future.

Personal injury claims

The litigation funding business is highly competitive and fragmented, and we expect that competition from new and existing companies will continue. We compete in the litigation funding marketplace based on many factors, including:

cost of funds lent;

application Fee costs;

broker’s commissions and bonuses paid;

reputation; and

direct and on-line marketing.

We believe that the management of Pegasus has the expertise and experience in identifying, evaluating, pricing and acquisition of litigating funding cases. However, we cannot assure that our litigation funding businesses will be able to compete against current or future competitors or that competition will not increase in the future.

Structured settlements

CBC competes with brokers and other direct purchasers of deferred consumer receivables. We compete in the marketplace for the purchase of structured settlement and annuity cash flows on many factors, including purchase price, reputation, effectiveness of marketing message and reach. We expect competition from new and existing companies to continue. Some of our competitors are larger and more established and may have substantially greater financial, technological, personnel and other resources than we have, including greater access to credit and capital markets. We believe that one of our competitors may account for 50% or more of the industry volume and that the remaining competitors are fragmented.

Social security benefit advocacy

The social security benefit advocacy environment is competitive. We believe our GAR Disability Advocates management has the knowledge to compete in this environment. Nevertheless, we can offer no assurance that the business will remain competitive against current and future competitors.

 

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Seasonality and Trends

Consumer receivables

Our management believes that our operations may, to some extent, be affected by high delinquency rates and by lower recoveries on consumer receivables acquired for liquidation during or shortly following certain holiday periods and during the summer months.

Personal injury claims

There are no discernible trends to indicate seasonality in the personal injury claims business.

Structured settlements

The purchase of deferred payment obligations is not significantly impacted by the time of year and consumer demand for advance funding remains reasonably constant.

Social security benefit advocacy

There is no indication that seasonality has any noticeable impact on GAR Disability Advocates.

Technology

Consumer receivables

We believe that a high degree of automation is necessary to enable us to grow and successfully compete with other finance companies. Accordingly, we continually look to upgrade our technology systems to support the servicing and recovery of consumer receivables acquired for liquidation. Our telecommunications and technology systems allow us to quickly and accurately process large amounts of data necessary to purchase and service consumer receivable portfolios. In addition, we rely on the information technology of our third-party collection agencies and attorneys and periodically review their systems to ensure that they can adequately service the consumer receivable portfolios outsourced to them.

Due to our desire to increase productivity through automation, we periodically review our systems for possible upgrades and enhancements. We are looking to enhance our international systems capabilities during fiscal year 2016.

Personal injury claims

Pegasus is dependent on its website to maintain and increase its business and, therefore, must remain current with technology.

Structured settlements

CBC recognizes that a high level of automation is required to continue to grow and compete within the industry. CBC has invested significantly in technology since its inception and particularly in its customer relationship management (“CRM”) system in order to maximize large quantities of information. This technology provides CBC management with the necessary tool to optimize its processes to improve its efficiency. CBC intends to continue to invest in technology.

Social security benefit advocacy

GAR Disability Advocates relies on substantial use of the internet and, therefore, endeavors to remain current technologically. We are in the process of installing a new client software system in fiscal year 2016, which is expected to improve management reporting capabilities.

Government Regulation

Consumer receivables

Our businesses are subject to extensive federal and state regulations. The relationship of a consumer and a creditor is extensively regulated by federal, state and local laws, rules, regulations and ordinances. These laws

 

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include, but are not limited to, the following federal statutes and regulations: the Federal Truth-In-Lending Act, the Fair Credit Billing Act (“FCBA”), the Equal Credit Opportunity Act and the Fair Credit Reporting Act (“FCRA”), as well as comparable statutes in states where consumers reside and/or where creditors are located. Among other things, the laws and regulations applicable to various creditors impose disclosure requirements regarding the advertisement, application, establishment and operation of credit card accounts or other types of credit programs. Federal law requires a creditor to disclose to consumers, among other things, the interest rates, fees, grace periods and balance calculation methods associated with their accounts. In addition, consumers are entitled to have payments and credits applied to their accounts promptly, to receive prescribed notices and to request that billing errors be resolved promptly. In addition, some laws prohibit certain discriminatory practices in connection with the extension of credit. Further, state laws may limit the interest rate and the fees that a creditor may impose on consumers. Failure by the creditors to comply with applicable laws could create claims and rights of offset by consumers that would reduce or eliminate their obligations, which could have a material adverse effect on our operations. Pursuant to agreements under which we purchase receivables, we are typically indemnified against losses resulting from the failure of the creditor to have complied with applicable laws relating to the receivables prior to our purchase of such receivables.

Certain laws, including the laws described above, may limit our ability to collect amounts owing with respect to the receivables regardless of any act or omission on our part. For example, under the FCBA, a credit card issuer may be subject to certain claims and defenses arising out of certain transactions in which a credit card is used if the consumer has made a good faith attempt to obtain satisfactory resolution of a problem relative to the transaction and, except in cases where there is a specified relationship between the person honoring the card and the credit card issuer, the amount of the initial transaction exceeds $50 and the place where the initial transaction occurred was in the same state as the consumer’s billing address or within 100 miles of that address. Accordingly, as a purchaser of defaulted receivables, we may purchase receivables subject to valid defenses on the part of the consumer. Other laws provide that, in certain instances, consumers cannot be held liable for, or their liability is limited to $50 with respect to, charges to the credit card credit account that were a result of an unauthorized use of the credit card account. No assurances can be given that certain of the receivables were not established as a result of unauthorized use of a credit card account, and, accordingly, the amount of such receivables may not be collectible by us.

Several federal, state and local laws, rules, regulations and ordinances, including, but not limited to, the Fair Debt Collection Practices Act (“FDCPA”) and the Federal Trade Commission Act and comparable state statutes, regulate consumer debt collection activity. Although, for a variety of reasons, we may not be specifically subject to the FDCPA or certain state statutes that govern third-party debt collectors, it is our policy to comply with applicable laws in our collection activities. Additionally, our third-party collection agencies and attorneys may be subject to these laws. To the extent that some or all of these laws apply to our collection activities or our third-party collection agencies’ and attorneys’ collection activities, failure to comply with such laws could have a material adverse effect on us.

In order to comply with the foregoing laws and regulations, we provide a comprehensive development training program for our new collection/dispute department representatives and on-going training for all collection/dispute department associates. All collection and dispute representatives are tested annually on their knowledge of the FDCPA and other applicable laws. Account representatives not achieving our minimum standards are required to complete a FDCPA review session and are then retested. In addition, annual supplemental instruction in the FDCPA and collection techniques is provided to all our account representatives.

On July 21, 2010, the Dodd-Frank Wall Street Reform and Protection Act, or the Dodd-Frank Act, was enacted. There are significant corporate governance and executive compensation-related provisions in the Dodd-Frank Act that require the SEC to adopt additional rules and regulations in areas such as corporate governance, “say on pay” and proxy access. Our efforts to comply with these requirements have resulted in, and are likely to continue to result in, an increase in expenses and a diversion of management’s time from other business activities. We are subject to changing rules and regulations of federal and state governments, the Public Company Accounting Oversight Board (“PCAOB”), the Financial Industry Regulatory Authority, Inc. (“FINRA”) and NASDAQ, all of which have issued a significant number of new and increasingly complex requirements and

 

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regulations over the course of the last several years and continue to develop additional regulations and requirements in response to laws enacted by Congress.

The enactment of the Dodd-Frank Act will subject us to substantial additional federal regulation, and we cannot predict the effect of such regulation on our business, results of operations, cash flows or financial condition. Through the Dodd-Frank Act, Congress established the Consumer Financial Protection Bureau (the “CFPB”), which has regulatory, supervisory and enforcement authority over entities involved in consumer financial markets. The CFPB has the authority to conduct periodic examinations of “larger participants” in each market, and we believe it is likely that we will be subject to an examination.

The CFPB published a final rule on October 24, 2012, that allows the agency to federally supervise the larger consumer debt collectors. The CFPB also released the field guide that examiners will use to ensure that companies and banks engaging in debt collection are following the law.

The consumer debt collection market covered by the rule includes three main types of debt collectors: first, firms that may buy defaulted debt and collect the proceeds for themselves; second, firms that may collect defaulted debt owned by another company in return for a fee; and third, debt collection attorneys that collect through litigation. A single company may be involved in any or all of these activities.

The CFPB’s supervisory authority over these entities began when the rule took effect on January 2, 2013. Under the rule, any firm that has more than $10 million in annual receipts from consumer debt collection activities will be subject to the CFPB’s supervisory authority. This authority will extend to about 175 debt collectors, which, according to the CFPB, account for over 60 percent of the industry’s annual receipts in the consumer debt collection market.

Pursuant to the CFPB’s supervisory authority, examiners will be assessing potential risks to consumers and whether debt collectors are complying with requirements of federal consumer financial law. Among other things, examiners will be evaluating whether debt collectors provide required disclosures; use accurate information; maintain a consumer complaint and dispute resolution process; and communicate with consumers in the manner required by law.

The CFPB’s general Supervision and Examination Manual, as well as its examination manual specific to the debt collection market, provide guidance on how the bureau will be conducting its monitoring of debt collection activities. Examiners will evaluate the quality of the regulated entity’s compliance management systems, review practices to ensure they comply with federal consumer financial law, and identify risks to consumers throughout the debt collection process. The CFPB can seek relief that includes: rescission or reformation of contracts, restitution, disgorgement of profits, payment of damages, limits on activities and civil money penalties of up to $1 million per day for knowing violations.

As a company that engages in debt collection, we need to be prepared for the heavy oversight that the CFPB will bring. Preparing for a CFPB audit will cost time and money. Additionally, the CFPB has the power to bring an enforcement action or cause a required settlement. Another large concern is the amount of privileged and confidential information the CFPB could release, which can lead to private lawsuits — including class and mass actions — as well as other state and federal agency oversight.

The CFPB is expressly charged with prohibiting unfair, deceptive or abusive acts or practices. Through its broad powers to regulate and enforce federal consumer financial laws, the CFPB could place restrictions on our business, the businesses of our customers and the business of our affiliates, if the CFPB were to determine through rulemaking, supervisory or enforcement actions, for example, that particular acts or practices were unfair, deceptive or abusive to consumers.

The CFPB will thus exercise supervisory authority over us. At this time, it is not possible or practical to attempt to provide a comprehensive analysis of how these new laws and regulations may impact debt collectors.

Additionally, the Dodd-Frank Act empowers state attorneys general (or the equivalent thereof) to bring civil actions in federal district court (or a state court that is located in that state and that has jurisdiction over the defendant), to enforce Title X of the Act or regulations issued by the CFPB thereunder. Therefore, we could also

 

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be the subject of investigations and enforcement actions by the Federal Trade Commission or by state agencies (e.g., state attorneys general) with powers to enforce CFPB regulations and the FCRA.

The Dodd-Frank Act authorized the CFPB to prescribe rules interpreting the FDCPA. On November 12, 2013, the CFPB signaled its intention to promulgate substantive rules under the FDCPA by publishing an Advance Notice of Proposed Rulemaking (ANPR) with regard to debt collection practices. The ANPR requested comments with regard to a wide array of issues relating to debt collection. The comment period closed on February 28, 2014. The CFPB has not yet issued a proposed rule. In its Fall 2015 Regulatory Agenda, the CFPB stated that it expects “Pre-rule activities” are the steps that the CFPB takes in preparation for issuing proposed regulations.

The Company has and will continue to have a substantive compliance program and maintain procedures to ensure that the law is followed and that consumer complaints are dealt with in an appropriate fashion.

Additional laws or amendments to existing laws, may be enacted that could impose additional restrictions on the servicing and collection of receivables. Such new laws or amendments may adversely affect our ability to collect the receivables.

We currently hold a number of licenses issued under applicable consumer credit laws or other licensing statutes or regulations. Certain of our current licenses, and any licenses that we may be required to obtain in the future, may be subject to periodic renewal provisions and/or other requirements. Our inability to renew licenses or to take any other required action with respect to such licenses could have a material adverse effect upon our results of operation and financial condition.

Personal injury claims

Numerous states have recently introduced legislation with respect to the litigation funding business, which, up to now, has been largely unregulated. According to the National Conference of State Legislatures during the 2015 legislative session, 10 states had legislation pending regarding litigation financing transactions, and two states enacted legislation. While the legislation varies from state to state, these proposed laws generally would establish requirements for contracts relating to litigation funding, including setting maximum amounts of interest, fees and other charges that may be imposed.

Structured settlements

With respect to the structured settlement business, 49 states have enacted regulations commonly referred to as Structured Settlement Protection Acts (“SSPAs”). The statutes generally require certain consumer disclosures as well as requiring that each transaction be filed in court and receive judicial approval. In addition to the state SSPAs, U.S. Code 5891, passed into law in 2002, imposes a 40% excise tax of 40% on any transactions not approved in compliance with the applicable SSPA.

Social security benefit advocacy

The liquidity of funds available to pay Social Security disability benefits could have a material impact on the GAR Disability Advocates business.

Employees

As of September 30, 2015, we had 149 full-time employees. We are not a party to any collective bargaining agreements.

Additional Information

Our web address is www.astafunding.com. Copies of our Form 10-Ks, 10-Qs, 8-Ks, proxy statements, amendments thereto, and other SEC reports are available on our website as soon as reasonably practical after filing electronically with the Securities and Exchange Commission . No part of our website is incorporated by reference into this report.

 

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Item 1A. Risk Factors.

Note Regarding Risk Factors

You should carefully consider the risk factors below in evaluating us. In addition to the following risks, there may also be risks that we do not yet know of or that we currently think are immaterial that may also impair our business operations. If any of the following risks occur, our business, results of operation or financial condition could be adversely affected, the trading price of our common stock could decline and stockholders might lose all or part of their investment. The risk factors presented below are those which we currently consider material. However, they are not the only risks facing our company. Additional risks not presently known to us, or which we currently consider immaterial, may also adversely affect us. There may be risks that a particular investor views differently from us, and our analysis might be wrong. If any of the risks that we face actually occur, our business, financial condition and operating results could be materially adversely affected and could differ materially from any possible results suggested by any forward-looking statements that we have made or might make. In such case, the trading price of our common stock could decline, and you could lose part or all of your investment. Except as required by law, we expressly disclaim any obligation to update or revise any forward-looking statements.

The enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act subjects us to substantial additional federal regulation, and we cannot predict the effect of such regulation on our business, results of operations, cash flows or financial condition.

On July 21, 2010, the Dodd-Frank Wall Street Reform and Protection Act, or the Dodd-Frank Act, was enacted. There are significant corporate governance and executive compensation-related provisions in the Dodd-Frank Act that require the SEC to adopt additional rules and regulations in these areas such as “say on pay” and proxy access. Our efforts to comply with these requirements have resulted in, and are likely to continue to result in, an increase in expenses and a diversion of management’s time from other business activities.

Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented, in their entirety, by the various regulatory agencies and through regulations, the full extent of the impact such requirements will have on our operations is unclear. The changes resulting from the Dodd-Frank Act may impact the profitability of business activities, require changes to certain business practices, or otherwise adversely affect our business. In particular, the potential impact of the Dodd-Frank Act on our operations and activities, both currently and prospectively, include, among others:

 

   

increased cost of operations due to greater regulatory oversight, supervision and compliance with consumer debt issuance and collection practices; and

 

   

the limitation on the ability to expand consumer product and service offerings due to anticipated stricter consumer protection laws and regulations.

The Dodd-Frank Act establishes the CFPB, which has broad regulatory powers over debt collectors and virtually all other “covered persons” who have any connection to consumer financial products or services. The CFPB has exclusive rule-making authority with respect to all significant federal statutes that impact the collection industry, including the FDCPA, the FCRA, and others. This means, for example, that the CFPB has the ability to pass rules and regulations that interpret any of the provisions of the FDCPA, potentially impacting all facets of the collection channel. Federal agencies, including the CFPB, have been given significant discretion in drafting the rules and regulations that will implement the Dodd-Frank Act. Consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for some time. In addition, this legislation mandated multiple studies and reports for Congress, which could result in additional legislative or regulatory action.

The CFPB has the authority to conduct periodic examinations of “larger participants” in each market, and we believe it is likely that we will be subject to an examination.

We cannot predict the requirements of the regulations ultimately adopted under the Dodd-Frank Act, the effect such regulations will have on financial markets generally, or on our businesses specifically, the additional

 

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costs associated with compliance with such regulations, or any changes to our operations that may be necessary to comply with the Dodd-Frank Act, any of which could have a material adverse effect on our business, results of operations, cash flows or financial condition.

Government regulations may limit our ability to recover and enforce the collection of our receivables.

Federal, state and local laws, rules, regulations and ordinances may limit our ability to recover and enforce our rights with respect to the receivables acquired by us. These laws include, but are not limited to, the following federal statutes and regulations promulgated thereunder and comparable statutes in states where consumers reside and/or where creditors are located:

 

   

The Fair Debt Collection Practices Act;

 

   

The Federal Trade Commission Act;

 

   

The Truth-In-Lending Act;

 

   

The Fair Credit Billing Act;

 

   

The Equal Credit Opportunity Act;

 

   

The Fair Credit Reporting Act;

 

   

The Financial Privacy Rule;

 

   

The Safeguards Rule;

 

   

Telephone Consumer Protection Act;

 

   

Health Insurance Portability and Accountability Act (“HIPAA”)/Health Information Technology for Economical and Clinical Health Act (“HITECH”);

 

   

U.S. Bankruptcy Code; and

 

   

Credit Card Accountability Responsibility and Disclosure Act of 2009.

We may be precluded from collecting receivables we purchase where the creditor or other previous owner or third-party collection agency or attorney failed to comply with applicable law in originating or servicing such acquired receivables. Laws relating to the collection of consumer debt also directly apply to our business. Our failure to comply with any laws applicable to us, including state licensing laws, could limit our ability to recover on receivables and could subject us to fines and penalties, which could reduce our earnings and result in a default under our loan arrangements. In addition, our third-party collection agencies and attorneys may be subject to these and other laws and their failure to comply with such laws could also materially adversely affect our finance income and earnings.

Additional laws or amendments to existing laws may be enacted that could impose additional restrictions on the servicing and collection of receivables. Such new laws or amendments may adversely affect the ability to collect on our receivables, which could also adversely affect our finance income and earnings.

Because our receivables are generally originated and serviced pursuant to a variety of federal, state and/or local laws by a variety of entities and may involve consumers in all 50 states, the District of Columbia, Puerto Rico and South America, there can be no assurance that all originating and servicing entities have, at all times, been in substantial compliance with applicable law. Additionally, there can be no assurance that we or our third-party collection agencies and attorneys have been or will continue to be at all times in substantial compliance with applicable law. Failure to comply with applicable law could materially adversely affect our ability to collect our receivables and could subject us to increased costs, fines and penalties.

We are subject to changing rules and regulations of federal and state government as well as the stock exchange on which our common stock is listed. These entities, including PCAOB, the SEC and the NASDAQ Global Market, have issued a significant number of new and increasingly complex requirements and regulations over the course of the last several years and continue to develop additional regulations and requirements in response to laws enacted by Congress.

 

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We are subject to various risks in connection with our litigation funding business.

Risks of the litigation funding business include the potential regulation or limitation of interest rates and other fees advanced by our litigation funding subsidiaries under federal and/or state regulation, a change in statutory or case law which limits or restricts the ability of our litigation funding subsidiaries to charge or collect fees and interest at anticipated levels, claimants being unsuccessful in whole or in part in the personal injury claims or divorce settlement upon which our funds are provided, the continued services of the senior management of our litigation funding subsidiaries to source and analyze cases in accordance with the subsidiaries’ respective underwriting guidelines.

We are subject to various risks in connection with our structured settlement funding business.

Risks of the structured settlement funding business include the potential regulation that could stem from the Dodd Frank Act, state regulation and/or any other change in statutory or case law which may limit or restrict the ability of our structured settlement business to: make investments; the effectiveness of our marketing programs; and our ability to continue to grow the volume of structured settlements. Competition in the marketplace could drive up the purchase price of structured settlement and annuity receivables. Additionally, the fact that one company controls at least 50% of the marketplace means that other players, including us, may be negatively impacted by strategic decisions employed by this competitor. Our failure or inability to execute any element of our business strategy and/or increased competition in the marketplace could materially adversely affect our business, financial position and results of operations.

We are exposed to interest rate volatility risk as interest rates can fluctuate in the period between when we purchase structured settlements payment streams and when we securitize such payment streams.

We purchase structured settlements at a discount rate based on, among other factors, our then estimates of the future interest rate environment. Once a critical mass of payment streams is achieved, those payment streams are then securitized, generally through fixed rate private placements. The discount rate at which our securitization is sold to investors is based on the current interest rates as of the time of the securitization. Interest rates may fluctuate significantly during the period between the purchase and securitization of payment streams, which can increase or decrease the spread between the discount rate at which we purchase the payment streams and the discount rate at which we securitize such payment streams, which could increase or decrease our revenues. Volatile interest rate environments can lead to volatility in our results of operations. If we are unable to finance the payment streams we purchase at a discount rate that is sufficiently lower than the discount rate at which we make such purchases, it could have a material adverse effect on our business, financial condition, results of operations and cash flows.

We are subject to various risks in connection to our disability advocacy business.

We have recently entered the disability advocacy business and are subject to all of the risks inherent in a new business. We are incurring substantial start-up costs and there can be no assurance this business segment will become profitable in the future. Risks of the disability advocacy business include the competition of other advocacy firms, statutory cut backs on the Federal Disability program and stricter guidelines in qualifying for disability benefits.

We may not be able to purchase consumer receivable portfolios domestically and internationally at favorable prices or on sufficiently favorable terms if at all.

Our success in this business segment depends upon the continued availability of consumer receivable portfolios that meet our purchasing criteria and our ability to identify and finance the purchases of such portfolios. The availability of consumer receivable portfolios at favorable prices and on terms acceptable to us, if at all, depends on a number of factors outside of our control, including:

 

   

the growth in consumer debt;

 

   

the volume of consumer receivable portfolios available for sale;

 

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availability of financing to fund purchases;

 

   

competitive factors affecting potential purchasers and sellers of consumer receivable portfolios; and

 

   

possible future changes in the bankruptcy laws, state laws and homestead acts which could make it more difficult for us to collect.

 

   

The foreign exchange rate changes of the countries in which we do business

There is no assurance that we will realize the full value of the deferred tax asset.

Although the carry forward period for income taxes is up to twenty years, such allowance period is outside a reasonable period to forecast full realization of the deferred tax asset. We continually monitor forecast information to ensure the valuation allowance is appropriate.

We may not be able to collect sufficient amounts on our consumer receivable portfolios to recover the costs associated with the purchase of those portfolios and to fund our operations.

We acquire (internationally) and collect on consumer receivable portfolios that contain charged-off receivables. In order to operate profitably over the long term, we must continually purchase (internationally) and collect on a sufficient volume of receivables to generate revenue that exceeds our purchase costs. For accounts that are charged-off or semi-performing, the originators or interim owners of the receivables generally have:

 

   

made numerous attempts to collect on these obligations, often using both their in-house collection staff and third-party collection agencies; and

 

   

subsequently deemed these obligations as uncollectible.

These receivable portfolios are purchased internationally at significant discounts to the amount the consumers owe. These receivables are difficult to collect and actual recoveries may be less than the amount expected. In addition, our collections may worsen in a weak economic cycle. We may not recover amounts in excess of our acquisition and servicing costs.

Our ability to recover the purchase costs on our portfolios and produce sufficient returns can be negatively impacted by the quality of the purchased receivables. In the normal course of our portfolio acquisitions, some receivables may be included in the portfolios that fail to conform to certain terms of the purchase agreements and we may seek to return these receivables to the seller for payment or replacement receivables. However, we cannot guarantee that any of such sellers will be able to meet their payment obligations to us. Accounts that we are unable to return to sellers may yield no return. If cash flows from operations are less than anticipated as a result of our inability to collect sufficient amounts on our receivables, our ability to satisfy our debt obligations, purchase new portfolios, and achieve future growth and profitability may be materially adversely affected.

We may be subject to competition for the purchase of international consumer receivable portfolios which may result in an increase in prices of such portfolios.

We compete with other purchasers of consumer receivable portfolios, with third-party collection agencies and with financial services companies that manage their own consumer receivable portfolios. We compete on the basis of price, reputation, industry experience and performance. Some of our competitors have greater capital, personnel and other resources than we have. The possible entry of new competitors, including competitors that historically have focused on the acquisition of different asset types, and the expected increase in competition from current market participants may reduce our access to consumer receivable portfolios. Aggressive pricing by our competitors has raised the price of consumer receivable portfolios above levels that we are willing to pay, which could reduce the number of consumer receivable portfolios suitable for us to purchase or if purchased by us, reduce the profits, if any, generated by such portfolios. If we are unable to purchase receivable portfolios at favorable prices or at all, our finance income and earnings could be materially reduced.

 

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We depend upon third parties to service a significant portion of our domestic and international consumer receivable portfolios. The loss of certain servicers could have an adverse effect on our financial position and results of operation.

As 38% of our portfolio face value is serviced by five organizations domestically, we are dependent upon the efforts of these collection agencies and attorneys to service and collect our consumer receivables. Any failure by our third-party collection agencies and attorneys to adequately perform collection services for us or remit such collections to us could materially reduce our finance income and our profitability. In addition, our finance income and profitability could be materially adversely affected if we are not able to secure replacement third party collection agencies and attorneys and redirect payments from the customers to our new third party collection agencies and attorneys promptly in the event our agreements with our third-party collection agencies and attorneys are terminated, our third-party collection agencies and attorneys fail to adequately perform their obligations or if our relationships with such third-party collection agencies and attorneys adversely change.

We may rely on third parties to locate, identify and evaluate international consumer receivable portfolios available for purchase.

We may rely on third parties, including brokers and third-party collection agencies and attorneys, to identify consumer receivable portfolios and, in some instances, to assist us in our evaluation and purchase of these portfolios. As a result, if such third parties fail to identify receivable portfolios or if our relationships with such third parties are not maintained, our ability to identify and purchase additional receivable portfolios could be materially adversely affected. In addition, if we, or such parties, fail to correctly or adequately evaluate the value or collectability of these consumer receivable portfolios, we may pay too much for such portfolios and suffer an impairment, which would negatively impact our earnings.

We rely on our third party collectors to comply with all rules and regulations and maintain proper internal controls over their accounting and operations.

Because the receivables were originated and serviced pursuant to a variety of federal and/or state laws by a variety of entities and involved consumers in all 50 states, the District of Columbia, Panama, Puerto Rico, Columbia and Peru, there can be no assurance that all original servicing entities have, at all times, been in substantial compliance with applicable law. Additionally, there can be no assurance that we or our third-party collection agencies and attorneys have been or will continue to be at all times in substantial compliance with applicable law. The failure to comply with applicable law and not maintain proper controls in their accounting and operations could materially adversely affect our ability to collect our receivables and could subject us to increased costs, fines and penalties.

Our collections may decrease if bankruptcy filings increase.

During times of economic uncertainty, the amount of defaulted consumer receivables generally increases, which contributes to an increase in the amount of personal bankruptcy filings. Under certain bankruptcy filings, a debtor’s assets are sold to repay credit originators, but since the defaulted consumer receivables we purchase are generally unsecured, we may not be able to collect on those receivables. Our collections may decline with an increase in bankruptcy filings. If our actual collection experience with respect to a defaulted consumer receivable portfolio is significantly lower than we projected when we purchased the portfolio, our earnings could be negatively affected.

The loss of any of our executive officers may adversely affect our operations and our ability to successfully acquire receivable portfolios.

Our executive officers are responsible for making substantially all management decisions, including determining which portfolios to purchase, the purchase price and other material terms of such portfolio acquisitions. These decisions are instrumental to the success of our business. Significant losses of the services of our executive officers or the inability to replace our officers with individuals who have experience in the industry or with the Company could disrupt our operations and adversely affect our ability to successfully acquire receivable portfolios.

 

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The Stern family effectively controls the Company, substantially reducing the influence of our other stockholders.

Members of the Stern family own directly or indirectly, approximately 32% of our outstanding shares of common stock as of September 30, 2015. As a result, the Stern family is able to significantly influence the actions that require stockholder approval, including:

 

   

the election of our directors; and

 

   

the approval of mergers, sales of assets or other corporate transactions or matters submitted for stockholder approval.

As a result, our other stockholders may have reduced influence over matters submitted for stockholder approval. In addition, the Stern family’s influence could preclude any unsolicited acquisition of us and, consequently, materially adversely affect the price of our common stock.

Negative press regarding the debt collection industry may have a negative impact on a customer’s willingness to pay the debt we acquire.

Consumers are exposed to information from a number of sources that may cause them to be more reluctant to pay their debts or to pursue legal actions against us. Online, print and other media publish stories about the debt collection industry which cite specific examples of abusive collection practices. These stories can lead to the rapid dissemination of the story, adding to the level of exposure to negative publicity about our industry. Various Internet sites are maintained where consumers can list their concerns about the activities of debt collectors and seek guidance from other website posters on how to handle the situation. Advertisements by debt relief attorneys and credit counseling centers are becoming more common, adding to the negative attention given to our industry. As a result of this negative publicity, customers may be more reluctant to pay their debts or could pursue legal action against us regardless of whether those actions are warranted. These actions could impact our ability to collect on the receivables we acquire and affect our revenues and profitability.

Class action suits and other litigation could divert our management’s attention from operating our business and increase our expenses.

Originators, debt purchasers and third-party collection agencies and attorneys in the consumer credit industry are frequently subject to putative class action lawsuits and other litigation. Claims include failure to comply with applicable laws and regulations and improper or deceptive origination and servicing practices. Being a defendant in such class action lawsuits or other litigation could materially adversely affect our results of operations and financial condition.

We may seek to make acquisitions that prove unsuccessful or strain or divert our resources.

We may seek to grow through acquisitions of related businesses in the financial services sector. Such acquisitions present risks that could materially adversely affect our business and financial performance, including:

 

   

the diversion of our management’s attention from our everyday business activities;

 

   

the assimilation of the operations and personnel of the acquired business;

 

   

the contingent and latent risks associated with the past operations of, and other unanticipated problems arising in, the acquired business; and

 

   

the need to expand management, administration and operational systems.

If we make such acquisitions, we cannot predict whether:

 

   

we will be able to successfully integrate the operations of any new businesses into our business;

 

   

we will realize any anticipated benefits of completed acquisitions; or

 

   

there will be substantial unanticipated costs associated with acquisitions.

 

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In addition, future acquisitions by us may result in:

 

   

potentially dilutive issuances of our equity securities;

 

   

the incurrence of additional debt; and

 

   

the recognition of significant charges for depreciation and impairment charges related to goodwill and other intangible assets.

If our technology infrastructure is not operational, our operations could be disrupted and our ability to successfully operate the business could be compromised.

Our success depends, in part, on sophisticated telecommunications and computer systems. The temporary loss of our computer or telecommunications systems, through casualty, operating malfunction or service provider failure, could disrupt our operations. In addition, we must record and process significant amounts of data quickly and accurately to properly bid on prospective acquisitions of receivable portfolios and to access, maintain and expand the databases we use for our collection and monitoring activities. Any failure of our information systems and their backup systems would interrupt our operations. We may not have adequate backup arrangements for all of our operations and we may incur significant losses if an outage occurs. In addition, we rely on third-party collection agencies and attorneys who also may be adversely affected in the event of an outage in which the third-party collection agencies and attorneys do not have adequate backup arrangements. Any interruption in our operations or our third-party collection agencies’ and attorneys’ operations could have an adverse effect on our results of operations and financial condition. However, we are in the process of implementing a disaster recovery program which would mitigate this risk.

A cyber security incident could have a negative effect on our business as we outsource a significant amount of the collection accounts with personal information electronically.

A security breach could have a detrimental effect on our business as we maintain a significant amount of personal information in our electronic files. A breach of our system or a leak of the personal information we maintain could leave us vulnerable to, among other things, loss of information and potential litigation each of which could have a material adverse effect on our business.

Our organizational documents and Delaware law may make it harder for us to be acquired without the consent and cooperation of our board of directors and management.

Several provisions of our organizational documents and Delaware law may deter or prevent a takeover attempt, including a takeover attempt in which the potential purchaser offers to pay a per share price greater than the current market price of our common stock. Under the terms of our certificate of incorporation, our board of directors has the authority, without further action by the stockholders, to issue shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof. The ability to issue shares of preferred stock could tend to discourage takeover or acquisition proposals not supported by our current board of directors. In addition, we are subject to Section 203 of the Delaware General Corporation Law, which restricts business combinations with some stockholders once the stockholder acquires 15% or more of our common stock.

We have adopted a stockholder rights plan which could make it more difficult for a third-party to acquire us.

We adopted a stockholder rights plan which is intended to protect us from efforts to obtain control of us that are inconsistent with our best interests and the interests of our stockholders. The rights will be exercisable ten days following the earlier of the public announcement that a stockholder has acquired 20% or more of our common stock without board approval or the announcement of a tender offer which results in the ownership of 20% or more of our common stock. If the rights become exercisable, all rights holders (other than the person triggering the rights) will be entitled to acquire our securities at a substantial discount. Because the rights may substantially dilute the stock ownership of a person or group attempting to take over the Company without the approval of our board of directors, the rights plan could make it more difficult for a third-party to acquire us or a significant percentage of our outstanding capital stock, without first negotiating with the board of directors.

 

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Future sales of our common stock by our affiliates or other stockholders may depress our stock price.

Sales of a substantial number of shares of our common stock in the public market could cause a decrease in the market price of our common stock. We had 12,070,373 shares of common stock issued and outstanding as of December 8, 2015. Of these shares, 4,196,806 are owned by our affiliates. In addition, options to purchase 1,043,566 shares of our common stock were outstanding as of September 30, 2015, of which 860,891 were exercisable. We may also issue additional shares in connection with our business and may grant additional stock options or restricted shares to our employees, officers, directors and consultants under our present or future equity compensation plans or we may issue warrants to third parties outside of such plans. As of September 30, 2015, there were 1,511,179 shares available for such purpose with such shares available under the 2012 Stock Option and Performance Award Plan. If a significant portion of these shares were sold in the public market, the market value of our common stock could be adversely affected.

We have the ability to issue preferred shares, warrants, convertible debt and other securities without stockholder approval which could dilute the relative ownership interest of current stockholders and adversely affect our share price.

Future sales of our equity-related securities in the public market, including sales of our common stock pursuant to our shelf-registration statement, could adversely affect the trading price of our common stock and our ability to raise funds in new stock offerings. Our common shares may be subordinate to classes of preferred shares issued in the future in the payment of dividends and other distributions made with respect to common shares, including distributions upon liquidation or dissolution. Our certificate of incorporation permits our board of directors to issue preferred shares without first obtaining stockholder approval. If we issued preferred shares, these additional securities may have dividend or liquidation preferences senior to our common shares. If we issue convertible preferred shares, a subsequent conversion may dilute the current common stockholders’ interest. We have similar abilities to issue convertible debt, warrants and other equity securities.

Climate change and related regulatory responses may adversely impact our business.

Climate change as a result of emissions of greenhouse gases is a significant topic of discussion and may generate federal and other regulatory responses in the near future, including the imposition of a so-called “cap and trade” system. It is impracticable to predict with any certainty the impact on our business of climate change or the regulatory responses to it, although we recognize that they could be significant. The most direct impact is likely to be an increase in energy costs, which would increase slightly our operating costs, primarily through increased utility and transportations costs. In addition, increased energy costs could impact consumers and their ability to incur and repay indebtedness. However, it is too soon for us to predict with any certainty the ultimate impact, either directionally or quantitatively, of climate change and related regulatory responses.

Our quarterly operating results may fluctuate and cause our stock price to decline.

Because of the nature of our business, our quarterly operating results may fluctuate, which may adversely affect the market price of our common stock. Our results may fluctuate as a result of any of the following:

 

   

the timing and amount of collections on our consumer receivable portfolios;

 

   

our inability to identify and acquire additional consumer receivable portfolios;

 

   

a decline in the estimated future value of our consumer receivable portfolio recoveries;

 

   

increases in operating expenses associated with the growth of our operations;

 

   

general and economic market conditions; and

 

   

Prices we are willing to pay for consumer receivable portfolios.

 

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Item 1B. Unresolved Staff Comments.

None

 

Item 2. Properties

Our executive and administrative offices are located in Englewood Cliffs, New Jersey, where we lease approximately 14,700 square feet of general office space for approximately $21,000 per month, plus utilities. The lease was renewed September 1, 2015 and expires on August 31, 2020.

Our office in Houston, Texas occupies approximately 2,600 square feet of general office space for approximately $4,000 per month. The lease expires on August 18, 2016.

Our New York City office occupies approximately 6,600 square feet for approximately $19,000 per month, including electricity. The lease expires in September 2017.

Our Conshohocken, Pennsylvania office occupies approximately 5,800 square feet for approximately $14,000 per month, plus utilities. The lease expires in January 2020.

We believe that our existing facilities are adequate for our current needs.

 

Item 3. Legal Proceedings.

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

 

Item 4. Mine Safety Disclosures.

Not applicable.

 

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PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our common stock is quoted on the NASDAQ Global Select Market under the symbol “ASFI.” On December 8, 2015 there were 15 holders of record of our common stock. High and low sales prices of our common stock since October 1, 2013 as reported by NASDAQ are set forth below (such quotations reflect inter-dealer prices without retail markup, markdown, or commission, and may not necessarily represent actual transactions):

 

     High      Low  

 2014

     

October 1, 2013 to December 31, 2013

   $ 8.85       $ 7.94   

January 1, 2014 to March 31, 2014

     8.59         7.99   

April 1, 2014 to June 30, 2014

     8.77         8.03   

July 1, 2014 to September 30, 2014

     8.51         8.11   

 2015

     

October 1, 2014 to December 31, 2014

   $ 9.50       $ 7.81   

January 1, 2015 to March 31, 2015

     8.94         8.02   

April 1, 2015 to June 30, 2015

     8.40         8.00   

July 1, 2015 to September 30, 2015

     9.38         7.57   

Dividends

Future dividend payments will be at the discretion of our board of directors and will depend upon our financial condition, operating results, capital requirements and any other factors our board of directors deems relevant. In addition, our agreements with our lender may, from time to time, restrict our ability to pay dividends. Currently there are no restrictions in place. The Company did not declare any dividends for fiscal years 2015 and 2014.

Share Repurchase Program

We have a share repurchase program that authorizes us to purchase up to $15.0 million of shares of our common stock, which is effective through December 31, 2015. The share repurchases may occur from time-to-time through open market purchases at prevailing market prices or through privately negotiated transactions as permitted by securities laws and other legal requirements. The following table sets forth information regarding our repurchases or acquisitions of common stock during the fiscal year ended September 30, 2015.

 

Period

   Total
Number of
Shares
(or Units)
Purchased
     Average
Price Paid
per Share
(or Unit)
     Total Number
of Shares
Purchased as
Part
of Publicly
Announced
Plans
or Programs
     Maximum Number
(or Approximate
Dollar Value)
of Shares that
May Yet Be
Purchased
Under the Plans
or Programs(1)
 

Repurchases from October 1, 2014 through September 30, 2015

     201,800       $ 8.66         201,800       $ 13,249,000   

 

(1) On August 17, 2015, our board of directors authorized the repurchase of up to $15.0 million of shares of our common stock through a non-discretionary stock repurchase plan.

 

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Performance Graph

Notwithstanding anything to the contrary set forth in any of our filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, that might incorporate by reference this Form 10-K, in whole or in part, the following Performance Graph shall not be incorporated by reference into any such filings.

Comparison of 5 Year Cumulative Total Return

Assumes Initial Investment of $100

2015

 

LOGO

 

      2010      2011      2012      2013      2014      2015  

ASTA FUNDING, INC.

     100.00         107.34         125.44         119.76         110.60         114.91   

NASDAQ MARKET INDEX

     100.00         102.96         134.39         165.00         199.01         206.96   

PEER GROUP INDEX

     100.00         98.64         152.07         253.97         226.70         219.14   

PEER GROUP INDEX + ASTA
FUNDING, INC.

     100.00         99.18         150.43         246.31         220.06         213.16   

 

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Item 6. Selected Financial Data

The following tables set forth a summary of our consolidated financial data as of and for the five fiscal years ended September 30, 2015. The selected financial data for the five fiscal years ended September 30, 2015, have been derived from our audited consolidated financial statements. The selected financial data presented below should be read in conjunction with our consolidated financial statements, related notes, and other financial information included elsewhere in this report, including the information set forth in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Certain items in prior years’ information have been reclassified to conform to the current year’s presentation.

 

     Year Ended September 30,  
      (In thousands, except per share data)  
      2015      2014      2013      2012      2011  

Income Statement Data:

              

Finance income, net

   $ 20,757       $ 19,865       $ 31,762       $ 40,803       $ 44,056   

Personal injury claims income

     8,482         7,134         6,438         1,647           

Unrealized gain on structured settlements

     7,146         2,840                           

Interest income on structured settlements

     4,672         2,368                           

Disability fee income

     1,434         378         2                   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

     42,491         32,585         38,202         42,450         44,056   

Forgiveness of non-recourse debt

             26,101                           

Other income

     1,687         1,399         1,609         2,256         557   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     44,178         60,085         39,811         44,706         44,613   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Expenses:

              

General and administrative expenses

     36,933         28,192         24,212         23,640         21,807   

Interest expense

     2,395         1,260         1,300         2,539         3,016   

Impairments of consumer receivables acquired for liquidation

             19,591         10,990         1,771         2,066   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     39,328         49,043         36,502         27,950         26,889   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income before income tax

     4,850         11,042         3,309         16,756         17,724   

Income tax expense

     2,122         4,613         894         6,797         7,143   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income

     2,728         6,429         2,415         9,959         10,581   

Less: net income attributable to non-controlling interests

     712         528         406         31           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income attributable to Asta Funding, Inc.

   $ 2,016       $ 5,901       $ 2,009       $ 9,928       $ 10,581   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Basic net income per share

   $ 0.15       $ 0.45       $ 0.16       $ 0.71       $ 0.72   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Diluted net income per share

   $ 0.15       $ 0.45       $ 0.15       $ 0.69       $ 0.71   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

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Table of Contents
     (In millions)  
     2015     2014     2013     2012     2011  

Other Financial Data (Unaudited):

          

For the Year ended September 30

          

Cash collections

   $ 36.7      $ 40.2      $ 51.7      $ 70.0      $ 81.2   

Portfolio purchases, at cost

     2.1        5.1        3.3        2.5        7.5   

Portfolio purchases, at face value

     28.0        478.9        53.5        6.0        19.5   

Return on average assets

     1.0 %     4.7 %(2)     1.2 %     4.2 %     4.1 %

Return on average stockholders’ equity(1)

     1.3 %     5.7 %(2)     1.6 %     5.9 %     6.3 %

Dividends declared per share

   $ 0.00      $ 0.00      $ 0.08      $ 0.08      $ 0.08   

At September 30,

          

Total assets

     237.4        217.1        211.5        237.6        252.6   

Total debt and other liabilities

     56.1        35.8        38.2        64.6        75.1   

Total stockholders’ equity

     181.3        181.3        173.3        173.0        177.5   

Inception to date — September 30,

          

Cumulative aggregate purchases, at face value

     32,465.3        32,437.3        31,958.3        31,904.9        31,898.9   

 

(1) The return on average assets is computed by dividing net income by average total assets for the fiscal year. The return on average stockholders’ equity is computed by dividing net income by the average stockholders’ equity for the fiscal year. Both ratios have been computed using beginning and period-end balances.

 

(2) Return calculations in fiscal year 2014 were significantly improved by the $26.1 million loan forgiveness recorded in that fiscal year.

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.

Caution Regarding Forward-Looking Statements

This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties. All forward-looking statements included in this Annual Report on Form 10-K are based on information available to us on the date hereof, and except as required by law, we assume no obligation to update any such forward-looking statements. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the caption “Risk Factors” contained in this report and elsewhere herein. The following should be read in conjunction with our annual financial statements contained elsewhere in this report.

Overview

We are engaged in the businesses of acquiring, managing, servicing and recovering on portfolios of consumer receivables, and, through Pegasus, funding of personal injury claims, through CBC, investing in structured settlements and through GAR Disability Advocates, assisting claimants in the process of disability and social security claims.

Consumer Receivables

The consumer receivable portfolios generally consist of one or more of the following types of consumer receivables:

 

   

charged-off receivables — accounts that have been written-off by the originators and may have been previously serviced by collection agencies; and

 

   

semi-performing receivables — accounts where the debtor is making partial or irregular monthly payments, but the accounts may have been written-off by the originators.

We acquire these consumer receivable portfolios at a significant discount to the amount actually owed by the borrowers. We acquire these portfolios after a qualitative and quantitative analysis of the underlying receivables and calculate the purchase price so that our estimated cash flow offers us an adequate return on our investment after servicing expenses. After purchasing a portfolio, we actively monitor its performance and review and adjust our collection and servicing strategies accordingly.

We purchase receivables from credit grantors and others through privately negotiated direct sales, brokered transactions and auctions in which sellers of receivables seek bids from several pre-qualified debt purchasers. We pursue new acquisitions of consumer receivable portfolios on an ongoing basis through:

 

   

our relationships with industry participants, financial institutions, collection agencies, investors and our financing sources;

 

   

brokers who specialize in the sale of consumer receivable portfolios; and

 

   

other sources.

Litigation Funding Business

On December 28, 2011, the Company purchased an 80% interest in Pegasus. Pegasus Legal Funding (“PLF”) holds the other 20% interest. The Company is committed to loan up to $22.4 million per year to Pegasus for a term of five (5) years, all of which is secured by the assets of Pegasus. These loans will provide financing for the personal injury litigation claims and operating expenses of Pegasus.

The Pegasus business model entails the outlay of non-recourse advances to a plaintiff with an agreed-upon fee structure to be repaid from the plaintiff’s recovery. Typically, such advances to a plaintiff approximate 10-20% of the anticipated recovery. These funds are generally used by the plaintiff for a variety of urgent necessities, ranging from surgical procedures to everyday living expenses.

 

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Pegasus’s profits and losses are distributed at 80% to the Company and 20% to PLF. These distributions will be made only after the repayment of Fund Pegasus’ principal amount loaned, plus an amount equal to advances for overhead expenses. While the overall returns to Pegasus are currently estimated to be in excess of 20% per annum, the Company has reserved the right to terminate Pegasus if returns to the Company for any rolling twelve (12) month period, after the first year of operations, do not exceed 15%. As of September 30, 2015, the Company had a net invested balance of approximately $36.7 million in personal injury cases. During the fiscal year ended September 30, 2015, distributions of $1.0 million were made to PLF.

On May 18, 2012, we announced the formation of BP Case Management, LLC (“Balance Point”), a joint venture (the “Venture”) with California-based Balance Point Divorce Funding, LLC (“Balance Point Management”). The Venture provides non-recourse funding to a spouse in a matrimonial action where the marital assets exceed $2,000,000. Such funds can be used for legal fees, expert costs and necessary living expenses. The Venture receives an agreed percentage of the proceeds received by such spouse upon final resolution of the case. Balance Point’s profits and losses will be distributed 60% to us and 40% to Balance Point Management, after the return of our investment on a case by case basis and after a 15% preferred return to us. Our initial investment in the Venture consists of up to $15 million to fund divorce claims to be fulfilled in three tranches of $5 million each. Each investment tranche is contingent upon a minimum 15% cash-on-cash return to us. At our option, there could be an additional $35 million investment in divorce claims in tranches of $10 million, $10 million, and $15 million, also with a 15% preferred return and such investments may even exceed a total of $50 million, at our sole option. Should the preferred return be less than 15% on any $5 million tranche, the 60%/40% profit and loss split would be adjusted to reflect our priority to a 15% preferred return. As of September 30, 2015, we have invested $2.6 million, net of reserve charges, in cases managed by this Venture.

In 2012, we provided a $1.0 million revolving line of credit to partially fund Balance Point Management’s operations with such loan bearing interest at the prevailing prime rate with an initial term of twenty four months. In September 2014, the agreement was revised to extend the term of the loan to August 2016, increase the credit line to $1.5 million and include a personal guarantee of the principal of Balance Point management. The revolving line of credit is collateralized by Balance Point management’s profits share in the venture and other assets. At September 30, 2015, the balance in the revolving line of credit was approximately $1.5 million.

Structured Settlement Business

On December 31, 2013, the Company acquired an 80% ownership interest in CBC Settlement Funding, LLC (“CBC”) and its affiliate, CBC Management Services, LLC for approximately $5.9 million. In addition, the Company will provide financing to CBC of up to $5 million.

CBC purchases periodic payments under structured settlements and annuity policies from individuals in exchange for a lump sum payment. The operating principals of CBC, William J. Skyrm, Esq. and James Goodman, have over 30 years combined experience in the structured settlements industry and continue to serve as management of CBC.

CBC has a portfolio of structured settlements which is financed by approximately $51.6 million of debt, including a $25.0 million line of credit from an institutional source (approximately $20.4 million of the line was unused as of September 30, 2015) and notes issued by CBC to third party investors. On September 15, 2015, CBC entered into the Ninth Amendment, increasing the line from $22.0 million to $25.0 million. and the interest rate floor was decreased from 4.75% to 4.1 %. At September 30, 2015, the line of credit had an expiration date of March 1, 2017 and the Company had an invested value of $64.6 million in structured settlements.

Disability Advocacy Business

GAR Disability Advocates is a social security disability advocacy group, which obtains and represents individuals in their claims for social security disability and supplemental security income benefits from the Social Security Administration.

 

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Critical Accounting Policies

We may account for our investments in consumer receivable portfolios, using either:

 

   

The interest method; or

 

   

The cost recovery method.

As we believe our extensive liquidating experience in certain asset classes such as distressed credit card receivables, consumer loan receivables and mixed consumer receivables has matured, we use the interest method when we believe we can reasonably estimate the timing of the cash flows. In those situations where we diversify our acquisitions into other asset classes in which we do not possess the same expertise or history, or we cannot reasonably estimate the timing of the cash flows, we utilize the cost recovery method of accounting for those portfolios of receivables.

The Company accounts for certain of its investments in finance receivables using the guidance of FASB Accounting Standards Codification (“ASC”), Receivables — Loans and Debt Securities Acquired with Deteriorated Credit Quality, (“ASC 310”). Under the guidance of ASC 310, static pools of accounts are established. These pools are aggregated based on certain common risk criteria. Each static pool is recorded at cost and is accounted for as a single unit for the recognition of income, principal payments and loss provision. 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 under 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 and once a static pool is established for a quarter, individual receivable accounts are not added to the pool (unless replaced by the seller) or removed from the pool (unless sold or returned to the seller).

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

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

CBC purchases periodic payments under structured settlements and annuity policies from individuals in exchange for a lump sum payment. The Company elected to carry structured settlements at fair value. Unearned income on structured settlements is recognized as interest income using the effective interest method over the life of the related settlement. Changes in fair value are recorded in unrealized gain (loss) in structured settlements in our statements of income.

The Company recognizes revenue for GAR Disability Advocates when cases close and fees are collected.

 

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Table of Contents

Results of Operations

The following discussion of our operations and financial condition should be read in conjunction with our financial statements and notes thereto included elsewhere in this report. In these discussions, most percentages and dollar amounts have been rounded to aid presentation. As a result, all such figures are approximations.

 

     Years Ended September 30,  
     2015     2014     2013  

Finance income, net

     48.9 %     60.9 %     83.1 %

Personal injury claim income

     20.0 %     21.9 %     16.9 %

Unrealized gain on structured settlements

     16.8 %     8.7 %     %

Interest income on structured settlements

     11.0 %     7.3    

Disability fee income

     3.3 %     1.2 %     %
  

 

 

   

 

 

   

 

 

 

Total revenues

     100.0 %     100.0 %     100.0 %

Debt forgiveness

     %     80.1 %     %

Other income

     3.9 %     4.3 %     4.2 %
  

 

 

   

 

 

   

 

 

 
     103.9 %     184.4 %     104.2 %
  

 

 

   

 

 

   

 

 

 

General and administrative expenses

     86.9 %     86.5 %     63.4 %

Interest expense

     5.6 %     3.9 %     3.4 %

Impairments of consumer receivables acquired for liquidation

     %     60.1 %     28.7 %
  

 

 

   

 

 

   

 

 

 
     92.5 %     150.5 %     95.5 %
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     11.4 %     33.9 %     8.7 %

Income tax expense

     5.0 %     14.2 %     2.3 %
  

 

 

   

 

 

   

 

 

 

Net income

     6.4 %     19.7 %     6.4 %

Less: net income attributable to non-controlling interest

     1.7 %     1.6 %     1.1 %
  

 

 

   

 

 

   

 

 

 

Net income attributable to Asta Funding, Inc.

     4.7 %     18.1 %     5.3 %
  

 

 

   

 

 

   

 

 

 

Year Ended September 30, 2015 Compared to the Year Ended September 30, 2014

Finance income.    For the fiscal year ended September 30, 2015 (“fiscal year 2015”), finance income from consumer receivables increased $1.0 million, or 5.1%, to $20.8 million from $19.8 million for the fiscal year ended September 30, 2014 (“fiscal year 2014”) , reflecting increased zero basis income. During fiscal year 2015, we acquired $28.0 million in face value of new portfolios at a cost of $2.1 million as compared to $478.9 million of face value portfolios at a cost of approximately $5.1 million, during fiscal year 2014. The portfolios purchased during fiscal year 2015 are accounted for on the cost recovery method.

Net collections decreased $3.5 million, or 8.7%, to $36.7 million for fiscal year 2015 from $40.2 million for fiscal year 2014. During fiscal year 2015, gross collections decreased 17.2% to $56.2 million from $67.9 million for fiscal year 2014, reflecting the lower level of purchases. Commissions and fees associated with gross collections from our third party collection agencies and attorneys decreased $8.2 million, or 29.7% as compared to the same period in the prior year and averaged 34.8% of collections for fiscal year 2015 as compared to 40.9% in the same prior year period The lower rate is the result of lower commissioned collections and lower search costs in the current year.

Personal injury claims income.    Personal injury claims income increased $1.4 million or 19.7% to $8.5 million from the prior year level of $7.1 million, as investment in personal injury claims in fiscal years 2013 and 2014 translated into more closed cases in fiscal year 2015 than in the prior year (cases take an average of 18 months to mature), in addition to increased level of investment in personal injury claims.

 

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Structured settlement income of $11.8 million, which includes $7.1 million of unrealized gains and $4.7 million of interest income, is included in the Company’s results in fiscal year 2015, compared to $5.2 million, which includes $2.8 million of unrealized gains and $2.4 million of interest income in fiscal year 2014. This increase in income is the result of increased investments in structured settlements in the current fiscal year in addition, fiscal year 2015 was the first full year of results included as CBC Settlement Funding, LLC was acquired on December 31, 2013. Unrealized gains on structured settlements is comprised of both unrealized gains resulting from fair market valuation at the date of acquisition of the structured settlements and the subsequent fair value adjustments resulting from the change in the discount rate. Of the $7.1 million of unrealized gains recognized in the fiscal year ended September 30, 2015, approximately $7.1 million is due to day one gains on new structured settlements financed during the period, $1.8 million due to a change in the discount rate, offset by a decrease of $1.8 million in realized gains recognized as realized interest income on structured settlements during the period. There were no other changes in assumptions during the period.

Disability Fee income of $1.4 million in fiscal year 2015 compared to $0.4 million in fiscal year 2014 is the result of a significant increase in manpower in the current fiscal year, translating into a significant increase in closed cases.

Forgiveness of debt is the result of the Settlement Agreement with the Bank of Montreal (“BMO”), reached in August of fiscal year 2013. The Company made the final payment of the Remaining Amount in June 2014. This was accompanied by a one-time $26.1 million forgiveness of debt.

Other income.    The following table summarizes other income for the years ended September 30, 2015 and 2014:

 

     2015      2014  

Interest and dividend income

   $ 1,223,000       $ 1,315,000   

Realized gains

     369,000         43,000   

Other

     95,000         41,000   
  

 

 

    

 

 

 
   $ 1,687,000       $ 1,399,000   
  

 

 

    

 

 

 

General and administrative expenses.    For the year ended September 30, 2015, general and administrative expenses increased $8.7 million, or 31.0%, to $36.9 million from $28.2 million for the year ended September 30, 2014. The increase in General and Administrative expenses is related to the growth of GAR Disability Advocates, $4.2 million and the full year inclusion of CBC Settlement Funding, LLC, $2.2 million. In addition, there was an increase of bad debt expense at Pegasus Funding, LLC, $2.1million.

Interest expense.    For the fiscal year ended September 30, 2015, interest expense increased $1.1 million to $2.4 million from $1.3 million in the fiscal year ended September 30, 2014. The increase is due to the growth of CBC and completion of CBC’s fourth private placement of approximately $20.9 million of fixed rate asset-backed notes in November 2014, as a result of the expanding structured settlement business. Additionally, we recognized 12 months of interest expense in the current fiscal year compared to only nine months in fiscal year 2014.

Impairments – There were no impairments in the fiscal ended September 30, 2015 as compared to $19.5 million recorded during the fiscal year ended September 30, 2014. The $19.6 million of impairments in the fiscal year 2014 was comprised of $14.1 million for the Great Seneca Portfolio, $4.8 million for the medical receivables portfolio and $0.7 million for other portfolios.

The Great Seneca portfolio was purchased in March 2007. The portfolio was purchased on the secondary market and as such accounts included in the portfolio were 5 to 6 years old at the time of purchase. Purchasing portfolios on the secondary market was not a normal course of action for us at the time, as we primarily purchased accounts from the originator of the accounts. This action of purchasing from the secondary market played a role in the determination in March 2008 that we could no longer reasonably forecast cash collections and therefore switched the portfolio to the cost recovery method. Based upon the age of the Great Seneca portfolio in June

 

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2014 (over seven years from our purchase date, and 12 to 13 years from the inception of the portfolio) the portfolio was clearly on the outer bounds of our collection forecasts. Based upon the significantly reduced collection forecast and the lower valuation of the judgments as they age, we determined an impairment of $14 million was necessary in June 2014.

The medical receivables were related to a market that we are no longer in. We exited the market in terms of financing such receivables in 2012 and impaired the portfolio and switched to the cost recovery method at that time. The collections continued to deteriorate and fell short of expectations by a significant margin and, therefore, we impaired the remaining value of the portfolio of $4.8 million in June 2014.

Net income before taxes — Consumer Receivables.    Net income before taxes decreased $5.1 million, from $18.9 million for the fiscal year ended September 30, 2014 as compared to $13.8 million for the fiscal year ended September 30, 2015, primarily due to BMO debt forgiveness in fiscal year 2014, partially offset by reduced impairments in the current fiscal year.

Net income before taxes — Personal Injury Claims.    Net income before taxes decreased $2.2 million to $0.1 million in fiscal year 2015 from $2.3 million for the prior fiscal year, as increased revenues, $1.3 million, were offset by the increase in bad debt reserves, $3.0 million.

Net income before taxes — Structured Settlements.    Net income before taxes was $3.5 million in fiscal year 2015 compared to $0.4 million in fiscal year 2014. The increase is due to the continued growth in the investment of the structured settlements. Additionally, we recognized 12 months of net income before taxes in the current fiscal year versus nine months in fiscal year 2014.

Net loss before taxes — GAR Disability Advocates.    Net loss before taxes was $5.8 million in the 2015 fiscal year compared to a net loss of $2.7 million in the same prior year period, reflecting increased start-up costs in the current fiscal year. Salaries increased by $1.9 million and marketing expense increased by $1.4 million compared to the prior fiscal year.

Income tax expense.    Income tax expense of $2.1 million recorded for fiscal year 2015 consists of a $7.4 million current income tax expense and a $5.3 million deferred income tax benefit. Income tax expense was lower primarily due to lower pre-tax income, significantly influenced by the $26.1 million of debt forgiveness in the prior fiscal year. In fiscal year 2014, income tax expense of $4.6 million consisted of a current income tax expense of $4.1 million and a $0.5 million deferred income tax expense.

Net income.    For the year ended September 30, 2015, net income decreased $3.7 million to $2.7 million from $6.4 million for the year ended September 30, 2014, primarily reflecting the forgiveness of debt of $26.1 million in the prior fiscal year, in addition to higher general and administrative expenses, $9.1 million, in the current fiscal year, partially offset by the impairments of $19.6 million in the prior fiscal year.

Income attributable to non-controlling interest.    Income to non-controlling interests increased $184,000 from $528,000 for the year ended September 30, 2014 to $712,000 for the year ended September 30, 2015, due to the improvement in the results of CBC.

Net income attributable to Asta Funding, Inc.    For the year ended September 30, 2015, net income attributable to Asta Funding, Inc. decreased $3.9 million to $2.0 million from $5.9 million for the year ended September 30, 2014, primarily reflecting the forgiveness of debt of $26.1 million in the prior fiscal year, plus increased general and administrative expenses, $9.1 million, partially offset by decreased impairments, $19.6 million. Net income per diluted share for the year ended September 30, 2015 decreased to $0.17 per diluted share from $0.45 per diluted share for the year ended September 30, 2014.

 

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The following tables detail non-controlling interest for the year ended September 30, 2015:

 

     For the Year Ended September 30, 2015  
     Pegasus Funding
LLC
    CBC
Settlement
Funding, LLC
     Total Non-
Controlling
Interests
 

Balance, beginning of period

   $ (783,000 )   $ 70,000       $ (713,000

Non-controlling interest

     11,000        701,000         712,000   

Distributions

     (996,000 )            (996,000 )
  

 

 

   

 

 

    

 

 

 

Balance, end of period

   $ (1,768,000 )   $ 771,000       $ (997,000 )
  

 

 

   

 

 

    

 

 

 

The non-controlling interests are related to Pegasus and CBC. The distribution to non-controlling interests is the distributions made to the 20% non-controlling interest owners of Pegasus Funding, LLC (“Pegasus Funding”). The distribution, based upon the profitability of the closed personal injury cases using the formula included in the operating agreement signed December 28, 2011, as revised, are calculated with a 20% deduction for overhead expenses of the Pegasus Funding operation unit and a 20% write off of the personal injury cases deemed to be lost. The 20% write off amount is deducted directly from the distribution amount. Distributions have been greater than the net income attributable to Asta Funding, primarily due to bad debt reserves reducing the net income attributable to Asta Funding, but not specifically factored into the formula to determine the distributions to non-controlling interest owners based on the operating agreement. Ultimately, this timing difference will reverse when personal injury cases are actually written-off. No distributions have been made to CBC.

Year Ended September 30, 2014 Compared to the Year Ended September 30, 2013

Finance income.    For the fiscal year ended September 30, 2014, finance income from consumer receivables decreased $12.0 million, or 37.5%, to $19.8 million from $31.8 million for the fiscal year ended September 30, 2013 (“fiscal year 2013”). The decrease is primarily due to the lower level of portfolio purchases over the last four years, and the reduction of zero based income. Zero based income decreased $5.8 million, from $25.7 million in the year 2013 to $19.8 million in the year 2014. Effective October 1, 2013 the Company transferred the remaining $1.3 million of interest method portfolios to the cost recovery method. During fiscal year 2014, we acquired $478.9 million in face value of new portfolios at a cost of $5.1 million as compared to $53.5 million of face value portfolios at a cost of approximately $3.3 million, during fiscal year 2013.

Net collections decreased $14.0 million, or 25.8%, to $40.2 million for fiscal year 2014, from $54.1 million for fiscal year 2013. During fiscal year 2014, gross collections decreased 20.6% to $67.9 million from $85.5 million for fiscal year 2013, reflecting the lower level of purchases over the last three years. Commissions and fees associated with gross collections from our third party collection agencies and attorneys decreased $3.7 million, or 11.7% as compared to the same period in the prior year and averaged 40.9% of collections for fiscal year 2014 as compared to 36.7% in the same prior year period. The higher rate was the result of higher collections (of higher commissioned) out-of-statute paper coupled with increased asset search costs in the current fiscal year.

As we switched to the cost recovery method on the current inventory of portfolios, there were no accretable yield adjustments recorded during the fiscal year ended September 30, 2014. Accretable yield adjustments were $0.6 million in fiscal year 2013.

Personal injury claims income.    Personal injury claims income increased $0.7 million or 10.8% to $7.1 million from the prior year level of $6.4 million, as investment in personal injury claims in fiscal years 2012 and 2013 translated into more closed cases in fiscal year 2014 than in the prior year (cases take an average of 18 months to mature).

Structured settlement income of $5.2 million, which includes $2.8 million of unrealized gains and $2.4 million of interest income, is included in the Company’s results for the first time with no comparative results in the prior year.

 

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Disability fee income Disability fee income amounted to $0.4 million in fiscal year 2014. Fiscal year 2013 disability fee income was immaterial for the start up operation, which included only five months of results.

Forgiveness of debt is the result of the Settlement Agreement with the Bank of Montreal (“BMO”), reached in August of fiscal year 2013. The Company made the final payment of the Remaining Amount in June 2014. The Company is entitled to 100% of the next $16.9 million of collections on the Portfolio Purchase, at which time collections will be split, with the Bank of Montreal on a 70%/ 30% distribution, with 70% being retained by the Company.

Other income.    The following table summarizes other income for the years ended September 30, 2014 and 2013:

 

     2014      2013  

Interest and dividend income

   $ 1,315,000       $ 1,583,000   

Realized gains (losses)

     43,000         (27,000

Other

     41,000         53,000   
  

 

 

    

 

 

 
   $ 1,399,000       $ 1,609,000   
  

 

 

    

 

 

 

General and administrative expenses.    For the year ended September 30, 2014, general and administrative expenses increased $4.0 million, or 16.4%, to $28.2 million from $24.2 million for the year ended September 30, 2013. The increase is due primarily to increased expenses related to the inclusion of CBC, $3.4 million, and the increased start-up expenses of GAR Disability Advocates, $1.9 million. CBC is included in the consolidated results of the Company for the first time in fiscal year 2014 and GAR Disability Advocates includes a full year of results during fiscal year 2014 as compared to approximately five months during fiscal year 2013. Offsetting these increases, costs associated with the collection business decreased 18.6% from fiscal year 2013.

Interest expense.    For the fiscal year ended September 30, 2014, interest expense was essentially flat as compared to the fiscal year ended September 30, 2013. The interest expense incurred during fiscal year 2014 was primarily from CBC. Interest expense from the consumer receivables business was immaterial during fiscal year 2014, as the Company signed a Settlement Agreement with BMO in August 2013 with a minimal interest rate and the final payment made in June 2014. The interest expense in fiscal year 2013 was primarily related to the Receivables Financing Agreement (“Receivables Financing Agreement”) with BMO, which was in place when the Settlement Agreement was signed.

Impairments.    We recorded impairments of $19.6 million during the year ended September 30, 2014, of which $14.1 million was recorded on the Great Seneca portfolio (“the Portfolio Purchase”) as projected collections continued to deteriorate. Approximately $4.8 million of the impairment was related to the medical receivable asset class. Impairments of $11.0 million were recorded for the year ended September 30, 2013, of which $10.1 million was recorded on the Portfolio Purchase.

The Great Seneca portfolio was purchased in March 2007. The portfolio was purchased on the secondary market and as such accounts included in the portfolio were 5 to 6 years old at the time of purchase. Purchasing portfolios on the secondary market was not a normal course of action for us at the time, as we primarily purchased accounts from the originator of the accounts. This action of purchasing from the secondary market played a role in the determination in March 2008 that we could no longer reasonably forecast cash collections and therefore switched the portfolio to the cost recovery method. Based upon the age of the Great Seneca portfolio in June 2014 (over seven years from our purchase date, and 12 to 13 years from the inception of the portfolio) the portfolio was clearly on the outer bounds of our collection forecasts. Based upon the significantly reduced collection forecast and the lower valuation of the judgments as they age, we determined an impairment of $14 million was necessary in June 2014.

The medical receivables were related to a market that we are no longer in. We exited the market in terms of financing such receivables in 2012 and impaired the portfolio and switched to the cost recovery method at that time. The collections continued to deteriorate and fell short of expectations by a significant margin and, therefore, we impaired the remaining value of the portfolio of $4.7 million in June 2014.

 

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Net income before taxes — Consumer Receivables.    Net income before taxes increased $8.8 million, from $10.1 million for the fiscal year ended September 30, 2013 as compared to $18.9 million for the fiscal year ended September 30, 2014, as the BMO debt forgiveness more than offset the negative impact of lower collections.

Net income before taxes — Personal Injury Claims.    Net income before taxes increased slightly to $2.3 million in fiscal year 2014 from $2.0 million for the prior fiscal year, as increased revenues were partially offset by higher salary expenses.

Net income before taxes — Structured Settlements.    Net income before taxes was $0.4 million in fiscal year 2014, with no corresponding data in the prior fiscal year.

Net loss before taxes — GAR Disability Advocates.    Net loss before taxes was $2.7 million in the 2014 fiscal year compared to a net loss of $1.2 million in the same prior year period, reflecting increased start-up costs in the current fiscal year. Salaries increased by $0.8 million and marketing expense increased by $0.7 million compared to the prior fiscal year.

Income tax expense.    Income tax expense of $4.6 million recorded for fiscal year 2014 consists of a $4.1 million current income tax expense and a $0.5 million deferred income tax expense. Income tax expense was higher primarily due to higher pre-tax income, significantly influenced by the $26.1 million of debt forgiveness. In fiscal year 2013, income tax expense of $0.8 million consisted of a current income tax expense of $0.9 million and a deferred income tax benefit of $0.1 million.

Net income.    For the year ended September 30, 2014, net income increased $ 4.0 million to $6.4 million from $2.4 million for the year ended September 30, 2013, primarily reflecting the forgiveness of debt of $26.1 million, offset by the impairments of $19.5 million and higher general and administrative expenses.

Income attributable to non-controlling interest.    Income to non-controlling interests increased $122,000 from $406,000 for the year ended September 30, 2013 to $528,000 for the year ended September 30, 2014, due to the improvement in the results of the joint venture Pegasus and the inclusion of CBC for the first time ($70,000) with no comparative results from fiscal year 2013.

Net income attributable to Asta Funding, Inc.    For the year ended September 30, 2014, net income attributable to Asta Funding, Inc. increased $3.9 million to $5.9 million from $2.0 million for the year ended September 30, 2013, primarily reflecting decreased total revenue, offset by the forgiveness of debt of $26.1 million, increased general and administrative expenses, increased impairments and income to non-controlling interests and higher income taxes. Net income per diluted share for the year ended September 30, 2014 increased to $0.45 per diluted share from $0.15 per diluted share for the year ended September 30, 2013.

The following tables detail non-controlling interest for the year ended September 30, 2014:

 

     For the Year Ended September 30, 2014  
     Pegasus Funding
LLC
    CBC
Settlement
Funding, LLC
     Total Non-
Controlling
Interests
 

Balance, beginning of period

   $ (184,000 )   $       $ (184,000

Non-controlling interest

     458,000        70,000         528,000   

Distributions

     (1,057,000 )            (1,057,000 )
  

 

 

   

 

 

    

 

 

 

Balance, end of period

   $ (783,000 )   $ 70,000       $ (713,000 )
  

 

 

   

 

 

    

 

 

 

The non-controlling interests are related to Pegasus and CBC. The distribution to non-controlling interests is the distributions made to the 20% non-controlling interest owners of Pegasus Funding, LLC (“Pegasus Funding”). The distribution, based upon the profitability of the closed personal injury cases using the formula included in the operating agreement signed December 28, 2011, as revised, are calculated with a 20% deduction for overhead expenses of the Pegasus Funding operation unit and a 20% write off of the personal injury cases deemed to be lost. The 20% write off amount is deducted directly from the distribution amount. Distributions have been greater than the net income attributable to Asta Funding, primarily due to bad debt reserves reducing

 

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the net income attributable to Asta Funding, but not specifically factored into the formula to determine the distributions to non-controlling interest owners based on the operating agreement. Ultimately, this timing difference will reverse when personal injury cases are actually written-off. No distributions have been made to CBC.

Liquidity and Capital Resources

Our primary source of cash from operations is collections on the receivable portfolios we have acquired and the funds generated from the Pegasus and CBC business segments. Our primary uses of cash include repayments of debt, our purchases of consumer receivable portfolios, interest payments, costs involved in the collections of consumer receivables, taxes and dividends, if approved. In the past, we relied significantly upon our lenders to provide the funds necessary for the purchase of consumer receivables acquired for liquidation.

Receivables Financing Agreement

In March 2007, Palisades XVI borrowed approximately $227 million under the Receivables Financing Agreement, as amended in July 2007, December 2007, May 2008, February 2009, October 2010 and August 2013 from BMO, in order to finance the Portfolio Purchase which had a purchase price of $300 million. The original term of the agreement was three years. This term was extended by each of the Second, Third, Fourth, Fifth Amendments and the most recent agreement signed in August 2013, discussed below.

Financing Agreement. The Settlement Agreement and Omnibus Amendment (“Settlement Agreement”) was in effect on August 7, 2013, Palisades XVI, a 100% owned bankruptcy remote subsidiary, entered into a Settlement Agreement with BMO as an amendment to the Receivables Financing Agreement. In consideration for a $15 million prepayment funded by the Company, BMO has agreed to significantly reduce minimum monthly collection requirements and the interest rate. If and when BMO were to receive the next $15 million of collections from the Portfolio Purchase, (the “Remaining Amount”) less certain credits for payments made prior to the consummation of the Settlement Agreement, the Company would be entitled to recover from future net collections the $15 million prepayment that it funded. Thereafter, BMO would have the right to receive 30% of future net collections. Upon repayment of the Remaining Amount to BMO, the Company would be released from the remaining contractual obligation of the Receivables Financing Agreement and the Settlement Agreement.

On June 3, 2014, Palisades XVI finished paying the Remaining Amount. The final principal payment of $2.9 million included a voluntary prepayment of $1.9 million provided from funds of the Company. Accordingly, Palisades XVI will be entitled to receive $16.9 million of future collections from the Portfolio Purchase before BMO is entitled to receive any payments with respect to its Income Interest. The Company estimated the Income Interest to be between $0 and $1.4 million. However, the Company believes that no amount would be incurred because of the continued deterioration of the collections from the portfolio purchase.

With the payment of the Remaining Amount and upon completion of the documents granting the Palisades XVI Income Interest, including a written confirmation from BMO that the obligation has been paid in full, Palisades XVI has been released from further debt obligations from the RFA. We have recorded as other income, forgiveness of non-recourse debt, in the amount of approximately $26.1 million, pre-tax in the third quarter of fiscal year 2014.

Bank Hapoalim B.M. (“Bank Hapoalim”) Line of Credit

On May 2, 2014, the Company obtained a $20 million line of credit facility from Bank Hapoalim, pursuant to a Loan Agreement (the “Loan Agreement”) among the Company and its subsidiary, Palisades Collection, LLC, as borrowers, and Bank Hapoalim, as agent and lender. The Loan Agreement provides for a $20.0 million committed line of credit and an accordion feature providing an increase in the line of credit of up to $30 million, at the discretion of the lenders. The facility is for a term of three years at an interest rate of LIBOR plus 275 basis points or prime, at the Company’s option. The Loan Agreement includes covenants that require the Company to maintain a minimum net worth of $150 million and pay an unused line fee. The facility is secured pursuant to a Security Agreement (“Security Agreement”) among the parties to the Loan Agreement. As of September 30, 2015, the Company had not used this facility.

 

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Personal Injury Claims

On December 28, 2011, we formed a joint venture Pegasus Funding, LLC (“Pegasus”) with Pegasus Legal Funding, LLC (“PLF”). Pegasus purchases interests in personal injury claims from claimants who are a party to personal injury litigation with the expectation of a settlement in the future. Pegasus advances to each claimant funds on a non-recourse basis at an agreed upon interest rate in anticipation of a future settlement. The interest purchased by Pegasus in each claim will consist of the right to receive from such claimant part of the proceeds or recoveries which such claimant receives by reason of a settlement, judgment or award with respect to such claimant’s claim. The profits from the joint venture are distributed based on the ownership percentage of the parties — Asta Funding, Inc. 80% and PLF, 20%.

Divorce Funding

On May 18, 2012, we formed BP Case Management, LLC (“BPCM), a joint venture with California-based Balance Point Divorce Funding, LLC (“BP Divorce Funding”). BPCM provides non-recourse funding to a spouse in a matrimonial action. The Company provides a $1.5 million revolving line of credit to partially fund BP Divorce Funding’s operations, with such loan bearing interest at the prevailing prime rate, with an initial term of twenty-four months. The revolving line of credit is collateralized by BP Divorce Funding’s profit share in BPCM and other assets. The term of the loan was to end in May 2014, but has been extended until August 2016.

Structured Settlements

On December 31, 2013, the Company acquired 80% ownership of CBC and its affiliate, CBC Management Services, LLC for approximately $5.9 million. At the closing, the operating principals of CBC, William J. Skyrm, Esq. and James Goodman, were each issued a 10% interest in CBC. In addition, the Company has agreed to provide financing to CBC of up to $5 million. Through the transaction we acquired debt that totaled $23 million consisting of $9.6 million of a revolving line of credit with a financial institution and $13.8 million of non-recourse notes issued by CBC’s subsidiaries. As of September 30, 2015, the debt approximated $51.6 million. On September 30, 2015, CBC completed its fifth private placement backed by structured settlements and fixed annuity payments. CBC issued through its subsidiary, BBRV, LLC, approximately $16.6 million of fixed rate asset-backed notes with a yield of 5.1%. On November 26, 2014, CBC announced the completion of its fourth private placement, backed by structured settlement and fixed annuity payments. CBC issued, through its subsidiary, BBR IV, LLC, approximately $20.8 million of fixed rate asset-backed notes with a yield of 5.4%. On March 1, 2015, CBC entered into the Ninth Amendment of the agreement with a new maturity date of March 1, 2017, increased the credit to $25.0 million and lowered the floor to 4.1%.

Cash Flow

As of September 30, 2015, our cash and cash equivalents decreased $4.4 million to $24.3 million, from $28.7 million at September 30, 2014. Although our cash flow remains strong, we have diversified some of our cash flow into other investments.

Net cash used in operating activities was $21.1 million during the fiscal year ended September 30, 2015, as compared to $2.1 million for the fiscal year ended September 30, 2014. The decrease is primarily due to no impairments in the current fiscal year compared to $19.6 million in fiscal year 2014. Net cash used in investing activities was $0.3 million during the fiscal year ended September 30, 2015, as compared to $1.0 million during the fiscal year ended September 30, 2014. The change in cash in investing activities is primarily due to increased investments in personal injury claims and other investments offset by decreased consumer receivable collections. Net cash provided by financing activities was $17.0 million during the fiscal year ended September 30, 2015, as compared to $3.3 million used in financing activities in the same 2014 period. The increase in net cash provided by financing activities was primarily due to an increase in net borrowings of CBC debt in the current fiscal year, partially offset by a pay down of non-recourse debt in the prior fiscal year.

Our cash requirements have been and will continue to be significant and include external financing to operate various lines of business. Significant requirements include investment in personal injury claims, investments in structured settlements, costs involved in the collections of consumer receivables, repayment of CBC debt and

 

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investment in consumer receivable portfolios, and, until the third quarter of fiscal year 2014, repayments under our non-recourse debt facilities. In addition, if approved by the board of directors, dividends are financed though operations. Acquisitions recently have been financed through cash flows from operating activities. We believe we will be less dependent on a credit facility (with the exception of CBC) in the short-term, as our cash flow from operations will be sufficient to invest in personal injury claims, purchase portfolios and finance the early stages of the disability advocacy business. Structured settlements are financed through the use of a credit line, warehouse facility and private placement financing.

We believe our available cash resources and expected cash flows from operations will be sufficient to fund operations for the next twelve months. We do not expect to incur any material capital expenditures during the next twelve months. We are cognizant of the current market fundamentals in the debt purchase and company acquisition markets which, because of significant supply and tight capital availability, could result in increased buying opportunities. The outcome of any future transaction(s) is subject to market conditions. In addition, due to these opportunities, we continue to seek opportunities with banking organizations and others on a possible financing loan facility.

Share Repurchase Program

On August 17, 2015, we announced the adoption of a Rule 10b5-1 plan under which we may repurchase our shares of common stock. On August 11, 2015, the Board of Directors of the Company approved the repurchase of up to $15.0 million of our common stock and authorized management of the Company to enter into a Rule 10b5-1 plan. The plan is effective through December 31, 2015. Through September 30, 2015, we purchased 201,800 shares at a cost of approximately $1,751,000. We anticipate that the cash used for the repurchase program will come primarily from current cash and from ongoing operating activities and the cash generated from such activities.

Contractual Obligations

The following table summarizes our contractual obligations in future fiscal years:

Payments Due By Period

 

     Total      Less Than
1  Year
     1-3 Years      3-5 Years      More Than
5  Years
 

Long Term Debt Obligations

   $ 46,988,000       $ 3,412,000       $ 6,259,000       $ 6,344,000       $ 30,973,000   

Operating Lease Obligations

     2,650,000         819,000         1,106,000         725,000         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 49,638,000       $ 4,231,000       $ 7,365,000       $ 7,069,000       $ 30,973,000   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Off-Balance Sheet Arrangements

As of September 30, 2015, we did not have any relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

 

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The following table shows the changes in finance receivables, including amounts paid to acquire new portfolios:

 

     Year Ended September 30,  
     2015     2014     2013     2012     2011
 
     (In millions)  

Balance at beginning of period

   $ 29.4      $ 64.3      $ 94.2      $ 122.7      $ 154.5   

Acquisitions of finance receivables, net of buybacks

     2.1        5.1        3.3        2.5        7.5   

Cash collections from customers applied to principal(1)

     (15.8 )     (20.4 )     (22.2 )     (29.1 )     (37.0 )

Cash collections represented by account sales applied to principal(1)

     (0.1 )     (0.1 )            (0.1 )     (0.2 )

Impairments/Portfolio write down

            (19.5 )     (11.0 )     (1.8 )     (2.1 )
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 15.6      $ 29.4      $ 64.3      $ 94.2      $ 122.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Cash collections applied to principal consists of cash collections less income recognized on finance receivables plus amounts received by us from the sale of consumer receivable portfolios to third parties.

Portfolio Purchases

 

     Year Ended September 30,  
      2015      2014      2013  
     (In millions)  

Aggregate Purchase Price

   $ 2.1       $ 5.1       $ 3.3   

Aggregate Portfolio Face Amount

     28.0         478.9         53.5   

The prices we pay for our consumer receivable portfolios are dependent on many criteria including the age of the portfolio, the number of third party collection agencies and attorneys that have been involved in the collection process and the geographical distribution of the portfolio. When we pay higher prices for portfolios which are performing or fresher, we believe it is not at the sacrifice of our expected returns. Price fluctuations for portfolio purchases from quarter to quarter or year to year are primarily indicative of the overall mix of the types of portfolios we are purchasing.

Schedule of Portfolios by Income Recognition Category

 

     September 30, 2015      September 30, 2014      September 30, 2013  
     Cost
Recovery
Portfolios
     Interest
Method
Portfolios
     Cost
Recovery
Portfolios
     Interest
Method
Portfolios
     Cost
Recovery
Portfolios
     Interest
Method
Portfolios
 
              (In millions)                

Original Purchase Price (at period end)

   $ 1,256.7       $       $ 1,254.6       $       $ 539.3       $ 710.3   

Cumulative Aggregate Managed Portfolios (at period end)

     32,465.3                 32,437.3                 15,102.4         16,855.9   

Receivable Carrying Value (at period end)

     15.6                 29.4                 51.1         13.1   

Finance Income Earned (for the respective period)

     20.8                 19.5                 4.5         27.3   

Total Cash Flows (for the respective period)

     36.7                 40.2                 25.2         28.8   

The original purchase price reflects what we paid for the receivables from 1998 through the end of the respective period. The cumulative aggregate managed portfolio balance is the original aggregate amount owed by the borrowers at the end of the respective period. Additional differences between year to year period end balances may result from the transfer of portfolios between the interest method and the cost recovery method. We

 

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purchase consumer receivables at substantial discounts from the face amount. We record finance income on our receivables under either the cost recovery or interest method. The receivable carrying value represents the current basis in the receivables after collections and amortization of the original price.

Collections Represented by Account Sales

 

Year

   Collections
Represented
By account
Sales
     Finance
Income
Recognized
 

2015

   $ 79,000       $ 77,000   

2014

     114,000         88,000   

2013

     2,448,000         2,015,000   

We do not anticipate collecting the majority of the purchased principal amounts. Accordingly, the difference between the carrying value of the portfolios and the gross receivables is not indicative of future finance income from these accounts acquired for liquidation. Since we purchased these accounts at significant discounts, we anticipate collecting only a portion of the face amounts.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (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. We are currently evaluating the impact this update will have on our consolidated financial statements as well as the expected adoption method.

In June 2014, the FASB issued ASU 2014-11, “Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.” The amendments in this ASU require two accounting changes. First, the amendments in this ASU change the accounting for repurchase-to maturity transactions to secured borrowing accounting. Second, for repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. This ASU also includes new disclosure requirements. The accounting changes in this Update are effective for public business entities for the first interim or annual period beginning after December 15, 2014. An entity is required to present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Earlier application for a public business entity is prohibited. The Company reviewed this ASU and determined that it did not have a material impact on its consolidated financial statements.

In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis,” which amends the consolidation requirements in ASC 810. This update is effective for public business entities for the first interim period in the first annual period beginning after December 15, 2015. We are currently reviewing this ASU to determine if it will have an impact on our consolidated financial statements.

In May 2015, the FASB issued ASU 2015-07, “Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent)”. The amendments apply to reporting entities that elect to measure the fair value of an investment using the net asset value (“NAV”) per share (or its equivalent) practical equivalent. The amendments remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the NAV per share practical expedient. The amendments in this ASU are effective for reporting periods beginning after December 15, 2015, with early adoption permitted. The Company has reviewed this ASU and has elected to early adopt these amendments

 

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in the quarter ending December 31, 2014 and has removed certain investments that are measured using the NAV practical expedient from the fair value hierarchy in all periods presented in the Company’s consolidated financial statements.

Inflation

We believe that inflation has not had a material impact on our results of operations for the years ended September 30, 2015, 2014 and 2013.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to various types of market risk in the normal course of business, including the impact of interest rate changes and changes in corporate tax rates. The debt associated with CBC, had a balance of approximately $51.6 million, consisting of $4.6 million through a line of credit, at a rate of LIBOR plus 4%, with a floor of 4.1%, from a financial institution, and $47.0 million of notes at varying rates, from 5.07% to 8.75%, issued by CBC’s subsidiaries. At September 30, 2015, the LIBOR rate was 0.19%. Thus, a 25 basis point change in the LIBOR rate would have had no impact on the line of credit interest expense, as the resulting rate would still have been below the 4.1% floor.

We have elected to measure structured settlements at fair value under ASC 825. However, the date used to finance our investments in structured settlements is measured at cost. This results in an accounting mismatch that yields potential gains or losses, recognized in the consolidated statements of income, depending primarily on changes in interest rates.

We monitor changes in market rate primarily based on our periodic securitization of assets, whereby we are able to determine a market rate. A significant change in the rate at which we can securitize can increase or decrease the gain or loss. We partially mitigate the risk over the long term by pricing new structured settlements originations relative to current market rates. As benchmark rates decrease, we can purchase structured settlements at lower discount rates to the consumer, while maintaining spread or gain. As benchmark rates increase, the market value of the entire portfolio could lose value. As such, future structured settlement purchases must be purchased at an increased discount rate in order to maintain or increase spread or gain. The Company does not currently purchase derivative products to mitigate risk.

 

Item 8. Financial Statements And Supplementary Data.

The Financial Statements of the Company, the Notes thereto and the Report of Independent Registered Public Accounting Firm thereon required by this item begin on page F-1 of this report located immediately preceding the signature page.

 

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

None.

 

Item 9A. Controls and Procedures.

Disclosure Controls and Procedures

We conducted an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of September 30, 2015. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based on their evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2015.

 

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Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Under the supervision and with the participation of our management, including its principal executive officer and principal financial officer, we conducted an assessment of the effectiveness of its internal control over financial reporting. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO 2013”) in Internal Control — Integrated Framework, issued in 2013. Based on management’s assessment, and based on the criteria in COSO 2013, we believe that we maintained effective internal control over financial reporting as of September 30, 2015.

Changes in Internal Controls over Financial Reporting

In fiscal year 2014, Management identified a material weakness in our internal control over financial reporting related to the revenue recognition process in our consumer receivables portfolios, specifically related to the application of the interest method of accounting as promulgated by Accounting Standards Codification (“ASC”) 310-30, Receivables – Loans and Debt Securities Acquired with Deteriorated Quality. During our review of portfolio cash flows, our controls did not include an analysis and review of the current cash flow variations within a quarter, to determine whether there is an impairment or accretion required. We took action to remediate the material weakness described above, which was completed during the 2015 fourth quarter. The action taken to remediate the material weakness is as follows:

 

   

Implement the additional control of analyzing cash flows within a quarterly period, in addition to the already established life of the loan analysis, to determine whether there is an impairment or accretion adjustment required, when necessary.

 

   

As our current inventory of portfolios are accounted for on the cost recovery method this control procedure was not applicable for the current quarter.

Except for the change discussed above, there have been no changes that occurred during the fourth quarter of 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Asta Funding, Inc.

We have audited Asta Funding, Inc. and subsidiaries’ (the “Company”) internal control over financial reporting as of September 30, 2015, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of September 30, 2015, is fairly stated, in all material respects, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of September 30, 2015 and 2014, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the three-year period ended September 30, 2015, and our report dated December 14, 2015, expressed an unqualified opinion on those consolidated financial statements.

/s/WeiserMazars LLP

Edison, New Jersey

December 14, 2015

 

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Item 9B. Other Information.

None.

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance.

The information required by this item will be set forth in our definitive proxy statement with respect to our 2016 annual meeting of stockholders to be filed not later than 120 days after September 30, 2015 and is incorporated herein by this reference.

 

Item 11. Executive Compensation.

The information required by this item will be set forth in our definitive proxy statement with respect to our 2016 annual meeting of stockholders to be filed not later than 120 days after September 30, 2015 and is incorporated herein by this reference.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required by this item will be set forth in our definitive proxy statement with respect to our 2016 annual meeting of stockholders to be filed not later than 120 days after September 30, 2015 and is incorporated herein by this reference.

 

Item 13. Certain Relationships and Related Transactions, and Director Independence.

The information required by this item will be set forth in our definitive proxy statement with respect to our 2016 annual meeting of stockholders to be filed not later than 120 days after September 30, 2015 and is incorporated herein by this reference.

 

Item 14. Principal Accounting Fees and Services.

The information required by this item will be set forth in our definitive proxy statement with respect to our 2016 annual meeting of stockholders to be filed not later than 120 days after September 30, 2015 and is incorporated herein by this reference.

Part IV

 

Item 15. Exhibits, Financial Statement Schedules.

(a) The following documents are filed as part of this report

 

Exhibit

Number

     
3.1    Certificate of Incorporation(1)
3.2    Amendment to Certificate of Incorporation(2)
3.3    Certificate of Designation of Series A Preferred Stock(3)
3.4    Bylaws(4)
3.5    Amendments to Article IX of the By-Laws of Asta Funding, Inc.(5)
4.1    Rights Agreement, dated as of August 23, 2012, between Asta Funding, Inc. and American Stock Transfer & Trust Co., LLC(6)
10.1    Asta Funding, Inc 1995 Stock Option Plan as Amended(1)
10.2    Asta Funding, Inc. 2002 Stock Option Plan(2)

 

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Exhibit

Number

     
10.3    Asta Funding, Inc. Equity Compensation Plan(7)
10.4    Asta Funding, Inc. 2012 Stock Option and Performance Award Plan(8)
10.5    Form of Intercreditor Agreement between Asta Funding and IDB as lending agent(9)
10.6    Amended and Restated Management Agreement, dated as of January 16, 2009, between Palisades Collection, L.L.C., and [*](10)
10.7    Amended and Restated Master Servicing Agreement, dated as of January 16, 2009, between Palisades Collection, L.L.C., and [*](11)
10.8    First Amendment to Amended and Restated Master Servicing Agreement, dated as of September 16, 2007, by and among Palisades Collection, L.L.C., and [*], and [*](12)
10.9    Indemnification agreement between Asta Funding and GMS Family Investors LLC. (13)
10.10    Settlement Agreement and Omnibus Amendment among Asta Funding, Inc., Palisades Acquisition XVI and BMO Capital Markets dated August 7, 2013. (20)
10.11    Lease agreement between the Company and ESL200 LLC dated August 2, 2010 (14)
10.12    Revolving Credit Agreement, dated December 28, 2011, by and between Pegasus Funding, LLC and Fund Pegasus, LLC(15)
10.13    Security Agreement, dated December 28, 2011, by and between Pegasus Funding, LLC and Fund Pegasus, LLC(16)
10.14    Secured Revolving Credit Note, dated December 28, 2011, by Pegasus Funding, LLC in favor of Fund Pegasus, LLC(17)
10.15    Operating Agreement of Pegasus Funding, LLC, dated December 28, 2011(18)
10.16    Consulting Agreement, dated December 12, 2011, by and between the Company and A.L. Piccolo & Co., Inc.(20)
10.17    Membership Interest Purchase Agreement by and among CBC Settlement, LLC, CBC Management Services Group, LLC, Asta Funding, Inc. and Other Parties Hereto (22) (24)
10.18    Amended and Restated Operating Agreement of CBC Settlement Funding, LLC (23) (24)
10.19    Asta Funding, Inc. lease agreement with ESL 200 LLC (25)
21.1    Subsidiaries of the Registrant*
23.1    Consent of Independent Registered Public Accounting Firm*
31.1    Certification of Registrant’s Chief Executive Officer, Gary Stern, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2    Certification of Registrant’s Chief Financial Officer, Robert J. Michel, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1    Certification of the Registrant’s Chief Executive Officer, Gary Stern, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2    Certification of the Registrant’s Chief Financial Officer, Robert J. Michel, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

 

* Filed herewith

 

(1) Incorporated by reference to an Exhibit to Asta Funding’s Registration Statement on Form SB-2 (File No. 33-97212).

 

(2) Incorporated by reference to an Exhibit to Asta Funding’s Quarterly Report on Form 10-QSB for the three months ended March 31, 2002.

 

(3) Incorporated by reference to Exhibit 3.1 to Asta Funding’s Current Report on Form 8-K filed August 24, 2012.

 

(4) Incorporated by reference to Exhibit 3.1 to Asta Funding’s Annual Report on Form 10-KSB for the year ended September 30, 1998.

 

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(5) Incorporated by reference to Exhibit 3.2 to Asta Funding’s Current Report on Form 8-K filed August 24, 2012.

 

(6) Incorporated by reference to Exhibit 4.1 to Asta Funding’s Current Report on Form 8-K filed August 24, 2012.

 

(7) Incorporated by reference to Exhibit 10.1 to Asta Funding’s Current Report on Form 8-K filed March 3, 2006.

 

(8) Incorporated by reference to Appendix A to Asta Funding’s Definitive Proxy Statement filed on February 17, 2012 for the March 21, 2012 Annual Meeting of Stockholders

 

(9) Incorporated by reference to Exhibit 10.26 to Asta Funding’s Annual Report on Form 10-K for the year ended September 30, 2008.

 

(10) Incorporated by reference to Exhibit 10.27 to Asta Funding’s Annual Report on Form 10-K for the year ended September 30, 2008.

 

(11) Incorporated by reference to Exhibit 10.28 to Asta Funding’s Annual Report on Form 10-K for the year ended September 30, 2008.

 

(12) Incorporated by reference to Exhibit 10.29 to Asta Funding’s Annual Report on Form 10-K for the year ended September 30, 2008.

 

(13) Incorporated by reference to Exhibit 10.32 to Asta Funding’s Annual Report on Form 10-K for the year ended September 30, 2009.

 

(14) Incorporated by reference to Exhibit 10.2 to Asta Funding’s Current Report on Form 8-K filed August 5, 2010.

 

(15) Incorporated by reference to Exhibit 10.1 to Asta Funding’s Current Report on Form 8-K filed January 4, 2012.

 

(16) Incorporated by reference to Exhibit 10.2 to Asta Funding’s Current Report on Form 8-K filed January 4, 2012.

 

(17) Incorporated by reference to Exhibit 10.3 to Asta Funding’s Current Report on Form 8-K filed January 4, 2012.

 

(18) Incorporated by reference to Exhibit 10.4 to Asta Funding’s Current Report on Form 8-K filed January 4, 2012.

 

(19) Incorporated by reference to Exhibit 10.1 to Asta Funding’s Current Report on Form 8-K filed January 6, 2012.

 

(20) Incorporated by reference to Exhibit 10.1 to Asta Funding’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2011.

 

(21) Incorporated by reference to Exhibit 10.1 to Asta Funding’s Current Report on Form 8-K filed August 9, 2012.

 

(22) Incorporated by reference to Exhibit 10.1 to Asta Funding’s Current Report on Form 8-K filed January 7, 2014.

 

(23) Incorporated by reference to Exhibit 10.2 to Asta Funding’s Current Report on Form 8-K filed January 7, 2014.

 

(24) The schedules to Exhibits 10.17 and 10.18 have not been filed with this registration statement as they contain due diligence information which the Registrant does not believe is material to an investment decision.

 

(25) Incorporated by reference to Exhibit 10.1 to Asta Funding’s Current Report on Form 8-K filed October 29, 2015.

 

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ASTA FUNDING, INC. AND SUBSIDIARIES

Contents

 

     Page  

Report of Independent Registered Public Accounting Firm

     F-2   

Consolidated Balance Sheets as of September 30, 2015 and 2014

     F-3   

Consolidated Statements of Income for the years ended September 30, 2015, 2014 and 2013

     F-4   

Consolidated Statements of Comprehensive Income for the years ended September  30, 2015, 2014 and 2013

     F-5   

Consolidated Statements of Stockholders’ Equity for the years ended September  30, 2015, 2014 and 2013

     F-6   

Consolidated Statements of Cash Flows for the years ended September 30, 2015, 2014 and 2013

     F-7   

Notes to Consolidated Financial Statements

     F-8   

 

F-1


Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Asta Funding, Inc.

We have audited the accompanying consolidated balance sheets of Asta Funding, Inc. and subsidiaries (the “Company”) as of September 30, 2015 and 2014, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the three-year period ended September 30, 2015. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of September 30, 2015 and 2014, and the consolidated results of their operations and their cash flows for each of the three years in the three-year period ended September 30, 2015, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of September 30, 2015, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated December 14, 2015 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 

/s/WeiserMazars LLP
Edison, New Jersey
December 14, 2015

 

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Table of Contents

ASTA FUNDING, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

 

     September 30,  
     2015     2014  

ASSETS

    

Cash and cash equivalents

   $ 24,315,000      $ 28,710,000   

Available-for-sale investments

     59,727,000        66,799,000   

Consumer receivables acquired for liquidation (at net realizable value)

     15,608,000        29,444,000   

Structured settlements

     64,635,000        42,079,000   

Investment in personal injury claims, net

     36,668,000        32,352,000   

Other investments

     4,239,000          

Due from third party collection agencies and attorneys

     1,422,000        1,026,000   

Prepaid and income taxes receivable

     6,744,000        430,000   

Furniture and equipment (net of accumulated depreciation of $4,865,000 at September 30, 2015 and $4,499,000 at September 30, 2014)

     480,000        756,000   

Deferred income taxes

     12,279,000        6,786,000   

Goodwill

     2,770,000        2,770,000   

Other assets

     8,485,000        5,986,000   
  

 

 

   

 

 

 

Total assets

   $ 237,372,000      $ 217,138,000   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Other debt — CBC (includes non-recourse notes payable amounting to $47.0 million at September 30, 2015 and $12.7 million at September 30, 2014)

   $ 51,611,000      $ 32,295,000   

Other liabilities

     4,441,000        3,587,000   
  

 

 

   

 

 

 

Total liabilities

     56,052,000        35,882,000   
  

 

 

   

 

 

 

Commitments and contingencies

    

STOCKHOLDERS’ EQUITY

    

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

              

Common stock, $.01 par value, authorized 30,000,000 shares; issued — 13,061,673 at September 30, 2015 and 12,985,839 at September 30, 2014; and outstanding — 12,859,873 at September 30, 2015 and 12,985,839 at September 30, 2014

     131,000        130,000   

Additional paid-in capital

     65,011,000        63,102,000   

Retained earnings

     120,611,000        118,595,000   

Accumulated other comprehensive (loss) income, net of income taxes

     (1,685,000 )     142,000   

Treasury stock (at cost), 201,800 shares at September 30, 2015 and 0 shares at September 30, 2014

     (1,751,000 )       

Non-controlling interests

     (997,000 )     (713,000 )
  

 

 

   

 

 

 

Total stockholders’ equity

     181,320,000        181,256,000   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 237,372,000      $ 217,138,000   
  

 

 

   

 

 

 

See notes to accompanying consolidated financial statements

 

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ASTA FUNDING, INC. AND SUBSIDIARIES

Consolidated Statements of Income

 

     Year Ended September 30,  
     2015      2014      2013  

Revenues:

        

Finance income, net

   $ 20,757,000       $ 19,865,000       $ 31,762,000   

Personal injury claims income

     8,482,000         7,134,000         6,438,000   

Unrealized gain on structured settlements

     7,146,000         2,840,000           

Interest income on structured settlements

     4,672,000         2,368,000           

Disability fee income

     1,434,000         378,000         2,000   
  

 

 

    

 

 

    

 

 

 

Total revenues

     42,491,000         32,585,000         38,202,000   

Forgiveness of non-recourse debt

             26,101,000           

Other income (includes ($155,000), ($143,000), and ($252,000) during the years ended September 30, 2015, 2014 and 2013, respectively, of accumulated other comprehensive income reclassifications for realized net losses on available for sale securities).

     1,687,000         1,399,000         1,609,000   
  

 

 

    

 

 

    

 

 

 
     44,178,000         60,085,000         39,811,000   
  

 

 

    

 

 

    

 

 

 

Expenses:

        

General and administrative expenses

     36,933,000         28,192,000         24,212,000   

Interest expense

     2,395,000         1,260,000         1,300,000   

Impairments of consumer receivables acquired for liquidation

             19,591,000         10,990,000   
  

 

 

    

 

 

    

 

 

 
     39,328,000         49,043,000         36,502,000   
  

 

 

    

 

 

    

 

 

 

Income before income tax

     4,850,000         11,042,000         3,309,000   

Income tax expense (includes tax benefit (expense) of $58,000, $59,000 and ($100,000) during the years ended September 30, 2015, 2014 and 2013, respectively, of accumulated other comprehensive income reclassifications for realized net (losses) gains on available for sales securities)

     2,122,000         4,613,000         894,000   
  

 

 

    

 

 

    

 

 

 

Net income

     2,728,000         6,429,000         2,415,000   

Less: net income attributable to non-controlling interests

     712,000         528,000         406,000   
  

 

 

    

 

 

    

 

 

 

Net income attributable to Asta Funding, Inc.

   $ 2,016,000       $ 5,901,000       $ 2,009,000   
  

 

 

    

 

 

    

 

 

 

Net income per share attributable to Asta Funding, Inc.:

        

Basic

   $ 0.15       $ 0.45       $ 0.16   

Diluted

   $ 0.15       $ 0.45       $ 0.15   

Weighted average number of common shares outstanding:

        

Basic

     13,044,215         12,981,076         12,952,150   

Diluted

     13,314,605         13,205,933         13,216,051   

See notes to accompanying consolidated financial statements

 

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Table of Contents

ASTA FUNDING, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

 

     Year Ended September 30,  
     2015     2014     2013  

Comprehensive income is as follows:

  

Net income

   $ 2,728,000      $ 6,429,000      $ 2,415,000   
  

 

 

   

 

 

   

 

 

 

Net unrealized securities (loss) / gain, net of tax benefit / (expense) of $303,000, ($599,000) and $705,000, during the years ended September 30, 2015, 2014 and 2013, respectively.

     (260,000     900,000        (1,067,000 )

Reclassification adjustments for securities sold, net of tax benefit / (expense) of $68,000, $59,000 and ($100,000), during years ended September 30, 2015, 2014 and 2013, respectively.

     (87,000 )     (84,000 )     152,000   

Foreign currency translation, net

     (1,480,000              
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (1,827,000 )     816,000        (915,000 )
  

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 901,000      $ 7,245,000      $ 1,500,000   
  

 

 

   

 

 

   

 

 

 

 

See notes to accompanying consolidated financial statements

 

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Table of Contents

ASTA FUNDING, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

For the years ended September 30, 2015, 2014 and 2013

 

    Common Stock     Additional
Paid-in
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Treasury
Stock(1)
    Non-
Controlling
Interests
    Total
Stockholders’
Equity
 
    Issued
Shares
    Amount              

Balance, September 30, 2012

    14,778,956      $ 148,000      $ 77,024,000      $ 111,715,000      $ 241,000      $ (16,226,000 )   $ 31,000      $ 172,933,000   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Exercise of options

    36,700          125,000                125,000   

Stock based compensation expense

        1,956,000                1,956,000   

Restricted stock

    102,321        1,000        (1,000               

Dividends

          (1,030,000 )           (1,030,000 )

Purchase of treasury stock

              (1,579,000 )       (1,579,000 )

Net income,

          2,009,000            406,000        2,415,000   

Unrealized loss on marketable securities

            (915,000 )         (915,000 )

Distributions to non-controlling interest

                (621,000 )     (621,000 )
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2013

    14,917,977        149,000        79,104,000        112,694,000        (674,000 )     (17,805,000 )     (184,000 )     173,284,000   

Exercise of options

    11,600          40,000                40,000   

Stock based compensation expense

        1,744,000                1,744,000   

Net income

          5,901,000            528,000        6,429,000   

Unrealized gain on marketable securities

            816,000            816,000   

Retirement of treasury stock

    (1,943,738 )     (19,000 )     (17,786,000 )         17,805,000            

Distributions to non-controlling interest

                (1,057,000 )     (1,057,000 )
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2014

    12,985,839        130,000        63,102,000        118,595,000        142,000               (713,000 )     181,256,000   

Exercise of options

    60,834        1,000        475,000                476,000   

Stock based compensation expense

        1,434,000                1,434,000   

Restricted stock

    15,000                      

Net income

          2,016,000            712,000        2,728,000   

Unrealized gain on marketable securities

            (347,000 )         (347,000

Purchase of treasury stock

              (1,751,000 )       (1,751,000 )

Foreign currency translation, net

            (1,480,000 )         (1,480,000

Distributions to non-controlling interest

                (996,000 )     (996,000 )
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2015

    13,061,673      $ 131,000      $ 65,011,000      $ 120,611,000      $ (1,685,000 )   $ (1,751,000 )   $ (997,000 )   $ 181,320,000   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Treasury shares are as follows: September 30, 2012, 1,772,038; Purchase of treasury stock, 171,700
                                                  September 30, 2013, 1,943,738; Retirement of treasury stock, (1,943,738)
                                                  September 30, 2014, 0; Purchase of treasury stock, 201,800; September 30, 2015, 201,800

See notes to accompanying consolidated financial statements

 

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Table of Contents

ASTA FUNDING, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

 

     Year Ended September 30,  
     2015     2014     2013  

Cash flows from operating activities:

      

Net income

   $ 2,728,000      $ 6,429,000      $ 2,415,000   

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

      

Depreciation and amortization

     366,000        363,000        440,000   

Deferred income taxes

     (5,343,000     446,000        57,000   

Impairments of consumer receivables acquired for liquidation

            19,591,000        10,990,000   

Stock based compensation

     1,434,000        1,744,000        1,956,000   

Loss on sale of available-for-sale securities

     155,000        143,000        252,000   

Structured settlements — accrued interest

     (4,330,000 )     (2,282,000 )       

Structured settlements — gains

     (7,146,000 )     (2,840,000 )       

Unrealized (gain) / loss on other investments

     (68,000              

Unrealized foreign exchange (gain) / loss on other investments

     829,000                 

Forgiveness of non-recourse debt

            (26,101,000 )       

Changes in:

      

Prepaid and income taxes receivable

     (6,314,000 )     1,066,000        561,000   

Due from third party collection agencies and attorneys

     (396,000 )     143,000        873,000   

Other assets

     (2,551,000 )     (1,592,000 )     (631,000 )

Other liabilities

     (489,000     745,000        (434,000 )
  

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (21,125,000 )     (2,145,000 )     16,479,000   
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

      

Purchase of consumer receivables acquired for liquidation

     (2,110,000 )     (5,078,000 )     (3,340,000 )

Principal collected on consumer receivables acquired for liquidation

     15,944,000        20,271,000        21,902,000   

Principal collected on consumer receivable accounts represented by account sales

     2,000        26,000        433,000   

Purchase of available-for-sale securities

     (17,843,000 )     (20,111,000 )     (34,171,000 )

Proceeds from sales of available-for-sale securities

     24,178,000        12,560,000        33,076,000   

Proceeds from maturities of certificates of deposit

                   42,682,000   

Purchase of other investments

     (5,000,000 )              

Cash paid for acquisition (net of cash acquired)

            (5,588,000 )       

Investments in personal injury claims — advances

     (25,077,000     (22,218,000 )     (30,963,000 )

Investments in personal injury claims — receipts

     20,761,000        25,624,000        13,801,000   

Investments in structured settlements — advances

     (16,615,000 )     (9,808,000 )       

Investments in structured settlements — receipts

     5,535,000        3,287,000          

Capital expenditures

     (90,000 )     (13,000 )     (725,000 )
  

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (315,000 )     (1,048,000 )     42,695,000   
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

      

Proceeds from exercise of stock options

     476,000        40,000        125,000   

Purchase of treasury stock

     (1,751,000 )            (1,579,000 )

Change in restricted cash

            968,000        120,000   

Dividends paid

                   (1,290,000 )

Distributions to non-controlling interest

     (996,000 )     (1,057,000 )     (621,000 )

Repayments of non-recourse debt — Bank of Montreal, net

            (9,659,000 )     (25,703,000 )

Borrowings of other debt — CBC

     54,766,000        9,903,000          

Repayments of other debt — CBC

     (35,450,000 )     (3,471,000 )       
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     17,045,000        (3,276,000 )     (28,948,000 )
  

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (4,395,000 )     (6,469,000 )     30,226,000   

Cash and cash equivalents at beginning of year

     28,710,000        35,179,000        4,953,000   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

   $ 24,315,000      $ 28,710,000      $ 35,179,000   
  

 

 

   

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

      

Cash paid for:

      

Interest

   $ 2,398,000      $ 1,004,000      $ 1,822,000   
  

 

 

   

 

 

   

 

 

 

Income taxes

   $ 13,060,000      $ 3,100,000      $   
  

 

 

   

 

 

   

 

 

 

Supplemental disclosures of non-cash investing and financing activities:

      

Structured settlements

          $ 30,436,000          

Other debt — CBC

          $ 23,363,000          

Retirement of treasury stock

          $ 17,505,000          

See notes to accompanying consolidated financial statements

 

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Table of Contents

ASTA FUNDING, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2015 and 2014

NOTE A — THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES

[1] The Company:

Asta Funding, Inc., together with its wholly owned significant operating subsidiaries Palisades Collection LLC, Palisades Acquisition XVI, LLC (“Palisades XVI”), VATIV Recovery Solutions LLC (“VATIV”), ASFI Pegasus Holdings, LLC (“APH”), Fund Pegasus, LLC (“Fund Pegasus”), GAR Disability Advocates, LLC (“GAR Disability Advocates”) and other subsidiaries, not all wholly owned (the “Company”, “we” or “us”), is engaged in several business segments in the financial services industry including structured settlements through our 80% owned subsidiary CBC Settlement Funding, LLC, funding of personal injury claims, through our 80% owned subsidiary Pegasus Funding, LLC, social security and disability advocates through our wholly owned subsidiary GAR Disability Advocates , LLC 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, 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

Pegasus conducts its business solely in the United States. Pegasus obtains its business from external brokers and internal sales professionals soliciting individuals with personal injury claims. Business is also obtained from the Pegasus web site and through attorneys.

Structured settlements

CBC purchases structured settlement and annuity policies through privately negotiated direct consumer purchases and brokered transactions across the United States. CBC funds the purchases primarily from cash, and its securitized debt, issued through its BBR subsidiaries. Blue Bell Receivables I, LLC (“BBR I”), Blue Bell Receivables II, LLC (“BBR II”), Blue Bell Receivables III, LLC (“BBR III”), Blue Bell Receivables IV, LLC (“BBR IV”) and Blue Bell Receivables V, LLC (BBR V”), collectively the “Blue Bell Entities,” are variable interest entities (“VIEs”). CBC is considered the primary beneficiary because its has the power to direct the significant activities of the VIEs via its ownership and service contract. It also has the rights to receive benefits from the collections that exceed the payments to the note holders.

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.

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

[2] Liquidity:

Consumer receivables

The Company’s cash requirements have been and will continue to be significant. In the past, we have depended upon external financing to acquire consumer receivables, fund operating expenses, interest and income taxes. If approved, the payment of dividends is also a significant use of cash. We have depended solely on operating cash flow to fund the acquisition of portfolios, pay operating expenses, dividends, and taxes. Net collections decreased $3.5 million or 8.7% from $40.2 million in fiscal year 2014 to $36.7 million in fiscal year

 

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Table of Contents

ASTA FUNDING, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2015 and 2014

NOTE A — THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

[2] Liquidity (Continued):

 

2015. Although the Company’s collections decreased from the prior year, the Company believes its net cash collections over the next twelve months, coupled with its current liquid cash balances, will be sufficient to cover its operating expenses.

Personal Injury Claims

On December 28, 2011, we formed a joint venture Pegasus Funding, LLC (“Pegasus”) with Pegasus Legal Funding, LLC (“PLF”). Pegasus purchases interests in personal injury claims from claimants who are a party to a personal injury litigation with the expectation of a settlement in the future. Pegasus advances to each claimant funds on a non-recourse basis at an agreed upon interest rate in anticipation of a future settlement. The interest purchased by Pegasus in each claim will consist of the right to receive from such claimant part of the proceeds or recoveries which such claimant receives by reason of a settlement, judgment or award with respect to such claimant’s claim. The profits from the joint venture are distributed based on the ownership percentage of the parties — Asta Funding, Inc. 80% and PLF, 20%. Funding for the business comes from internally-generated revenue and the Company.

Structured Settlements

On December 31, 2013, the Company acquired 80% ownership of CBC and its affiliate, CBC Management Services, LLC for approximately $5.9 million. At the closing, the operating principals of CBC, William J. Skyrm, Esq. and James Goodman, were each issued a 10% interest in CBC. In addition, the Company has agreed to provide financing to CBC of up to $5 million. Through the transaction we acquired debt that totaled $23 million consisting of $9.6 million of a revolving line of credit with a financial institution and $13.8 million of non-recourse notes issued by CBC’s subsidiaries. As of September 30, 2015, the debt approximated $51.6 million. On September 30, 2015, CBC completed its fifth private placement backed by structured settlements and fixed annuity payments. CBC issued through its subsidiary, BBRV, LLC, approximately $16.6 million of fixed rate asset-backed notes with a yield of 5.1%. On March 1, 2015 CBC entered into the 9 th amendment of the agreement with a new maturity date of March 1, 2017, increased the credit to $25.0 million and lowered the floor to 4.1%. On November 26, 2014, CBC announced the completion of its fourth private placement, backed by structured settlement and fixed annuity payments. CBC issued, through its subsidiary, BBR IV, LLC, approximately $20.8 million of fixed rate asset-backed notes with a yield of 5.4%.

Disability Advocates

Funding for the GAR Disability Advocates business is from the Company and internally-generated revenues.

[3] Principles of consolidation:

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

Palisades XVI is a variable interest entity (“VIE”). Asta Funding, Inc. is considered the primary beneficiary because it has the power to direct the significant activities of the VIE via its ownership and service contract. Palisades XVI holds the Great Seneca portfolio of $10.5 million as of September 30, 2015. See Note I — Debt, Non-Recourse Debt — Bank of Montreal for additional details.

 

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Table of Contents

ASTA FUNDING, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2015 and 2014

NOTE A — THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

[3] Principles of consolidation (Continued):

 

Blue Bell Receivables I, LLC, Blue Bells Receivables II, LLC, Blue Bell Receivables III, LLC, Blue Bell Receivables IV, LLC and Blue Bell Receivables V, LLC (the “Blue Bell Entities”) are VIEs. CBC is considered the primary beneficiary because it has the power to direct the significant activities of the VIEs via its ownership and service contract. It also has the rights to receive benefits from the collections that exceed the payments to the note holders. The Blue Bell Entities held structured settlements of $64.6 million and non-recourse notes payable of $47.0 million as of September 30, 2015.

[4] Concentration of Credit Risk — Cash:

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

Cash balances are maintained at various depository institutions and are insured by the Federal Deposit Insurance Corporation (“FDIC”). The Company had cash balances with 12 banks that exceeded the balance insured by the FDIC by approximately $20.8 million at September 30, 2015. The Company does not believe it is exposed to any significant credit risk for cash.

[5] Available-for-Sale Investments:

Investments that the Company intends to hold for an indefinite period of time, but not necessarily to maturity, are classified as available-for-sale and are carried at fair value. Unrealized gains and losses on available-for-sale securities are determined using the specific-identification method.

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

[6] Income recognition, Impairments and Accretable yield adjustments:

Income Recognition

The Company accounts for certain of its investments in finance receivables using the guidance of FASB Accounting Standards Codification (“ASC”), Receivables — Loans and Debt Securities Acquired with Deteriorated Credit Quality, (“ASC 310”). Under the guidance of ASC 310, static pools of accounts are established. These pools are aggregated based on certain common risk criteria. Each static pool is recorded at cost and is accounted for as a single unit for the recognition of income, principal payments and loss provision. 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 under 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 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).

 

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Table of Contents

ASTA FUNDING, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2015 and 2014

NOTE A — THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

[6] Income recognition, Impairments and Accretable yield adjustments (Continued):

 

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

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

The funding of matrimonial actions is on a non-recourse basis. Revenue from matrimonial actions is recognized under the cost recovery method.

CBC purchases periodic payments under structured settlements and annuity policies from individuals in exchange for a lump sum payment. The Company elected to carry structured settlements at fair value. Unearned income on structured settlements is recognized as interest income using the effective interest method over the life of the related settlement. Changes in fair value are recorded in unrealized gain (loss) in structured settlements in our statements of income.

The Company recognizes revenue for GAR Disability Advocates when cases close and fees are collected.

Impairments and accretable yield adjustments

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

If collection projections indicate the carrying value will not be recovered, an impairment is required. The impairment will be equal to the difference between the carrying value at the time of the forecast and the corresponding estimated remaining future collections.

Increases in expected cash flows are recognized prospectively through an adjustment of the internal rate of return (“accretable yield adjustments”), while decreases in expected cash flow are recognized as impairments.

As the Company switched to the cost recovery method at the very beginning of fiscal year 2014, there were no accretable yield adjustments recorded in the fiscal years ended September 30, 2015 and 2014. Accretable yield adjustments were $0.6 million in fiscal year 2013.

The Company believes it has significant experience in acquiring certain distressed consumer receivable portfolios at a significant discount to the amount actually owed by underlying customers. The Company invests

 

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Table of Contents

ASTA FUNDING, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2015 and 2014

NOTE A — THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

[6] Income recognition, Impairments and Accretable yield adjustments (Continued):

 

in these portfolios only after both qualitative and quantitative analyses of the underlying receivables are performed and a calculated purchase price is paid so that it believes its estimated cash flow offers an adequate return on acquisition costs after servicing expenses. Additionally, when considering larger portfolio purchases of accounts, or portfolios from issuers with whom the Company has limited experience, it has the added benefit of soliciting its third party collection agencies and attorneys for their input on liquidation rates and, at times, incorporates such input into the estimates it uses for its expected cash flows.

[7] Commissions and fees:

Commissions and fees are the contractual commissions earned by third party collection agencies and attorneys, and direct costs associated with the collection effort- generally court costs. The Company expects to continue to purchase portfolios and utilize third party collection agencies and attorney networks.

[8] Furniture, equipment and leasehold improvements:

Furniture and equipment is stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the assets (5 to 7 years). Amortization on leasehold improvements is provided by the straight line-method of the remaining life of the respective lease. An accelerated depreciation method is used for tax purposes.

[9] Income taxes:

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

[10] Net income per share:

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

 

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Table of Contents

ASTA FUNDING, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2015 and 2014

NOTE A — THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

[10] Net income per share (Continued):

 

The following table presents the computation of basic and diluted per share data for the fiscal years ended September 30, 2015, 2014 and 2013:

 

    2015     2014     2013  
    Net
Income
    Weighted
Average
Shares
    Per
Share
Amount
    Net
Income
    Weighted
Average
Shares
    Per
Share
Amount
    Net
Income
    Weighted
Average
Shares
    Per
Share
Amount
 

Basic

  $ 2,016,000        13,044,215      $ 0.15      $ 5,901,000        12,981,076      $ 0.45      $ 2,009,000        12,952,150      $ 0.16   
     

 

 

       

 

 

       

 

 

 

Dilutive effect of stock options

      270,390        0.00          224,857        0.00          263,901        (0.01 )
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ 2,016,000        13,314,605      $ 0.15      $ 5,901,000        13,205,933      $ 0.45      $ 2,009,000        13,216,051      $ 0.15   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At September 30, 2015, 418,962 options at a weighted average exercise price of $9.57 were not included in the diluted earnings per share calculation as they were anti-dilutive. At September 30, 2014, 960,559 options at a weighted average exercise price of $12.12 were not included in the diluted earnings per share calculation as they were anti-dilutive. At September 30, 2013, 606,332 options at a weighted average exercise price of $8.01 were not included in the diluted earnings per share calculation as they were anti-dilutive.

[11] Use of estimates:

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. With respect to income recognition the Company takes into consideration the relative credit quality of the underlying receivables constituting the portfolio acquired, the strategy involved to maximize the collections thereof, the time required to implement the collection strategy as well as other factors to estimate the anticipated cash flows. Actual results could differ from those estimates including management’s estimates of future cash flows and the resultant allocation of collections between principal and interest resulting therefrom. Downward revisions to estimated cash flows will result in impairments.

[12] Stock-based compensation:

The Company accounts for stock-based employee compensation under FASB ASC 718, Compensation — Stock Compensation, (“ASC 718”). ASC 718 requires that compensation expense associated with stock options and vesting of restricted stock awards be recognized in the statement of income.

[13] Impact of Recently Issued Accounting Standards:

In May 2014, the FASB issued an update to ASC 606, “Revenue from Contracts with Customers,” that will supersede virtually all existing revenue guidance. Under this update, an entity is required to recognize revenue upon transfer of promised goods or services to customers, in an amount that reflects the entitled consideration received in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from the customer contracts. This update is effective for annual reporting periods beginning after December 15, 2017 including interim periods

 

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Table of Contents

ASTA FUNDING, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2015 and 2014

NOTE A — THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

[13] Impact of Recently Issued Accounting Standards (Continued):

 

within that reporting period. Early application is permitted for annual reporting periods beginning after December 15, 2016. We are currently evaluating the impact this update will have on our consolidated financial statements as well as the expected adoption method.

In June 2014, the FASB issued ASU 2014-11, “Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.” The amendments in this ASU require two accounting changes. First, the amendments in this ASU change the accounting for repurchase-to maturity transactions to secured borrowing accounting. Second, for repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. This ASU also includes new disclosure requirements. The accounting changes in this Update are effective for public business entities for the first interim or annual period beginning after December 15, 2014. An entity is required to present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Earlier application for a public business entity is prohibited. The Company reviewed this ASU and determined that it did not have a material impact on its consolidated financial statements.

In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis,” which amends the consolidation requirements in ASC 810. This update is effective for public business entities for the first interim period in the first annual period beginning after December 15, 2015. We are currently reviewing this ASU to determine if it will have an impact on our consolidated financial statements.

In May 2015, the FASB issued ASU 2015-07, “Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent)”. The amendments apply to reporting entities that elect to measure the fair value of an investment using the net asset value (“NAV”) per share (or its equivalent) practical equivalent. The amendments remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the NAV per share practical expedient. The amendments in this ASU are effective for reporting periods beginning after December 15, 2015, with early adoption permitted. The Company has reviewed this ASU and has elected to early adopt these amendments in the quarter ending December 31, 2014 and has removed certain investments that are measured using the NAV practical expedient from the fair value hierarchy in all periods presented in the Company’s consolidated financial statements.

[14] Foreign Currency Translation

The U.S. dollar is the functional currency for the majority of our business. For local currency functional locations, assets and liabilities are translated at end-of-period rates while revenues and expenses are translated at average rates in effect during the period. Equity is translated at historical rates and the resulting cumulative translation adjustments are included as a component of accumulated other comprehensive income.

[15] Reclassifications:

Certain items in the years ended September 30, 2014 and 2013 in the consolidated financial statements have been reclassified to conform to the current year’s presentation, primarily related to certain statement of income items.

 

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Table of Contents

ASTA FUNDING, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2015 and 2014

 

NOTE B — AVAILABLE-FOR-SALE INVESTMENTS

Mutual funds investments classified as available-for-sale at September 30, 2015 and 2014 consist of the following:

 

     Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
     Fair Value  

2015

   $ 60,069,000       $ 98,000       $ (440,000 )    $ 59,727,000   

2014

   $ 66,559,000       $ 411,000       $ (171,000 )    $ 66,799,000   

The available-for-sale investments did not have any contractual maturities. The Company sold four investments during the year ended September 30, 2015, with an aggregate realized loss of $155,000. Additionally, the Company received $234,000 in capital gains distributions during fiscal year 2015. The Company sold five investments in fiscal year 2014, resulting in an aggregate realized loss of approximately $143,000. Additionally, the Company received $186,000 in capital gains distributions during fiscal year 2014. The realized gains and losses are all included as part of other income.

At September 30, 2015, there were six investments, four of which were in an unrealized loss position. Three of the four investments had unrealized losses existing for more than 12 months and one of the four for 12 months or less. At September 30, 2014, there were six investments, four of which were in an unrealized loss position. However, the Company was in an aggregate gain position, as the unrealized gain of the remaining two investments more than offset the unrealized loss of the four investments. All of these securities were considered to be acceptable credit risks. Based on the evaluation of the available evidence at that time, including changes in market rates and credit rating information, management believed that any decline in fair value for these instruments would be temporary. In addition, management had the ability but did not believe it would be required to sell those investment securities for a period of time sufficient to allow for an anticipated recovery or maturity. Should the impairment of any of those securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period in which the other-than-temporary impairment were identified.

Unrealized holding gains and losses on available-for-sale securities are included in other comprehensive income 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 C — CONSUMER RECEIVABLES ACQUIRED FOR LIQUIDATION

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

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

 

   

the interest method; or

 

   

the cost recovery method.

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 310-30. 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.

 

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Table of Contents

ASTA FUNDING, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2015 and 2014

NOTE C — CONSUMER RECEIVABLES ACQUIRED FOR LIQUIDATION (CONTINUED)

 

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 is 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 balance sheet account of consumer receivables acquired for liquidation during the following periods:

 

     For the Year Ended September 30, 2015  
     Interest
Method
    Cost
Recovery
Method
    Total  

Balance beginning of period

   $                 —      $ 29,444,000      $ 29,444,000   

Acquisition of receivable portfolios

            2,110,000        2,110,000   

Net cash collections from collection of consumer receivables acquired for liquidation

            (36,361,000     (36,361,000

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

            (79,000     (79,000

Impairment

                     

Effect of foreign currency translation

            (263,000     (263,000

Finance income recognized

            20,757,000        20,757,000   
  

 

 

   

 

 

   

 

 

 

Balance, end of period

   $      $ 15,608,000      $ 15,608,000   
  

 

 

   

 

 

   

 

 

 

Finance income as a percentage of collections

     0     57.0     57.0

 

F-16


Table of Contents

ASTA FUNDING, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2015 and 2014

NOTE C — CONSUMER RECEIVABLES ACQUIRED FOR LIQUIDATION (CONTINUED)

 

     For the Year Ended September 30, 2014  
     Interest
Method
    Cost
Recovery
Method
    Total  

Balance beginning of period

   $ 13,121,000      $ 51,133,000      $ 64,254,000   

Reclassification of interest method portfolios to cost recovery method

     (13,121,000 )     13,121,000          

Acquisition of receivable portfolios

            5,078,000        5,078,000   

Net cash collections from collection of consumer receivables acquired for liquidation

            (40,048,000     (40,048,000

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

            (114,000     (114,000

Impairment

            (19,591,000     (19,591,000

Finance income recognized

            19,865,000        19,865,000   
  

 

 

   

 

 

   

 

 

 

Balance, end of period

   $      $ 29,444,000      $ 29,444,000   
  

 

 

   

 

 

   

 

 

 

Finance income as a percentage of collections

     0     49.5     49.5

Accretable yield represents the amount of income the Company can expect to generate over the remaining amortizable life of its existing portfolios based on estimated future net cash flows as of September 30, 2014. The Company adjusted the accretable yield upward when it believes, based on available evidence, that portfolio collections will exceed amounts previously estimated. There were no accretable yield adjustments in fiscal years 2015 and 2014. As the Company transferred the then remaining interest method portfolios to the cost recovery method in fiscal year 2014, there is no remaining projected accretable finance income. The accretable yield schedules for the fiscal year ended September 2014 is as follows:

 

     Year Ended
September 30,
2014
 

Balance at beginning of period, October 1, 2013

   $ 7,679,000   

Transfer to cost recovery

     (7,679,000 )
  

 

 

 

Balance at end of period, September 30, 2014

   $ 0   
  

 

 

 

During the year ended September 30, 2015, the Company purchased $28.0 million in face value receivables at a cost of $2.1 million. During the year ended September 30, 2014, the Company purchased $478.9 million in face value receivables at cost of $5.1 million.

 

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Table of Contents

ASTA FUNDING, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2015 and 2014

NOTE C — 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 years ended September 30, 2015, 2014 and 2013, respectively.

 

     For the Years Ended September 30,  
     2015      2014      2013  

Gross collections(1)

   $ 56,195,000       $ 67,913,000       $ 85,512,000   

Less: commissions and fees(2)

     19,755,000         27,751,000         31,415,000   
  

 

 

    

 

 

    

 

 

 

Net collections

   $ 36,440,000       $ 40,162,000       $ 54,097,000   
  

 

 

    

 

 

    

 

 

 

 

(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 and fees are the contractual commissions earned by third party collection agencies and attorneys, and direct costs associated with the collection effort, generally court costs. Includes a 3% fee charged by a servicer on gross collections in connection with the Portfolio Purchase. Such arrangement was consummated in December 2007. The fee is charged for asset location, skip tracing and ultimately suing debtors in connection with this portfolio purchase.

Finance income recognized on net collections represented by account sales was $0.1 million for the fiscal years ended September 30, 2015 and 2014, and $1.8 million for the fiscal year ended September 30, 2013.

NOTE D — ACQUISITION OF CBC

On December 31, 2013, the Company acquired 80% ownership of CBC and its affiliate, CBC Management Services, LLC, for approximately $5.9 million. In addition, the Company will provide financing to CBC of up to $5 million. The 20% non-controlling interests are held by two of the original owners of CBC. The fair value of non-controlling interests at the acquisition date was determined to be immaterial. The non-controlling interests will not be entitled to any distributions from CBC until the Company receives distributions of $2,337,190. The non-controlling interests are entitled to two of the five seats of CBC’s Board of Managers and have the right to approve certain material transactions of CBC. The non-controlling interest owners are employed by CBC. If the employment is terminated, other than for cause, CBC could be required to purchase their membership interest in CBC. If the employment is terminated for any other reason, CBC has the right to purchase their non-controlling interests. The purchase price would be determined by a third party appraiser and is payable over a period of time. The fair value of the put right was determined to be $0 at December 31, 2013. No re-measurement is required at September 30, 2015 as it is not probable that the put option will become redeemable. The acquisition provided the Company with the opportunity to further diversify its portfolio.

 

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Table of Contents

ASTA FUNDING, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2015 and 2014

NOTE D — ACQUISITION OF CBC (CONTINUED)

 

CBC purchases periodic structured settlements and annuity policies from individuals in exchange for a lump sum payment. The Company accounted for this purchase in accordance with ASC Topic 805 “Business Combinations”. Under this guidance, an entity is required to recognize the assets acquired and liabilities assumed and the consideration given at their fair value on the acquisition date. The following table summarizes the fair value of the assets acquired and the liabilities assumed as of the December 31, 2013 acquisition date:

 

Cash

   $ 351,000   

Structured settlements

     30,436,000   

Other assets

     11,000   

Other liabilities

     (356,000 )

Other debt (see Note J: Other debt — CBC (including non-recourse notes payable amounting to $13.8 million)

     (25,863,000 )
  

 

 

 

Total identifiable net assets acquired

     4,579,000   

Goodwill (see Note H: Goodwill)

     1,360,000   
  

 

 

 

Purchase Price

   $ 5,939,000   
  

 

 

 

As the transaction was consummated on December 31, 2013, there were no actual operational results that were attributable to the Company in the first quarter of fiscal year 2014 and the comparable period of fiscal years 2013. Total revenues, as reported, for the fiscal year ended September 30, 2014, were $32,207,000. On a pro forma basis, total revenues for the fiscal year ended September 30, 2014 would have been $33,842,000. Net income attributable to Asta Funding, Inc., as reported, for the fiscal year ended September 30, 2014, was $5,901,000. On a pro forma basis, net income attributable to Asta Funding, Inc. for the fiscal year ended September 30, 2014 would have been $5,943,000. Total revenues, as reported, for the fiscal years ended September 30, 2013 was $38,200,000. On a pro forma basis, total revenues for the same prior year period would have been $42,544,000. Net income attributable to Asta Funding, Inc., as reported, for the fiscal year ended September 30, 2013 was $2,009,000. On a pro forma basis, net income attributable to Asta Funding, Inc. would have been $2,378,000 for the same prior year period.

NOTE E — STRUCTURED SETTLEMENTS (AT FAIR VALUE)

CBC purchases periodic payments under structured settlements and annuity policies from individuals in exchange for a lump sum payment. The Company elected to carry the structured settlements at fair value. Unearned income on structured settlements is recognized as interest income using the effective interest method over the life of the related structured settlement. Changes in fair value are recorded in unrealized gain (loss) on structured settlements in the Company’s statements of income. Unrealized gains on structured settlements is comprised of both unrealized gains resulting from fair market valuation at the date of acquisition of the structured settlements and the subsequent fair value adjustments resulting from the change in the discount rate. Of the $7.1 million of unrealized gains recognized in the fiscal year ended September 30, 2015, approximately $7.1 million is due to day one gains on new structured settlements financed during the period, $1.8 million due to a change in the discount rate, offset by a decrease of $1.8 million in realized gains recognized as realized interest income on structured settlements during the period. There were no other changes in assumptions during the period.

We elected the fair value treatment under ASC 825-10-50-28 through 50-32 to be transparent to the user regarding the underlying fair value of the structured settlement which collateralizes the debt of CBC. The Com-

 

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Table of Contents

ASTA FUNDING, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2015 and 2014

NOTE E — STRUCTURED SETTLEMENTS (AT FAIR VALUE) (CONTINUED)

 

pany believes any change in fair value is driven by market risk as opposed to credit risk associated with the underlying structured settlement annuity issuer.

The purchased personal injury structured settlements result in payments over time through an annuity policy. Most of the annuities acquired involve guaranteed payments with specific defined ending dates. CBC also purchases a small number of life contingent annuity payments with specific ending dates but the actual payments to be received could be less due to the mortality risk associated with the measuring life. CBC records a provision for loss each period. The life contingent annuities are not a material portion of assets at September 30, 2015 and revenue for the fiscal year ended September 30, 2015.

Structured settlements consist of the following as of September 30, 2015 and 2014:

 

     September 30,
2015
     September 30,
2014
 

Maturity(1)(2)

   $ 99,135,000       $ 64,852,000   

Unearned income

     (34,500,000 )      (22,773,000 )
  

 

 

    

 

 

 

Net carrying value

   $ 64,635,000       $ 42,079,000   
  

 

 

    

 

 

 

 

(1) The maturity value represents the aggregate unpaid principal balance at September 30, 2015 and 2014.

 

(2) There are no amounts of structured settlements that are past due, or in nonaccrual status at September 30, 2015 and 2014.

Encumbrances on structured settlements as of September 30, 2015 and 2014 are as follows:

 

     September 30,
2015
     September 30,
2014
 

Notes payable secured by settlement receivables with principal and interest outstanding payable until June 2025(1)

   $ 2,270,000       $ 2,521,000   

Notes payable secured by settlement receivables with principal and interest outstanding payable until August 2026(1)

     4,713,000         5,363,000   

Notes payable secured by settlement receivables with principal and interest outstanding payable until April 2032(1)

     4,497,000         4,828,000   

Notes payable secured by settlement receivables with principal and interest outstanding payable until February 2037(1)

     20,147,000           

Notes payable secured by settlement receivables with principal and interest outstanding payable until March 30, 2034(1)

     15,361,000           

Revolving line of credit — $25,000,000 at September 30, 2015 and $22,000,000 at September 30, 2014(1)

     4,623,000         19,583,000   
  

 

 

    

 

 

 

Encumbered structured settlements

     51,611,000         32,295,000   

Structured settlements not encumbered

     13,024,000         9,784,000   
  

 

 

    

 

 

 

Total structured settlements

   $ 64,635,000       $ 42,079,000   
  

 

 

    

 

 

 

 

(1) See Note J — Other Debt — CBC

 

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Table of Contents

ASTA FUNDING, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2015 and 2014

NOTE E — STRUCTURED SETTLEMENTS (AT FAIR VALUE) (CONTINUED)

 

At September 30, 2015, the expected cash flows of structured settlements based on maturity value are as follows:

 

September 30, 2016

   $ 7,363,000   

September 30, 2017

     7,428,000   

September 30, 2018

     5,918,000   

September 30, 2019

     6,257,000   

September 30, 2020

     5,637,000   

Thereafter

     66,532,000   
  

 

 

 

Total

   $ 99,135,000   
  

 

 

 

NOTE F — LITIGATION FUNDING

Personal Injury Claims

On December 28, 2011, the Company entered into a joint venture with Pegasus Legal Funding, LLC (“PLF”) in the operating subsidiary of Pegasus. 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. The Company, through Pegasus, earned $8.5 million in interest and fees during fiscal year 2015 compared to $7.1 million and $6.4 during fiscal years 2014 and 2013, respectively. The Company had a net invested balance in personal injury claims of $36.7 million and $32.4 million on September 30, 2015 and 2014, respectively. Pegasus records reserves for bad debts, which, at September 30, 2015 and 2014 amounted to $5.5 million, and $2.5 million, respectively, as follows:

 

     For the Years Ended
September 30,
 
     2015      2014  

Balance at beginning of period

   $ 2,474,000       $ 2,248,000   

Provisions for losses

     3,789,000         1,707,000   

Write offs

     (804,000      (1,481,000
  

 

 

    

 

 

 

Balance at end of period

   $ 5,459,000       $ 2,474,000   
  

 

 

    

 

 

 

Matrimonial Claims

On May 18, 2012, the Company formed BP Case Management, LLC (“BPCM”), a joint venture with California-based Balance Point Divorce Funding, LLC (“BP Divorce Funding”). BPCM provides non-recourse funding to a spouse in a matrimonial action. The Company provided a $1.0 million revolving line of credit to partially fund BPCM’s operations, with such loan bearing interest at the prevailing prime rate, with an initial term of twenty-four months. In September 2014, the agreement was revised to extend the term of the loan to August 2016, increase the credit line to $1.5 million and include a personal guarantee of the principal of BP Divorce Funding. The loan balance at September 30, 2015 was approximately $1.5 million. The revolving line of credit is collateralized by BP Divorce Funding’s profits share in BPCM and other assets. As of September 30, 2015, the Company’s investment in cases through BPCM was approximately $2.6 million. The Company recognized no income during fiscal years 2015 and 2014 compared to $34,000 during fiscal year 2013.

 

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Table of Contents

ASTA FUNDING, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2015 and 2014

 

NOTE G — FURNITURE AND EQUIPMENT

Furniture and equipment as of September 30, 2015 and 2014 consist of the following:

 

     2015      2014  

Furniture

   $ 414,000       $ 323,000   

Equipment

     3,622,000         3,622,000   

Software

     1,210,000         1,211,000   

Leasehold improvements

     99,000         99,000   
  

 

 

    

 

 

 
     5,345,000         5,255,000   

Less accumulated depreciation

     4,865,000         4,499,000   
  

 

 

    

 

 

 
   $ 480,000       $ 756,000   
  

 

 

    

 

 

 

Depreciation expense for the years ended September 30, 2015, 2014 and 2013 aggregated $366,000, $363,000, and $440,000, respectively.

NOTE H — GOODWILL

Goodwill represents the excess of the purchase price of an acquired business over the fair value of amounts assigned to assets acquired and liabilities assumed. Goodwill is reviewed for impairment if events or circumstances indicate that impairment may be present. Any excess in carrying value over the estimated fair value is recorded as impairment loss and charged to results of operations in the period such determination is made. For each of the fiscal years ended September 30, 2015 and 2014, management has determined that there was no impairment loss required to be recognized in the carrying value of goodwill.

The goodwill balances at September 30, 2015 and 2014 are as follows:

 

     2015      2014  

Balance at beginning of period

   $ 2,770,000       $ 1,410,000   

Goodwill from acquisition (see Note D: Acquisition of CBC)

             1,360,000   
  

 

 

    

 

 

 

Balance at end of period

   $ 2,770,000       $ 2,770,000   
  

 

 

    

 

 

 

NOTE I — NON RECOURSE DEBT

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

In March 2007, Palisades XVI borrowed approximately $227 million under the Receivables Financing Agreement (“RFA”), as amended in July 2007, December 2007, May 2008, February 2009, October 2010 and August 2013 from BMO, in order to finance a $300 million portfolio purchase in March 2007 (the “Portfolio Purchase”). The original term of the agreement was three years. This term was extended by each of the Second, Third, Fourth and Fifth Amendments and the most recent agreement signed in August 2013.

On August 7, 2013, Palisades XVI, a 100% owned bankruptcy remote subsidiary, entered into a Settlement Agreement and Omnibus Amendment (the “Settlement Agreement”) with BMO as an amendment to the RFA. In consideration for a $15 million prepayment funded by the Company, BMO agreed to significantly reduce minimum monthly collection requirements and the interest rate. If and when BMO receives the next $15 million of collections from the Portfolio Purchase or from voluntary prepayments by Asta Funding, Inc., less certain credits for payments made prior to the consummation of the Settlement Agreement (the “Remaining Amount”), Palisades XVI and its affiliates would be automatically released from liability in connection with the RFA

 

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ASTA FUNDING, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2015 and 2014

NOTE I — NON RECOURSE DEBT (CONTINUED)

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

 

(subject to customary exceptions). A condition to the release was Palisade XVI’s agreement to grant BMO, as of the time of the payment of the Remaining Amount, the right to receive 30% of net collections from the Portfolio Purchase once Palisades XVI has received from future net collections, the sum of $15 million plus voluntary prepayments included in the payment of the Remaining Amount (the “Income Interest”). The Company estimated the Income Interest to be between $0 and $1.4 million. However, the Company believes that no amount would be incurred because of the continued deterioration of collections from the Portfolio Purchase.

On June 3, 2014, Palisades XVI paid the Remaining Amount. The final principal payment of $2,901,199 included a voluntary prepayment of $1,866,036 provided from funds of the Company. Accordingly, Palisades XVI will be entitled to receive $16.9 million of future collections from the Portfolio Purchase before BMO is entitled to receive any payments with respect to its Income Interest.

With the payment of the Remaining Amount and upon completion of the documents granting the Palisades XVI Income Interest, including a written confirmation from BMO that the obligation has been paid in full, Palisades XVI has been released from further debt obligations from the RFA. The Company has recorded as other income, forgiveness of non-recourse debt, in the amount of approximately $26.1 million, pre-tax in the third quarter of fiscal year 2014.

As of September 30, 2015, approximately $4.8 million remained to be received by the Company against the $16.9 million.

Bank Hapoalim B.M. (“Bank Hapoalim”) Line of Credit

On May 2, 2014, the Company obtained a $20 million line of credit facility from Bank Hapoalim, pursuant to a Loan Agreement (the “Loan Agreement”) among the Company and its subsidiary, Palisades Collection, LLC, as borrowers (“the Borrowers”), and Bank Hapoalim, as agent and lender. The Loan Agreement provides for a $20.0 million committed line of credit and an accordion feature providing an increase in the line of credit of up to $30 million, at the discretion of the lender. The facility is for a term of three years at an interest rate of either LIBOR plus 275 basis points or prime, at the Company’s option. The Loan Agreement includes covenants that require the Company to maintain a minimum net worth of $150 million and pay an unused line fee. The facility is secured pursuant to a Security Agreement (“Security Agreement”) among the parties to the Loan Agreement, with property of the Borrowers serving as collateral. Since inception, through September 30, 2015, the Company has not used this facility.

NOTE J — OTHER DEBT — CBC

The Company assumed $25.9 million of debt related to the CBC acquisition (see Note D) on December 31, 2013. On the same date, the Company paid down $2.5 million of the debt. On March 27, 2014, CBC entered into the Sixth Amendment, whereby it increased its revolving line of credit from $12.5 million to $15.0 million, the interest rate floor was reduced from 5.5% to 4.75% and the commitment was extended to February 28, 2015. The amendment also included changes in carrier concentration ratios and removal of the personal guarantees of the general managers and non-controlling interest partners. On July 15, 2014, CBC entered into the Seventh Amendment, extending the revolving line of credit to $20.0 million. On September 29, 2014, CBC entered into the Eighth Amendment, further extending the credit line to $22.0 million. On March 11, 2015, CBC entered into the Ninth Amendment. This amendment, effective March 1, 2015, extended the maturity date on its credit line from February 28, 2015 to March 1, 2017. Additionally, the credit line was increased from $22.0 million to $25.0 million and the interest rate floor was decreased from 4.75% to 4.1%. Other terms and conditions were

 

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Table of Contents

ASTA FUNDING, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2015 and 2014

NOTE J — OTHER DEBT — CBC (CONTINUED)

 

materially unchanged. On November 26, 2014, CBC completed its fourth private placement, backed by structured settlement and fixed annuity payments. CBC issued, through its subsidiary, BBR IV, LLC, approximately $21.8 million of fixed rate asset-backed notes with a yield of 5.4%. On September 25, 2015, CBC completed its fifth private placement, backed by structured settlement and fixed annuity payments. CBC issued, through its subsidiary, BBR V, LLC, approximately $16.6 million of fixed rate asset-backed notes with a yield of 5.1%. As of September 30, 2015, the remaining debt amounted to $51.6 million, which consisted of $4.6 million drawdown from a line of credit from an institutional source and $47.0 million notes issued by entities 100%-owned and consolidated by CBC. These entities are bankruptcy-remote entities created to issue notes secured by structured settlements. The following table details the other debt at September 30, 2015 and 2014:

 

     Interest Rate     September 30,
2015
     September 30,
2014
 

Notes payable secured by settlement receivables with principal and interest outstanding payable until June 2025

     8.75 %   $ 2,270,000       $ 2,521,000   

Notes payable secured by settlement receivables with principal and interest outstanding payable until August 2026

     7.25     4,713,000         5,363,000   

Notes payable secured by settlement receivables with principal and interest outstanding payable until April 2032

     7.125 %     4,497,000         4,828,000   

Notes payable secured by settlement receivables with principal and interest outstanding payable until February 2037

     5.39 %     20,147,000          

Notes payable secured by settlement receivables with principal and interest outstanding payable until March 2034

     5.07 %     15,361,000          
    

 

 

    

 

 

 

Subtotal notes payable

       46,988,000         12,712,000   

$25,000,000 revolving line of credit expiring on March 1, 2017

     4.1 %     4,623,000         19,583,000   
    

 

 

    

 

 

 

Total debt — CBC

     $ 51,611,000       $ 32,295,000   
    

 

 

    

 

 

 

NOTE K — OTHER LIABILITIES

Other liabilities as of September 30, 2015 and 2014 are as follows:

 

     2015      2014  

Accounts payable and accrued expenses

   $ 3,394,000       $ 3,126,000   

IRS interest payable (see Note L)

     624,000           

Other

     423,000         461,000   
  

 

 

    

 

 

 

Total other liabilities

   $ 4,441,000       $ 3,587,000   
  

 

 

    

 

 

 

 

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ASTA FUNDING, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2015 and 2014

 

NOTE L — INCOME TAXES

The components of the provision for income taxes for the years ended September 30, 2015, 2014 and 2013 are as follows:

 

     2015      2014      2013  

Current:

        

Federal

   $ 6,875,000       $ 4,148,000       $ 561,000   

Federal true up

     (34,000 )      18,000           

Interest on IRS payment

     624,000         
  

 

 

    

 

 

    

 

 

 
     7,465,000         4,166,000         561,000   
  

 

 

    

 

 

    

 

 

 

Deferred:

        

Federal

     (7,282,000      (1,620,000 )      212,000   

State

     1,939,000         2,067,000         121,000   
  

 

 

    

 

 

    

 

 

 
     (5,343,000 )      447,000         333,000   
  

 

 

    

 

 

    

 

 

 

Provision for income taxes

   $ 2,122,000       $ 4,613,000       $ 894,000   
  

 

 

    

 

 

    

 

 

 

The difference between the statutory federal income tax rate on the Company’s pre-tax income and the Company’s effective income tax rate is summarized for the years ended September 30, 2015, 2014 and 2013 as follows:

 

     2015     2014     2013  

Statutory federal income tax rate

     34.0 %     34.0 %     34.0 %

State income tax, net of federal benefit

     5.9        4.5        6.1   

State tax rate change

            8.4          

Permanent difference in municipal interest

     (6.6 )     (3.3 )     (7.5 )

Permanent difference other

            0.2        (0.7 )

Federal prior year provision to return difference

            0.2        (2.1 )

Interest on IRS payment

     12.9                 

Other

     (2.5     (2.2 )     (2.8 )
  

 

 

   

 

 

   

 

 

 

Effective income tax rate

     43.7 %     41.8 %     27.0 %
  

 

 

   

 

 

   

 

 

 

 

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ASTA FUNDING, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2015 and 2014

NOTE L — INCOME TAXES (CONTINUED)

 

The Company recognized a net deferred tax asset of $12,279,000 and $6,786,000 as of September 30, 2015 and 2014, respectively. The components are as follows:

 

     September 30,
2015
     September 30,
2014
 

Deferred and accrued revenue

   $       $ 7,000   

Impairments/bad debt reserves/prior period adjustments

     1,752,000         915,000   

Revenue recognition tax basis

     9,911,000           

State tax net operating loss carryforward

     6,684,000         9,958,000   

Stock based compensation

     3,062,000         2,814,000   

Unrealized gain on structured settlements

     (3,644,000 )      (930,000 )

Depreciation, amortization and other

     77,000         (249,000 )
  

 

 

    

 

 

 

Deferred income taxes

     17,842,000         12,515,000   

Deferred tax valuation allowance

     (5,563,000 )      (5,729,000 )
  

 

 

    

 

 

 

Deferred income taxes

   $ 12,279,000       $ 6,786,000   
  

 

 

    

 

 

 

The Company files consolidated Federal and state income tax returns. Substantially all of the Company’s subsidiaries are single member limited liability companies and, therefore, do not file separate tax returns. Majority and minority owned subsidiaries file separate partnership tax returns. The expiration date for state net operating loss (“NOL”) carryforwards (from September 30, 2009) is September 30, 2029. The New Jersey NOL carryforward balance as of September 30, 2015 is approximately $87.9 million. Included in the Federal current tax provision is the effect of the recently concluded IRS audit, taking into consideration the adjustment effected in fiscal year 2013 for the tax periods 2009 through 2013, coupled with the Federal tax refund carryback claim resulting from the carryback of the current net operating loss. This current tax provision was offset by a deferred tax provision of the same amount because the IRS adjustment was temporary in nature. There are no federal NOL carryforwards.

The Company accounts for income taxes using the asset and liability method which requires the recognition of deferred tax assets and, if applicable, deferred tax liabilities, for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and, if applicable, liabilities. Additionally, the Company would adjust deferred taxes to reflect estimated tax rate changes, if applicable. The Company conducts periodic evaluations to determine whether it is more likely than not that some or all of its deferred tax assets will not be realized. Among the factors considered in this evaluation are estimates of future earnings, the future reversal of temporary differences and the impact of tax planning strategies that the Company can implement, if warranted. The Company is required to provide a valuation allowance for any portion of our deferred tax assets that, more likely than not, will not be realized at September 30, 2015. Based on this evaluation, the Company has a deferred tax asset valuation allowance of approximately $5.6 million as of September 30, 2015 as compared to $5.7 million reported on September 30, 2014. Although the carryforward period for state income tax purposes is up to twenty years, given the economic conditions, such economic environment could limit growth over a reasonable time period to realize the deferred tax asset. The Company determined the time period allowance for carryforward is outside a reasonable period to forecast full realization of the deferred tax asset, therefore recognized the deferred tax asset valuation allowance. The Company continually monitors forecast information to ensure the valuation allowance is at the appropriate value. As required by FASB ASC 740, Income Taxes, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.

 

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ASTA FUNDING, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2015 and 2014

NOTE L — INCOME TAXES (CONTINUED)

 

Interest and penalties arising from uncertain tax positions are presented as a component of income taxes. $624,000 of interest was recognized in the Company’s consolidated financial statements for 2015. On July 16, 2015, the Company made a payment to the IRS of approximately $13 million in anticipation of the conclusion of the examination by the IRS and in accordance with the notice of proposed adjustment, for the fiscal years September 30, 2009 through September 30, 2013. The adjustment is the result of a change in the accounting method for income tax purposes. Apart from the change in accounting method for income tax purposes, there were no other material disallowances or adjustments to other items of income, deductions, and credits to the tax returns under examination. The payment does not include approximately $624,000 of interest related to the tax year of the IRS adjustment, September 30, 2013, which has been accrued as of July 15, 2015, classified in the income tax line of the statements of income. The Company will be amending its federal tax return for the fiscal year ended September 30, 2014, to reflect the new accounting method for tax purposes. There is no state and local tax liability as a result of the federal tax examination, however the New Jersey state NOL was adjusted to reflect the current year and revised previous years results. On December 1, 2015 the Company received notification that the Congressional Joint Committee on Taxation completed its consideration on the income tax returns and took no exception to the conclusions reached by the IRS.

The Company does not have any uncertain tax positions.

As a result of the IRS examination, the Company will amend its state tax returns for the same periods.

NOTE M — COMMITMENTS AND CONTINGENCIES

Leases

The Company leases its facilities in (i) Englewood Cliffs, New Jersey, (ii) Houston, Texas, (iii) New York, New York and (iv) Conshohocken, Pennsylvania. The leases are operating leases, and the Company incurred related rent expense in the amounts of $967,000, $617,000 and $554,000 during the years ended September 30, 2015, 2014 and 2013, respectively. The future minimum lease payments are as follows:

 

Year

Ending

September 30,

      

2016

   $ 819,000   

2017

     677,000   

2018

     429,000   

2019

     434,000   

2020

     291,000   
  

 

 

 
   $ 2,650,000   
  

 

 

 

Contingencies

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

 

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Table of Contents

ASTA FUNDING, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2015 and 2014

NOTE M — COMMITMENTS AND CONTINGENCIES (CONTINUED)

Contingencies (Continued)

 

The Company is fully cooperating with several state agencies in connection with subpoenas seeking information and/or documentation regarding business practices. The Company has not made any provision with respect to these matters in the financial statements because the Company does not believe that they are material to its business and financial condition.

The Office of the Attorney General of the State of New York, Bureau of Consumer Frauds and Protection (“NYAG”) had conducted investigations into the debt collection practices of several companies in the industry, including the Company. The Company cooperated with NYAG and, in April 2015, reached an Assurance of Discontinuation (“AOD”) that resolved NYAG’s concerns without admitting or denying any of NYAG’s allegations. The Company paid $100,000 to New York State and has agreed to comply with debt collection laws and certain training and certification requirements. The AOD has not had a material impact on the operating results of the Company.

NOTE N — CONCENTRATIONS

At September 30, 2015, approximately 38% of the Company’s portfolio face value was serviced by five collection organizations. The Company has servicing agreements in place with these five collection organizations, as well as all of the Company’s other third party collection agencies and attorneys that cover standard contingency fees and servicing of the accounts.

NOTE O — STOCK OPTION PLANS

2012 Stock Option and Performance Award Plan

On February 7, 2012, the Board of Directors adopted the Company’s 2012 Stock Option and Performance Award Plan (the “2012 Plan”), which was approved by the stockholders of the Company on March 21, 2012. The 2012 Plan replaces the Equity Compensation Plan (as defined below).

The 2012 Plan provides the Company with flexibility with respect to equity awards by also providing for grants of stock awards (i.e., restricted or unrestricted), stock purchase rights and stock appreciation rights, in addition to the granting of stock options.

The Company authorized 2,000,000 shares of Common Stock for issuance under the 2012 Plan. As of September 30, 2015, the Company has granted 417,100 options and 117,321 shares of restricted stock since inception of the 2012 Plan. Additionally, 45,600 options have been cancelled during that time period, leaving 1,511,179 shares available as of September 30, 2015. As of September 30, 2015, approximately 95 of the Company’s employees were eligible to participate in the 2012 Plan.

Equity Compensation Plan

On December 1, 2005, the board of directors adopted the Company’s Equity Compensation Plan (the “Equity Compensation Plan”), which was approved by the stockholders of the Company on March 1, 2006. The Equity Compensation Plan was adopted to supplement the Company’s 2002 Stock Option Plan (as defined below).

In addition to permitting the grant of stock options as are permitted under the 2002 Stock Option Plan, the Equity Compensation Plan allows the Company flexibility with respect to equity awards by also providing for grants of stock awards (i.e., restricted or unrestricted), stock purchase rights and stock appreciation rights.

 

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Table of Contents

ASTA FUNDING, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2015 and 2014

NOTE O — STOCK OPTION PLANS (CONTINUED)

Equity Compensation Plan (Continued)

 

The Company authorized 1,000,000 shares of Common Stock for issuance under the Equity Compensation Plan. As of March 21, 2012, no more awards could be issued under this plan.

2002 Stock Option Plan

On March 5, 2002, the board of directors adopted the Company’s 2002 Stock Option Plan (the “2002 Plan”), which was approved by the Company’s stockholders on May 1, 2002. The 2002 Plan was adopted in order to attract and retain qualified directors, officers and employees of, and consultants to, the Company.

The 2002 Plan authorizes the granting of incentive stock options (as defined in Section 422 of the Internal Revenue Code of 1986, as amended (“the “Code”)) and non-qualified stock options to eligible employees of the Company, including officers and directors of the Company (whether or not employees) and consultants of the Company.

The Company authorized 1,000,000 shares of Common Stock for issuance under the 2002 Plan. As of March 5, 2012, no more awards could be issued under this plan.

Stock Based Compensation

The Company accounts for stock-based employee compensation under ASC 718, Compensation — Stock Compensation (“ASC 718”). ASC 718 requires that compensation expense associated with stock options and other stock based awards be recognized in the income statement rather than a disclosure in the notes to the Company’s consolidated financial statements.

In February 2015, the Compensation Committee of the Board of Directors of the Company (“Compensation Committee”) granted 45,400 options to employees of the Company. The exercise price of these options, issued on February 23, 2015, was at the market price on that date. The options generally vest in three equal annual installments and are accounted for as one graded vesting award. The weighted average assumptions used in the option pricing model were as follows:

 

Risk-free interest rate

     0.12 %

Expected term (years)

     5.9   

Expected volatility

     32.7 %

Dividend yield

     0.00 %

On October 2, 2014, the Compensation Committee of the Board of Directors of the Company (“Compensation Committee”) granted 15,000 restricted shares to an employee of the Company. These shares vest in three equal installments, starting on the first anniversary of the grant.

In February 2014, the Compensation Committee of the Board of Directors of the Company (“Compensation Committee”) granted 5,000 stock options to a consultant of the Company. The exercise price of these was at the market price on that date. The options vested immediately. The weighted average assumptions used in the option pricing model were as follows:

 

Risk-free interest rate

     0.06 %

Expected term (years)

     5.9   

Expected volatility

     35.3 %

Dividend yield

     0.00 %

 

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Table of Contents

ASTA FUNDING, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2015 and 2014

NOTE O — STOCK OPTION PLANS (CONTINUED)

Stock Based Compensation (Continued)

 

In December 2013, the Compensation Committee of the Board of Directors of the Company (“Compensation Committee”) granted 156,700 stock options, of which 70,000 options were awarded to the Officers of the Company and the remaining 86,700 stock options were awarded to non-officer employees of the Company. The exercise price of these options, issued on December 12, 2013, was at the market price on that date. The options vest in three equal annual installments and accounted for as one graded vesting award. The weighted average assumptions used in the option pricing model were as follows:

 

Risk-free interest rate

     0.08 %

Expected term (years)

     6.5   

Expected volatility

     98.3 %

Dividend yield

     0.00 %

In June 2013, through a previous action of the Compensation Committee of the board of directors of the Company (the “Compensation Committee”) authorizing the Chief Executive Officer of the Company the discretion to grant stock option awards to non-officer employees, the Chief Executive Officer awarded 50,000 stock options to non-officer employees. The exercise price of these options, issued on June 13, 2013, was at the market price on that date. The options vest in three equal installments, accounted for as one graded vesting award, starting on the first anniversary of the grant. The assumptions used in the option pricing model were as follows:

 

Risk-free interest rate

     0.10 %

Expected term (years)

     6.2   

Expected volatility

     99.7 %

Dividend yield

     0.92 %

In December 2012, the Compensation Committee granted 160,000 stock options, of which 65,000 options were awarded to three officers of the Company and 20,000 options were awarded to an employee of the Company. The remaining 75,000 shares were issued to six non-employee directors of the Company. The exercise price of these options, issued on December 18, 2012, was at the market price on that date. The options vest in three equal installments, accounted for as one graded vesting award, starting on the first anniversary of the grant. The assumptions used in the option pricing model were as follows:

 

Risk-free interest rate

     0.16 %

Expected term (years)

     6.0   

Expected volatility

     101.0 %

Dividend yield

     1.67 %

In addition, the Company granted 102,321 restricted shares to the Chief Executive Officer of the Company. The shares vest in three equal installments, starting on the first anniversary of the grant.

 

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Table of Contents

ASTA FUNDING, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2015 and 2014

NOTE O — STOCK OPTION PLANS (CONTINUED)

Stock Based Compensation (Continued)

 

The following table summarizes stock option transactions under the plans:

 

     Year Ended September 30,  
     2015      2014      2013  
     Shares     Weighted
Average
Exercise
Price
     Shares     Weighted
Average
Exercise
Price
     Shares     Weighted
Average
Exercise
Price
 

Outstanding options at the beginning of year

     1,403,259      $ 10.78         1,622,771      $ 11.31         1,499,471      $ 11.27   

Options granted

     45,400        8.37         161,700        8.48         210,000        9.36   

Options forfeited/cancelled

     (344,259 )     17.90         (369,612 )     12.33         (50,000 )     7.77   

Options exercised

     (60,834 )     7.83         (11,600 )     3.46         (36,700 )     3.41   
  

 

 

      

 

 

      

 

 

   

Outstanding options at the end of year

     1,043,566      $ 8.47         1,403,259      $ 10.78         1,622,771      $ 11.31   
  

 

 

      

 

 

      

 

 

   

Exercisable options at the end of year

     860,891      $ 8.41         888,587      $ 12.15         1,108,271      $ 12.62   
  

 

 

      

 

 

      

 

 

   

The Company recognized $1,063,000 of compensation expense related to stock options, for fiscal year 2015. The Company recognized $1,418,000 and $1,683,000 of compensation expense related to stock options in the fiscal years ended September 30, 2014 and 2013, respectively. As of September 30, 2015, there was $661,000 of unrecognized compensation cost related to unvested stock options. The weighted average remaining period over which such costs are expected to be recognized is 1.1 years.

The intrinsic value of the outstanding and exercisable options as of September 30, 2015 was approximately $520, 000 and $512,000, respectively. The intrinsic value of the options exercised during fiscal years 2015 and 2014 was approximately $76,000 and $57,000, respectively. The fair value of the options exercised during the fiscal years ended September 30, 2015 and 2014 was approximately $379,000 and $97,000, respectively. The proceeds from the exercise of stock options during the fiscal years ended September 30, 2015 and 2014 were approximately $476,000 and $40,000, respectively. The weighted average remaining contractual life of exercisable options as of September 30, 2015 is 5.8 years. The fair value of the stock options that vested during the 2015 and 2014 fiscal years was approximately $3,201,000 and $740,000, respectively. The fair value of options granted during the fiscal years ended September 30, 2015 and 2014 was approximately $298,000 and $1,372,000, respectively.

The following table summarizes information about the plans’ outstanding options as of September 30, 2015:

 

     Options Outstanding      Options Exercisable  

Range of

Exercise Price

   Number
Outstanding
     Weighted
Average
Remaining
Contractual
Life (In Years)
     Weighted
Average
Exercise
Price
     Number
Exercisable
     Weighted
Average
Exercise
Price
 

$  2.8751 - $  5.7500

     7,100         3.6       $ 2.95         7,100       $ 2.95   

$  5.7501 - $  8.6250

     847,466         6.1         7.96         722,795         7.88   

$  8.6251 - $11.5000

     174,000         7.3         9.40         115,996         9.40   

$11.5001 - $28.7500

     15,000         1.2         28.75         15,000         28.75   
  

 

 

          

 

 

    
     1,043,566         6.2       $ 8.47         860,891       $ 8.41   
  

 

 

          

 

 

    

 

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ASTA FUNDING, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2015 and 2014

NOTE O — STOCK OPTION PLANS (CONTINUED)

Stock Based Compensation (Continued)

 

The following table summarizes information about restricted stock transactions:

 

     Year Ended
September 30, 2015
Shares
    Weighted
Average
Grant Date
Fair Value
     Year Ended
September 30, 2014
Shares
    Weighted
Average
Grant Date
Fair Value
 

Unvested at the beginning of period

     68,214      $ 9.57         102,321      $ 9.57   

Awards granted

     15,000        8.30                0.00   

Vested

     (39,107 )     9.41         (34,107 )     9.57   

Forfeited

            0.00                0.00   
  

 

 

      

 

 

   

Unvested at the end of period

     44,107      $ 9.28         68,214      $ 9.57   
  

 

 

      

 

 

   

The Company recognized $371,000, $326,000 and $273,000 of compensation expense during the fiscal years ended September 30, 2015, 2014 and 2013, respectively, for restricted stock. As of September 30, 2015, there was a total of $150,000 of unrecognized compensation cost related to unvested restricted stock. The weighted average remaining period over which such costs are recognized is 1.1 years. There was $15,000 of restricted stock awards granted during the first quarter of fiscal year 2015, with a fair value of $125,000. There were no restricted stock awards granted during fiscal year 2014. The fair value of the restricted stock awards vested during the fiscal years ended September 30, 2015 and 2014 was approximately $368,000 and $326,000, respectively.

The Company recognized an aggregate total of $1,434,000, $1,744,000 and $1,956,000 in compensation expense for the fiscal years ended September 30, 2015, 2014 and 2013, respectively, for the stock options and restricted stock grants. As of September 30, 2015, there was a total of $811,000 of unrecognized compensation cost related to unvested stock options and restricted stock grants. The method used to calculate stock based compensation is the straight line pro-rated method.

NOTE P — STOCKHOLDERS’ EQUITY

Dividends are at the discretion of the board of directors and will depend upon the Company’s financial condition, operating results, capital requirements and any other factors the board of directors deems relevant. In addition, agreements with the Company’s lenders may, from time to time, restrict the ability to pay dividends. As of September 30, 2015, there were no such restrictions. No dividends were declared for fiscal years 2015 and 2014.

On August 11, 2015, the Board of Directors of the Company approved the repurchase of up to $15,000,000 of the Company’s common stock and authorized management of the Company to enter into a Rule 10b5-1 plan. The plan is effective through December 31, 2015. Through September 30, 2015, the Company purchased approximately 202,000 at an aggregate cost of approximately $1.8 million. No shares were repurchased in fiscal year 2014.

NOTE Q — RETIREMENT PLAN

The Company maintains a 401(k) Retirement Plan covering all of its eligible employees. Matching contributions made by the employees to the plan are made at the discretion of the board of directors each plan year. Contributions for the years ended September 30, 2015, 2014 and 2013 were $113,000, $119,000 and $88,000, respectively.

 

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ASTA FUNDING, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2015 and 2014

 

NOTE R — FAIR VALUE OF FINANCIAL MEASUREMENTS AND DISCLOSURES

Disclosures about Fair Value of Financial Instruments

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

The estimated fair value of the Company’s financial instruments is summarized as follows:

 

    September 30, 2015     September 30, 2014  
    Carrying
Amount
    Fair
Value
    Carrying
Amount
    Fair
Value
 

Financial assets

       

Cash and cash equivalents (Level 2)

  $ 24,315,000      $ 24,315,000      $ 28,710,000      $ 28,710,000   

Available-for-sale investments (Level 1)

    59,727,000        59,727,000        66,799,000        66,799,000   

Consumer receivables acquired for liquidation (Level 3)

    15,608,000        31,339,000        29,444,000        50,962,000   

Structured settlements (Level 3)

    64,635,000        64,635,000        42,079,000        42,079,000   

Other investments(1)

    4,239,000        4,239,000                 

Financial liabilities

       

Other debt — CBC, revolving line of credit (Level 3)

    4,623,000        4,623,000        19,583,000        19,583,000   

Other debt — CBC, non-recourse notes payable with varying installments (Level 3)

    46,988,000        46,988,000        12,712,000        12,712,000   

 

(1) The Company has elected to early adopt ASU 2015-07 and in accordance with ASU 2015-07, certain investments that are measured at fair value using the net asset value per share (or its equivalent) have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the condensed consolidated balance sheet.

Disclosure of the estimated fair values of financial instruments often requires the use of estimates. The Company uses the following methods and assumptions to estimate the fair value of financial instruments:

Cash and cash equivalents — The carrying amount of cash and cash equivalents approximates fair value.

Available-for-sale investments — The available-for-sale securities consist of mutual funds that are valued based on quoted prices in active markets.

Consumer receivables acquired for liquidation — The Company computed the fair value of the consumer receivables acquired for liquidation using its proprietary forecasting model. The Company’s forecasting model utilizes a discounted cash flow analysis. The Company’s cash flows are an estimate of collections for consumer receivables based on variables fully described in Note C: Consumer Receivables Acquired for Liquidation. These cash flows are discounted to determine the fair value.

Structured settlements — The Company determined the fair value based on the discounted forecasted future collections of the structured settlements. Unrealized gains on structured settlements is comprised of both unrealized gains resulting from fair market valuation at the date of acquisition of the structured settlements and the

 

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ASTA FUNDING, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2015 and 2014

NOTE R — FAIR VALUE OF FINANCIAL MEASUREMENTS AND DISCLOSURES (CONTINUED)

Disclosures about Fair Value of Financial Instruments (Continued)

 

subsequent fair value adjustments resulting from the change in the discount rate. Of the $7.1 million of unrealized gains recognized in the fiscal year ended September 30, 2015, approximately $7.1 million is due to day one gains on new structured settlements financed during the period, $1.8 million due to a change in the discount rate, offset by a decrease of $1.8 million in realized gains recognized as realized interest income on structured settlements during the period. There were no other changes in assumptions during the period.

Other investments — The Company estimated the fair value using the net asset value per share of the investment. There are no unfunded commitments and the investment cannot be redeemed for 5 years.

Other debt CBC, revolving line of credit — The Company determined the fair value based on similar instruments in the market.

Other debt CBC, notes payable with varying installments — The fair value at September 30, 2015 was based on the discounted forecasted future collections of the structured settlements.

Fair Value Hierarchy

The Company recorded its available-for-sale investments at estimated fair value on a recurring basis. The accompanying consolidated financial statements include estimated fair value information regarding its available-for-sale investments as of September 30, 2015, as required by FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s level within the fair value hierarchy is based on the lowest level of input significant to the fair value measurement.

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

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

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

A significant unobservable input used in the fair value measurement of structured settlements is the discount rate. Significant increases and decreases in the discount rate used to estimate the fair value of structured settlements could decrease or increase the fair value measurement of the structured settlements. The discount rate could be affected by factors, which include, but are not limited to, creditworthiness of insurance companies, market conditions, specifically competitive factors, credit quality of receivables purchased, the diversity of the payors of the receivables purchased, the weighted average life of receivables, current benchmark rates (i.e. 10 year treasury or swap rate) and the historical portfolio performance of the originator and/or servicer.

The Company’s available-for-sale investments are classified as Level 1 financial instruments based on the classifications described above. The Company did not have any transfers into (out of) Level 1 investments during the fiscal year ended September 30, 2015. The Company had no Level 2 or Level 3 available-for-sale investments during the fiscal year ended September 30, 2015.

 

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ASTA FUNDING, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2015 and 2014

NOTE R — FAIR VALUE OF FINANCIAL MEASUREMENTS AND DISCLOSURES (CONTINUED)

Fair Value Hierarchy (Continued)

 

The following table sets forth the Company’s quantitative information about its Level 3 fair value measurements as of September 30, 2015:

 

     Fair Value      Valuation
Technique
     Unobservable
Input
     Rate  

Structured settlements at fair value

   $ 64,635,000        
 
Discounted
cash flow
  
  
    
 
Discount
rate
  
  
     5.07 %

The changes in structured settlements at fair value using significant unobservable inputs (Level 3) during the year ended September 30, 2015 were as follows:

 

Balance at September 30, 2014

   $ 42,079,000   

Total gains included in earnings

     7,146,000   

Purchases

     16,615,000   

Sales

       

Interest accreted

     4,330,000   

Payments received

     (5,535,000 )
  

 

 

 

Total

   $ 64,635,000   
  

 

 

 

The amount of total gains for the year included in earnings attributable to the change in unrealized gains (losses) relating to assets held at September 30, 2015

   $ 7,146,000   

Realized and unrealized gains and losses included in earnings in the accompanying consolidated statements of income for the year ended September 30, 2015 are reported in the following revenue categories:

 

Total gains (losses) included in earnings in fiscal year 2015

   $ 7,146,000   
  

 

 

 

Change in unrealized gains (losses) relating to assets still held at September 30, 2015

   $ 7,146,000   
  

 

 

 

NOTE S — RELATED PARTY TRANSACTIONS

On December 12, 2011, the Company and Piccolo Business Advisory (“Piccolo”), which is owned by Louis Piccolo, a director of the Company, entered into a Consulting Agreement, pursuant to which Piccolo provided consulting services which included, but was not limited to, analysis of proposed debt and equity transactions, due diligence and financial analysis and management consulting services (“Services”). The Consulting Agreement was for a period of two years, which ended on December 31, 2013 and Piccolo received compensation of $150,000 per annum payable monthly, a bonus of $25,000 per new transaction closed by the Company with Piccolo’s assistance (if any), and 30,000 options per year, with such options vesting in three equal annual installments on the first, second and third anniversaries of the first grant date. The Company paid Piccolo $25,000 in the fiscal year ended September 30, 2014. This agreement was not immediately renewed.

On September 17, 2015, the Company and Piccolo agreed to terms to a new two-year, $80,000 contract, pursuant to which Piccolo will provide consulting services, as described above. The compensation is to be paid quarterly. For the fiscal year ended September 30, 2015, the Company paid Piccolo approximately $3,000 for such services.

 

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ASTA FUNDING, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2015 and 2014

 

NOTE T — SUMMARIZED QUARTERLY DATA (UNAUDITED)

 

Quarter

  First
Quarter
    Second
Quarter(1)
    Third
Quarter
    Fourth
Quarter
    Full
Year
 

2015

         

Total revenue

  $ 9,827,000      $ 10,398,000      $ 10,032,000      $ 12,234,000      $ 42,491,000   

Income before income taxes

    419,000        1,143,000        408,000        2,880,000        4,850,000   

Net income attributable to Asta Funding, Inc.

    370,000        345,000        161,000        1,140,000        2,016,000   

Basic net income per share attributable to Asta Funding, Inc.

  $ 0.03      $ 0.03      $ 0.01      $ 0.08      $ 0.15   

Diluted net income per share attributable to Asta Funding, Inc.

  $ 0.03      $ 0.03      $ 0.01      $ 0.08      $ 0.15   

2014

         

Total revenue

  $ 7,457,000      $ 7,857,000      $ 8,396,000      $ 8,875,000      $ 32,585,000   

Income before income taxes

    2,194,000        126,000        7,680,000        1,042,000        11,042,000   

Net income attributable to Asta Funding, Inc.

    947,000        75,000        4,687,000        192,000        5,901,000   

Basic net income per share attributable to Asta Funding, Inc.

  $ 0.07      $ 0.01      $ 0.36      $ 0.01      $ 0.45   

Diluted net income per share attributable to Asta Funding, Inc.

  $ 0.07      $ 0.01      $ 0.35      $ 0.01      $ 0.45   

 

* Due to rounding the sum of quarterly totals for earnings per share may not add to the yearly total.
(1) Second quarter of fiscal year 2015 was revised to reflect the proper period of recognizing the unrealized foreign exchange loss on other investments.

NOTE U — SEGMENT REPORTING

The Company operates through strategic business units that are aggregated into four reportable segments: Consumer receivables, Personal injury claims, structured settlements and disability advocacy. The four reportable segments consist of the following:

 

   

Consumer receivables — segment is engaged in the business of purchasing, managing for its own account and servicing distressed consumer receivables, including charged off receivables, semi-performing receivables and performing receivables. The primary charged-off receivables are accounts that have been written-off by the originators and may have been previously serviced by collection agencies. Semi-performing receivables are accounts where the debtor is currently making partial or irregular monthly payments, but the accounts may have been written-off by the originators. Performing receivables are accounts where the debtor is making regular monthly payments that may or may not have been delinquent in the past. Distressed consumer receivables are the unpaid debts of individuals to banks, finance companies and other credit providers. A large portion of our distressed consumer receivables are MasterCard®, Visa® and other credit card accounts which were charged-off by the issuers or providers for non-payment. We acquire these and other consumer receivable portfolios at substantial discounts to their face values. The discounts are based on the characteristics (issuer, account size, debtor location and age of debt) of the underlying accounts of each portfolio. Litigation related receivables are semi-performing investments

 

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Table of Contents

ASTA FUNDING, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2015 and 2014

NOTE U — SEGMENT REPORTING (CONTINUED)

 

 

whereby the Company is assigned the revenue stream from the proceeds received. The business conducts its activities primarily under the name Palisades Collection, LLC.

 

   

Personal injury claims — Pegasus Funding, LLC , an 80% owned subsidiary, purchases interests in personal injury 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 claim.

 

   

Structured settlements — On December 31, 2013, the Company purchased an 80% interest in CBC Settlement Funding, LLC. CBC purchases periodic structured settlements and annuity policies from individuals in exchange for a lump sum payment.

 

   

GAR Disability Advocates is a non-attorney advocacy group, which obtains and represents individuals nationwide in their claims for social security disability and supplemental security income benefits from the Social Security Administration.

Certain non-allocated administrative costs, interest income, interest expense and various other non-operating income and expenses are reflected in Corporate. Corporate assets include cash and cash equivalents, available-for-sale securities, property and equipment, goodwill, deferred taxes and other assets.

 

(Dollars in millions)

   Fiscal
Year
     Consumer
Receivables
     Personal
Injury
Claims
     Structured
Settlements
     GAR
Disability
Advocates
    Corporate     Total
Company
 

Revenues

     2015       $ 20.8       $ 8.5       $ 11.8       $ 1.4      $      $ 42.5   
     2014         19.8         7.2         5.2         0.4               32.6   
     2013         31.8         6.4                               38.2   

Other income

     2015                                        1.7        1.7   
     2014         26.1                                1.4        27.5   
     2013                                        1.6        1.6   

Income before income taxes

     2015         13.8         0.1         3.5         (5.8     (6.7 )     4.9   
     2014         18.9         2.3         0.4         (2.7 )     (7.9 )     11.0   
     2013         10.1         2.0                 (1.2 )     (7.6 )     3.3   

Total assets

     2015         17.0         39.6         63.1         2.6        115.1        237.4   
     2014         30.5         34.0         38.5         1.0        113.1        217.1   
     2013         65.4         36.8                 0.2        109.1        211.5   

Capital expenditures

     2015                         0.1                       0.1   
     2014                                                 
     2013                                        0.7        0.7   

Depreciation

     2015                         0.1                0.3        0.4   
     2014                                        0.4        0.4   
     2013                                        0.4        0.4   

The Company does not have any intersegment revenue transactions.

 

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Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

ASTA FUNDING, INC.

By:

 

/s/ Gary Stern

  Gary Stern
  President and Chief Executive Officer
  (Principal Executive Officer)

Dated: December 14, 2015

Pursuant to the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:

 

Signature

  

Title

  

Date

/s/ Gary Stern

Gary Stern

  

Chairman of the Board, President, and

Chief Executive Officer

   December 14, 2015

/s/ Robert J. Michel

Robert J. Michel

  

Chief Financial Officer

(Principal Financial Officer and

Accounting Officer)

   December 14, 2015

/s/ Edward Celano

Edward Celano

   Director    December 14, 2015

/s/ Harvey Leibowitz

Harvey Leibowitz

   Director    December 14, 2015

/s/ David Slackman

David Slackman

   Director    December 14, 2015

/s/ Louis A. Piccolo

Louis A. Piccolo

   Director    December 14, 2015