Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

Form 10-K/A

(Amendment No. 1)

 

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

 

For the fiscal year ended September 30, 2016

 

OR

 

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

 

For the transition period from               to

 

Commission file number: 001-35637

ASTA FUNDING, INC.

 

(Exact Name of Registrant as Specified in its Charter)

 

Delaware		22-3388607
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
210 Sylvan Avenue, Englewood Cliffs, New Jersey		07632 (Zip Code)
(Address of Principal Executive Offices)

Registrant'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 each exchange on which registered
Common Stock, par value $.01 per share		NASDAQ Global Select Market

 

Securities registered pursuant to Section 12(g) of the 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   ☑

 

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     ☑

 

☐     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   ☐         No   ☑

 

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

 

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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.     ☑

 

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

 

Large Accelerated Filer ☐		Accelerated Filer ☑
Non-Accelerated Filer ☐ (Do not check if a smaller reporting company)		Smaller reporting company ☐
		Emerging growth company☐

 

 

 

 

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

 

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

 

The aggregate market value of voting and nonvoting common equity held by non-affiliates of the registrant was approximately $48,889,000 as of March 31, 2016.

 

As of September 14, 2018, the registrant had 6,685,415 shares of Common Stock issued and outstanding.

  

 

Explanatory Note

 

 As previously disclosed in the Current Report on Form 8-K filed by Asta Funding, Inc. (the “Company” or “Asta”) with the Securities and Exchange Commission (the “SEC”) on January 18, 2018, effective January 11, 2018, the Board of Directors (the “Board”) of the Company, upon the recommendation of the Audit Committee of the Board (the “Audit Committee”), determined that the Company’s previously issued financial statements for each of the years ended September 30, 2016, 2015 and 2014 and the interim periods contained therein (collectively, the “Non-Reliance Periods”), could no longer be relied upon. As a result, the Company is filing this Amendment No. 1 on Form 10-K/A (this “Amendment”) to amend and restate the Company’s original Annual Report on Form 10-K for the fiscal year ended September 30, 2016, which was filed with the SEC on December 14, 2016 (the “Original Form 10-K”). The Board, upon recommendation of the Audit Committee, also determined that the Company’s previously issued unaudited financial statements for the quarters ended December 31, 2016, March 31, 2017 and June 30, 2017 can no longer be relied upon. As a result, the Company expects to file, at a later time, amendments to its Quarterly Reports on Form 10-Q for those quarters.

 

Restatement Background

 

The Board’s decision to restate the Company’s financial statements for the Non-Reliance Periods stems from the Company's re-evaluation of its historical conclusions to consolidate Pegasus Funding, LLC ( “Pegasus”). Management has determined that the Company lacked the requisite control to consolidate Pegasus during the Non-Reliance Periods. As such, the Company should have reported its investment in Pegasus as an equity investment in accordance with accounting principles generally accepted in the United States (“US GAAP”). Additionally, the Company evaluated its historical and current practices with respect to accounting for Foreign Currency Matters under Accounting Standard Codification (“ASC”) 830 - Foreign Currency Matters in accordance with US GAAP. In connection with this evaluation, the Company determined that it had not previously accounted for foreign currency gains/losses on intercompany balances and other transaction and translation adjustments in accordance with US GAAP. The Company has since then expanded its review of its accounting practices and has identified additional transactions not accounted for in accordance with US GAAP. 

 

The "As Reported" amounts included in Note A - Restatement of Previously Consolidated Financial Statements in the accompanying notes to the consolidated financial statements, which were first reported in the Original Form 10-K, have been adjusted to reflect the presentation as discontinued operations of the Company's wholly-owned subsidiary, CBC Settlement Funding, LLC, which was sold on December 13, 2017 (See Note C - Discontinued operations and Note V - Subsequent events).

 

 The following errors in the Company’s annual financial statements were identified and corrected as part of this restatement:

 

 

1.

In connection with the Company determining it lacked the requisite control to consolidate Pegasus during the Non-Reliance Periods, the Company has corrected the presentation and has now accounted for its investment in Pegasus under the equity method in accordance with ASC 810 - Consolidation and US GAAP. The correction of the error has resulted in a reduction in total revenues of $20,212,000, $8,482,000 and $7,134,000 for the years ended September 30, 2016, 2015 and 2014, respectively, a reduction in expenses of $7,151,000, $8,425,000 and $4,845,000 for the years ended September 30, 2016, 2015 and 2014, respectively, and a decrease in non-controlling interest of $2,612,000, $11,000 and $458,000 for the years ended September 30, 2016, 2015 and 2014, respectively. This change to the equity method of accounting had no effect on net income during the Non-Reliance Periods. Additionally, there were other corrections made to the Pegasus financial statements which have been included in the adjustment column in the restatement tables, which are included in #6 below.

 

2.

The Company determined that it had not previously accounted for certain foreign currency gains/losses on intercompany balances, transaction and translation adjustment in accordance with US GAAP. The Company improperly accounted for the foreign currency effect of certain transactions as if they were long-term investments by including the foreign currency effect in accumulated other comprehensive income instead of properly recording the effect as operating expenses as required under ASC 830. The correction to properly apply US GAAP to these foreign currency matters resulted in an increase in revenue and other income of $148,000 for the year ended September 30, 2016, a decrease in other income of $118,000 for the year ended September 30, 2015, a decrease in expenses of $165,000 for the year ended September 30, 2016, and an increase in expenses of $1,667,000 and $186,000 for the years ended September 30, 2015 and 2014, respectively. Income from continuing operations increased by $313,000 for the year ended September 30, 2016, and decreased by $1,780,000 and $186,000 for the years ended September 30, 2015 and 2014, respectively. Net assets decreased by $952,000 as of September 30, 2016, and increased $305,000 as of September 30, 2015. Net liabilities decreased $18,000 as of September 30, 2016 and increased $565,000 in 2015. Accumulated other comprehensive income increased $718,000 and $1,705,000 as of September 30, 2016 and 2015, respectively.

 

3.

The Company did not reflect the quarterly increase in certain underlying benchmark interest rates used in determining fair value of the Company’s structured settlements for the year ended September 30, 2016. Prior to the sale of its structured settlements business in December 2017, the Company purchased periodic payments under structured settlements and annuity policies from individuals in exchange for a lump sum payment. The Company has elected to carry the structured settlements at fair value in accordance with the guidance of ASC, Recognition and Measurement of Financial Assets and Financial Liabilities (ASC 822). The Company has revised the fair market value of the structured settlements, which resulted in an increase to assets related to discontinued operations of $727,000 as of September 30, 2016, and an increase in income from discontinued operations of $727,000 for the year ended September 30, 2016.

 

 

4.

The Company has determined that it had not accounted for certain unallocated payments reported on its consolidated balance sheet properly during the Non-Reliance Periods. The correction of this error resulted in a reduction in finance income of $195,000, $193,000 and $261,000 for the years ended September 30, 2016, 2015 and 2014, respectively. Net assets decreased by $648,000 and $453,000 as of September 30, 2016 and 2015, respectively.

 

5.

The Company discovered that it did not properly record an amortizable asset and related liability in conjunction with an asset purchase agreement entered into in June 2015 with a previously undisclosed related party. The correction of this error resulted in a decrease in income from discontinued operations of $317,000, $56,000 and $69,000 for the years ended September 30, 2016, 2015 and 2014, respectively. Net assets related to discontinued operations increased by $307,000 and $997,000 as of September 30, 2016 and 2015, respectively. Net liabilities increased $756,000 and $1,078,000 as of September 30, 2016 and 2015, respectively.

 

6.

The Company identified other liabilities that had not been properly accrued in the correct period and/or for improper amounts. The adjustments of these errors were immaterial on an individual basis. The correction of these errors resulted in increased general and administrative expenses of $234,000 and $290,000 for the years ended September 30, 2016 and 2014, respectively, and a decrease in general and administrative expenses of $292,000 for the year ended September 30, 2015, as well as an increase in earnings from equity investment of $102,000 and $100,000 for the years ended September 30, 2016 and 2014, respectively, and a decrease in earnings from equity investment of $100,000 for the year ended September 30, 2015. For the year ended September 30, 2015, the correction of this error resulted in a decrease in income from discontinued operations of $40,000. Net liabilities increased $141,000 as of September 30, 2016, and net assets increased $67,000 as of September 30, 2015.

 

7.

The Company identified other transactions that had been recorded in incorrect accounts and/or for improper amounts. The net corrections of these transactions, which were individually immaterial, resulted in an increase in net assets of $33,000 and $45,000 as of September 30, 2016 and 2015, respectively. Net liabilities decreased $11,000 as of September 30, 2016.

 

8.

Certain of the corrections noted above impacted earnings (loss) before taxes which, in turn, required a calculation of the tax impact. The net impact was an increase to income taxes of $242,000 for the year ended September 30, 2016, and a reduction in income taxes of $1,120,000 and $254,000 for the years ended September 30, 2015 and 2014, respectively. The net effect of the adjustment in income taxes to discontinued operations was a decrease to income from discontinued operations for $473,000 and $293,000 for the years ended September 30, 2016 and 2015, respectively, and an increase to income from discontinued operations of $52,000 for the year ended September 30, 2014.

 

In addition to the adjustments to the Company's annual consolidated financial statements noted above, during the Non-Reliance Periods, the Company also had adjustments to its quarterly financial statements. These quarterly restatement adjustments are presented in Note S to the consolidated financial statements included herein.

 

Internal Control and Disclosure Controls Considerations

 

In connection with this restatement, our Chief Executive Officer and Chief Financial Officer determined that there were deficiencies in our internal control over financial reporting that constituted material weaknesses at September 30, 2016, 2015 and 2014. Accordingly, our Chief Executive Officer and Chief Financial Officer have concluded that disclosure controls and procedures (which the Company believes to be an integral part of its disclosure controls and procedures) were not effective at September 30, 2016, 2015 and 2014, and management concluded that the Company’s internal control over financial reporting was not effective at September 30, 2016, 2015 and 2014.

 

Items Amended In This Amendment

 

For the convenience of the reader, this Amendment sets forth the Original Form 10-K in its entirety, as modified and superseded as necessary to reflect the restatement described above (other than Part III, which is not being amended hereby, and which was incorporated by reference in the Original Form 10-K from the Company’s Proxy Statement for the 2017 Annual Meeting of Stockholders, filed with the SEC on April 14, 2017). In addition to such changes, this Amendment also includes: (i) revisions in presentation for the discontinued operations of the Company’s structured settlement business, which was sold on December 13, 2017, and; (ii) updates to the Company’s Subsequent Events disclosure included in Note V to the consolidated financial statements (collectively with (i) above, the “subsequent events”).

 

In accordance with applicable SEC rules, this Amendment also includes new certifications required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, as amended, from our Chief Executive Officer and Chief Financial Officer, dated as of the filing date of this Amendment. Aside from the foregoing items, this Amendment has not modified the Original Form 10-K other than to correct immaterial items, and certain errors in the exhibits and exhibit index, and the disclosures contained in this Amendment have not been updated to reflect events occurring subsequent to the date of the Original Form 10-K, December 14, 2016, except as noted above with respect to Subsequent Events.

 

Accordingly, this Amendment amends and restates the following items of the Original Form 10-K:

 

●

Part I - Item 1. Business.

●

Part I - Item 1A. Risk Factors.

●

Part I – Item 2. Properties.

●

Part II - Item 6. Selected Financial Data.

	●	Part II - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
	●	Part II - Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

●

Part II - Item 8. Financial Statements and Supplementary Data.

●

Part II - Item 9A. Controls and Procedures.

●

Part IV – Item 15. Exhibits and Financial Statements and Schedules.

 

 

FORM 10-K/A

 

TABLE OF CONTENTS

 

		Page
PART I
Item 1.	Business (restated)	3
Item 1A.	Risk Factors (restated)	12
Item 1B.	Unresolved Staff Comments	21
Item 2.	Properties (restated)	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	22
Item 6.	Selected Financial Data (restated)	25
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations (restated)	27
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk (restated)	40
Item 8.	Financial Statements and Supplementary Data (restated)	41
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	41
Item 9A	Controls and Procedures (restated)	41
Item 9B.	Other Information	46
PART IV
Item 15.	Exhibits and Financial Statement Schedules (restated)	46

  

 

Caution Regarding Forward Looking Statements

 

This Amendment 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 Amendment, 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, the restatement of previously issued financial statements, the identified material weaknesses in our internal control over financial reporting and our ability to remediate those material weaknesses, 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 12 of this Amendment 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.

 

 

Part I

 

Item 1.

Business. (restated)

 

Overview

 

Asta Funding, Inc., together with its wholly owned significant operating subsidiaries Palisades Collection, LLC, Palisades Acquisition XVI, LLC (“Palisades XVI”), Palisades Acquisition XIX, LLC (“Palisades XIX”), Palisades Acquisition XXIII, LLC (“Palisades XXIII”), 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, which are not all wholly owned (the “Company,” “we” or “us”), is engaged in several business segments in the financial services industry including funding of personal injury claims, through our 50% controlled equity investment in Pegasus Funding, LLC (“Pegasus”), social security and disability advocacy through our wholly owned subsidiaries GAR Disability Advocates and Five Star and the business of purchasing, managing for its own account and servicing distressed consumer receivables, including charged off receivables, and semi-performing receivables. The Company started out in the consumer receivable business in 1995 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 and supplemental security benefits from the Social Security Administration.

 

Pegasus provides funding for individuals in need of short term funds pending insurance settlements of their personal injury claims. The funds are 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.

 

In November 2016, the Company formed Simia, a 100% owned subsidiary. Simia will commence funding personal injury settlement claims in January 2017. Simia was formed in response to the Company’s decision not to renew its joint venture with Pegasus Legal Funding, LLC (“PLF”), which expires at the end of December 2016. Pegasus will continue to remain in operation to collect its current portfolio of advances, but will not fund any new advances after December 28, 2016. Simia will be operated by a new management team, with significant experience in the personal injury funding business. 

 

On December 13, 2017, the Company sold all of the issued and outstanding equity capital of CBC Settlement Funding, LLC (“CBC”), its wholly owned subsidiary engaging in structured settlements. As a result of this sale all prior periods presented in the Company’s consolidated financial statements will account for CBC as a discontinued operation. This determination resulted in the reclassification of the assets and liabilities comprising the structured settlement business to assets and liabilities related to discontinued operations in the consolidated balance sheets, and a corresponding adjustment to our consolidated statements of operations to reflect discontinued operations for all periods presented. See Note C - Discontinued Operations in the Company's notes to the consolidated financial statements.

 

 The Company operates principally in the United States in three reportable business segments: consumer receivables, GAR disability advocates and personal injury claims. The Company previously operated a fourth segment when it engaged in the structured settlements business through CBC prior to its sale on December 13, 2017.

 

 

Financial Information about Operating Segments

 

The Company operates through strategic business units that are aggregated into three 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 market. 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 (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.

 

 

•

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

 

•

Personal Injury Claims (Equity Method of Accounting) – Pegasus 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 settlement, judgment or award with respect to such claimant’s claim. Effective January 2017, Simia will commence funding personal injury settlement claims while Pegasus will not fund any new advances, and will remain in operation to liquidate its current portfolio of advances.

 

The consumer receivable segment accounted for 10% or more of consolidated net revenue during fiscal years 2016, 2015, and 2014, and the GAR Disability Advocates segment accounted for more than 10% in fiscal year 2016. The personal injury claims segment is accounted for under the equity method. The following table summarizes the net revenues by percentage from the consumer receivables and GAR Disability Advocates segments for the fiscal years 2016, 2015 and 2014:

 

		Years Ended September 30,
		2016				2015				2014
Finance income (consumer receivables)			82.5	%			93.5	%			98.1	%
GAR Disability Advocates			17.5				6.5				1.9
Total revenues			100.0	%			100.0	%			100.0	%

 

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. Separate segment MD&A is not provided, as segment revenue corresponds to the revenue presented in the Company's consolidated statement of operations, and material expense items are not allocable to any specific segment.

 

(Dollars in millions)		Consumer Receivables				GAR Disability Advocates				Corporate (3)				(Equity Investment) Personal Injury Claims(2)				Total
Fiscal Year Ended September 30,
2016:
Revenues		$	18.9			$	4.0			$	—			$	—			$	22.9
Other income			—				—				1.7				—				1.7
Segment profit (loss)			14.2				(7.3	)			(11.7	)			10.5				5.7
Segment assets(1) (4)			18.9				2.0				185.5				48.6				255.0
2015:
Revenues		20.6					1.4				—				—				22.0
Other income			—				—				1.6				—				1.6
Segment profit (loss)			16.3				(5.8	)			(11.3	)			(0.1	)			(0.9	)
Segment assets(1) (4)			21.5				2.6				175.4				40.8				240.3
2014:
Revenues		19.6					0.4				—				—				20.0
Other income			26.1				—				1.4				—				27.5
Segment profit (loss)			22.9				(2.7	)			(12.8	)			1.9				9.3
Segment assets(1) (4)			36.4				1.0				145.5				34.3				217.2

 

The Company does not have any intersegment revenue transactions.

 

 

(1)	Includes other amounts in other line items on the consolidated balance sheet and excludes assets from discontinued operations.
(2)	The Company records Pegasus as an equity investment in its consolidated financial statements. For segment reporting the Company has included its pro-rated share of the earnings and losses from its investment under the Personal Injury Claims segment, and the carrying value of the investment is included in segment assets.
(3)	Corporate is not part of the three reportable segments. Certain non-allocated administrative costs, interest income, interest expense and various other non-operating income and expense are reflected in Corporate.
(4)	The Company has included assets related to discontinued operations under Corporate. See Note C - Discontinued Operations in the Company's notes to consolidated financial statements.

 

 Principal Markets and Methods of Distribution

 

All of the Company’s lines of business are principally conducted in the United States, with some receivables originating and being serviced 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 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 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, particularly Colombia and Peru, 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 website and through attorneys. Simia will conduct its business similar to that of Pegasus.

  

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.

  

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 continues to service its existing portfolio , while Simia intends to attract new business through its attorneys, brokers and sales contacts.

 

 

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 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.

 

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 and consolidation of all business segments.

   

Personal Injury Claims

 

The operations structure of the personal injury claims unit of Pegasus, and newly formed Simia 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.

 

 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.

 

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..

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

 

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

 

We made 18 portfolio consumer debt purchases in fiscal year 2016. We have expanded relationships with credit providers internationally, as well as maintained our existing relationships domestically with brokers, finance companies and other credit providers.

 

Personal injury claims

 

Pegasus will not invest in a formal marketing program at this time as it will continue to serve its existing portfolio. Simia also will not invest in a formal marketing program at this time. It will rely on external brokers, internal sales professionals and attorneys to acquire market share.

 

 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 international competition will not increase in the future, affecting our consumer receivables financial performance.

 

We compete with:

 

•

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

 

•

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;

 

brokers’ commissions and bonuses paid;

 

reputation; and

 

direct and on-line marketing.

 

We believe that the management of Pegasus and Simia have 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.

  

 

Benefit advocacy

 

The social security benefit advocacy environment is competitive. We believe that the management of GAR Disability Advocates 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.

  

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.

 

 

Social security benefit advocacy

 

There is no indication that seasonality has any noticeable impact on the social security disability process.

 

   

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 began the process of enhancing our international systems capabilities during fiscal year 2016, and we expect to complete the process during fiscal year 2017.

 

 

Personal injury claims

 

Pegasus is and Simia will be dependent on its website to maintain and increase its business and, therefore, each must remain current in its technology.

 

 Social security benefit advocacy

 

GAR Disability Advocates relies on substantial use of the internet and, therefore, endeavors to remain current technologically. We completed the installation of a new client software system in fiscal year 2016, which has improved 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 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. Moreover, 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 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 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.

 

There are significant corporate governance and executive compensation-related provisions in the Dodd Frank Wall Street Reform and Provision Act (“Dodd-Frank Act”) that required 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 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 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 Dodd-Frank 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. 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 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 assess potential risks to consumers and whether debt collectors are complying with requirements of federal consumer financial law. Among other things, examiners evaluate 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 conducts 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 understand the oversight that the CFPB brings. 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 thus exercises supervisory authority over us. At this time, it is not possible or practical to attempt to provide a comprehensive analysis of how these 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 there under. Therefore, we could also 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. 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.

 

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 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.

 

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.  Recently proposed laws, while varying from state to state, generally would establish requirements for contracts relating to litigation funding, including setting maximum amounts of interest, fees and other charges that may be imposed.

  

Social security benefit advocacy

 

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

  

Employees

 

As of September 30, 2016, we had 188 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 Annual Reports on Forms 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements, amendments thereto, and other SEC reports are available on our website as soon as reasonably practical after filing electronically with the SEC. No part of our website is incorporated by reference into this report.

  

Item 1A.

Risk Factors. (restated)

 

Note Regarding Risk Factors

 

You should carefully consider the risk factors below as well as risks identified throughout this Amendment and our other filings with the SEC in evaluating us. In addition to the following identified 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, or if risks that we do not yet know or that we currently think are minor 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.

 

We have restated prior consolidated financial statements, which may lead to additional risks and uncertainties, including loss of investor confidence and negative impacts on our stock price.

 

We have restated our consolidated financial statements as of and for the fiscal years ended September 30, 2016, 2015 and 2014 (including the quarterly periods within those years) in order to correct certain accounting errors related to, among other items, our historical decision to consolidate the financial results of Pegasus. For discussion of the accounting errors identified and the restatement adjustments, see “Note A to the Restated Consolidated Financial Statements.” For a description of the material weaknesses in our internal control over financial reporting identified by management and management’s plan to remediate those material weaknesses, see “Part II, Item 9A — Controls and Procedures.”

 

As a result of the restatement and the circumstances giving rise to the restatement, we have become subject to a number of additional costs and risks, including accounting and legal fees incurred in connection with the restatement. In addition, the restatement may lead to a loss of investor confidence and have negative impacts on the trading price of our common stock.

 

 

We have identified material weaknesses in our internal control over financial reporting that, if not remediated, could result in additional material misstatements in our financial statements.

 

As described in “Part II, Item 9A — Controls and Procedures,” management has identified and evaluated the control deficiencies that gave rise to the accounting errors related to equity method accounting, foreign currency matters and related party transactions, and has concluded that those deficiencies, represent material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. As a result of those material weaknesses, management has concluded that we did not maintain effective internal control over financial reporting as of September 30, 2016, 2015 and 2014. See “Part II, Item 9A — Controls and Procedures.”

 

We are in the process of developing and implementing a remediation plan to address the material weaknesses. If our remediation efforts are insufficient or if additional material weaknesses in our internal control over financial reporting are discovered or occur in the future, our consolidated financial statements may contain material misstatements and we could be required to restate our financial results, which could materially and adversely affect our business, results of operations and financial condition, restrict our ability to access the capital markets, require us to expend significant resources to correct the material weakness, subject us to fines, penalties or judgments, harm our reputation or otherwise cause a decline in investor confidence.

 

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 and foreign jurisdictions such as Colombia and Peru 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.

 

  Changes in governmental laws and regulations could increase our costs and liabilities or impact our operations.

 

Title X of the Dodd-Frank Act (also referred to as the Consumer Financial Protection Act) created a new independent regulator, the Consumer Financial Protection Bureau ("CFPB"). The CFPB has rulemaking, supervisory, and enforcement and other authorities relating to consumer financial products and services, including debt collection, provided by covered persons. We are subject to the CFPB's supervisory and enforcement authority.

 

The relationship between consumers, lenders and credit card issuers is extensively regulated by consumer protection and related laws and regulations. Changes in laws and regulations or the manner in which they are interpreted or applied may alter our business environment. This could affect our results of operations or increase our liabilities. These negative impacts could result from changes in collection laws, laws related to credit reporting, statutes of limitation, laws related to consumer bankruptcy or insolvency, privacy protection, accounting standards, taxation requirements, employment laws and communications laws, among others.

 

The CFPB also accepts debt collection consumer complaints and has provided form letters for consumers to use in their correspondences with debt collectors. The CFPB makes publicly available its data on consumer complaints, and consumer complaints against us could result in reputational damage to us. The Dodd-Frank Act also mandates the submission of multiple studies and reports to Congress by the CFPB, and CFPB staff is regularly making speeches on topics related to credit and debt. All of these activities could trigger additional legislative or regulatory action.

 

The CFPB has rulemaking authority with respect to significant federal statutes that impact the debt collection industry, including the Federal Debt Collection Practices Act ("FDCPA"), the Fair Credit Reporting Act "FCRA", and Section 5 of the Federal Trade Commission ("FTC Act"), which prohibits unfair or deceptive acts or practices. As a result, the CFPB has the authority to adopt regulations that interpret the FDCPA, and the FTC Act, potentially describing specified acts and practices as being "unfair," "deceptive" or "abusive," impacting the manner in which we conduct our debt collection business.

 

The CFPB has the authority to conduct hearings and adjudication proceedings, impose monetary penalties for violations of applicable federal consumer financial laws (including Title X of the Dodd-Frank Act, FDCPA, and FCRA, among other consumer protection statutes) which may require remediation of practices and include enforcement actions. The CFPB also has the authority to obtain cease and desist orders (which can include orders for restitution or rescission of contracts, as well as other kinds of affirmative relief), costs, and monetary penalties. In addition, where a company has violated Title X of the Dodd-Frank Act or CFPB regulations implemented thereunder, the Dodd-Frank Act empowers state Attorneys General and other state regulators to bring civil actions to remedy violations under state law. The CFPB has been active in its supervision, examination and enforcement of financial services companies, most notably bringing enforcement actions imposing fines and mandating large refunds to customers of several financial institutions for practices relating to the extension and collection of consumer credit. If the CFPB, the FTC, acting under the FTC Act or other applicable statute such as the FDCPA, or one or more state Attorneys General or other state regulators make findings that we have violated any of the applicable laws or regulations, they could exercise their enforcement powers in ways that could have an adverse effect on our business, results of operations, cash flows, or financial condition.

 

We may become subject to additional costs or liabilities in the future resulting from our own, or our vendors' supervision or examination by the CFPB, or by changes in, or additions to laws and regulations that could adversely affect our results of operations and financial condition. Further, we cannot definitively predict the scope and substance of any such laws or regulations ultimately adopted by the CFPB related to our activities and the exact efforts required by us to comply therewith, nor can we have any way to know with certainty the ultimate impact on our business, results of operations, and financial condition that such regulations may have.

 

 

Investigations or enforcement actions by governmental authorities may result in changes to our business practices; negatively impact our receivables portfolio purchasing volume; make collection of receivables more difficult or expose us to the risk of fines, penalties, restitution payments and litigation.

 

Our business practices are subject to review from time to time by various governmental authorities and regulators, including the Consumer Financial Protection Bureau ("CFPB"), who may commence investigations or enforcement actions or reviews targeted at businesses in the financial services industry. These reviews may involve governmental authority consideration of individual consumer complaints, or could involve a broader review of our debt collection policies and practices. Such investigations could lead to assertions by governmental authorities that we are not complying with applicable laws or regulations. In such circumstances, authorities may request or seek to impose a range of remedies that could involve potential compensatory or punitive damage claims, fines, restitution payments, sanctions or injunctive relief, that if agreed to or granted, could require us to make payments or incur other expenditures that could have an adverse effect on our financial position. Government authorities could also request or seek to require us to cease certain of our practices or institute new practices.

   

We may also elect to change practices that we believe are compliant with applicable law and regulations in order to respond to the concerns of governmental authorities. In addition, we may become required to make changes to our internal policies and procedures in order to comply with new statutory and regulatory requirements under the Dodd-Frank Act or other applicable laws. Such changes in practices or procedures could negatively impact our results of operations. Negative publicity relating to investigations or proceedings brought by governmental authorities could have an adverse impact on our reputation, could harm our ability to conduct business with industry participants, and could result in financial institutions reducing or eliminating sales of receivables portfolios to us which would harm our business and negatively impact our financial results. Moreover, changing or modifying our internal policies or procedures, responding to governmental inquiries and investigations and defending lawsuits or other proceedings could require significant efforts on the part of management and result in increased costs to our business. In addition, such efforts could divert management's full attention from our business operations. All of these factors could have an adverse effect on our business, results of operations, and financial condition.

  

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.

 

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;

   

•

availability of financing to fund purchases;

 

•

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

 

•

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 and collect on consumer receivable portfolios that contain charged-off receivables. In order to operate profitably over the long term, we must continually purchase 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 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.

  

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 14% of our portfolio face value, which represents approximately 84% of the Company’s portfolio face value at all third party collection agencies and attorneys, is serviced by three 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 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.

 

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.

 

Our equity method investment in Pegasus may have a material impact on our net earnings. 

 

We have a significant investment in Pegasus that is accounted for under the equity method of accounting. Under the equity method, we report our proportionate share of the net earnings or losses of Pegasus in our statement of operations under “Loss (earnings) from equity method investment” which contributes to our income from continuing operations before income taxes. If the earnings or losses of Pegasus are material in any year, those earnings or losses may have a material effect on our net earnings. Notwithstanding the impact on our net earnings, we do not have the ability to cause Pegasus to pay dividends or make other payments or advances to its stockholders, including us.

 

 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.

   

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 37% of our outstanding shares of common stock as of September 30, 2016. 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 discourage 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. Currently the Company has set up a reserve for settlement costs of $2.3 million to cover a class action lawsuit.

 

Economic slowdowns increase our credit losses. 

 

During periods of economic slowdown or recession, we experience an increase in rates of delinquencies and frequency and severity of credit losses. Our actual rates of delinquencies and frequency and severity of credit losses may be comparatively higher during periods of economic slowdown or recession than those experienced by more traditional providers of consumer credit because of our focus on the financially underserved consumer market, which may be disproportionately impacted.

 

Because a significant portion of our reported income is based on management’s estimates of the future performance of our loans and fees receivable, differences between actual and expected performance of the receivables may cause fluctuations in net income.

 

Significant portions of our reported income (or losses) are based on management’s estimates of cash flows we expect to receive on our loans and fees receivable, particularly for such assets that we report based on fair value. The expected cash flows are based on management’s estimates of interest rates, default rates, payment rates, cardholder purchases, servicing costs, and discount rates. These estimates are based on a variety of factors, many of which are not within our control. Substantial differences between actual and expected performance of the receivables will occur and cause fluctuations in our net income. For instance, higher than expected rates of delinquencies and losses could cause our net income to be lower than expected. Similarly, levels of loss and delinquency can result in our being required to repay our lenders earlier than expected, thereby reducing funds available to us for future growth.

 

We may determine to incur near-term losses based on longer-term strategic considerations.

 

We may consider long-term strategic considerations more important than near-term economic gains when assessing business arrangements and opportunities. For example, we expect the structure and pricing terms in near-term future securitization transactions, if any, to be substantially different from our past transactions, including lower revenues and lower advance rates. We may nevertheless determine to participate in, or structure, future financing transactions based on longer-term strategic considerations. As a result, net cash flows over the life of a future securitization trust, particularly any trust that we may facilitate in the near-term as we re-enter the securitization market, could be negative as a result of transaction size, transaction expenses or financing costs.

 

 

We may experience losses on portfolios consisting of new types of receivables or receivables in new geographies due to our lack of collection experience with these receivables, which could harm our business, financial condition and operating results.

 

We continually look for opportunities to expand the classes of assets that make up the portfolios we acquire. Therefore, we may acquire portfolios consisting of assets with which we have little or no collection experience or portfolios of receivables in new geographies where we do not historically maintain an operational footprint. Our lack of experience with these assets may hinder our ability to generate expected levels of profits from these portfolios. Further, our existing methods of collections may prove ineffective for these new receivables, and we may not be able to collect on these portfolios. Our inexperience with these receivables may have an adverse effect on our business, financial condition and operating results.

  

We may not be able to manage our growth effectively, including the expansion of our foreign operations.

 

We have expanded significantly in recent years. Continued growth will place additional demands on our resources, and we cannot be sure that we will be able to manage our growth effectively. For example, continued growth could place strains on our management, operations, and financial resources that our infrastructure, facilities, and personnel may not be able to adequately support. In addition, the recent expansion of our foreign operations subjects us to a number of additional risks and uncertainties, including:

 

■

compliance with and changes in international laws, including regulatory and compliance requirements that could affect our business;

 

■

increased exposure to U.S. laws that apply abroad, such as the Foreign Corrupt Practices Act;

 

■

social, political and economic instability or recessions;

 

■

fluctuations in foreign economies and currency exchange rates;

 

■

difficulty in hiring, staffing and managing qualified and proficient local employees and advisors to run international operations;

 

■

the difficulty of managing and operating an international enterprise, including difficulties in maintaining effective communications with employees due to distance, language, and cultural barriers;

 

■

difficulties implementing and maintaining effective internal controls and risk management and compliance initiatives;

 

■

potential disagreements with our joint venture business partners;

 

■

differing labor regulations and business practices; and

 

■

foreign tax consequences.

 

To support our growth and improve our international operations, we continue to make investments in infrastructure, facilities, and personnel in our operations; however, these additional investments may not be successful or our investments may not produce profitable results. If we cannot manage our growth effectively, our business, financial condition and operating results may be adversely affected.

  

 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.

  

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 could 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. We have implemented a disaster recovery program to 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.

  

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 11,876,224 shares of common stock issued and outstanding as of December 12, 2016. Of these shares, 8,427,772 are owned by affiliates of the company, which are defined as in Rule 405 under the Act as a “person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with”, an issuer. In addition, options to purchase 949,667 shares of our common stock were outstanding as of September 30, 2016, of which 830,326 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, 2016, there were 1,329,243 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 within various jurisdictions;

 

•

prices we are willing to pay for consumer receivable portfolios.

 

 Our financial performance is subject to risks associated with changes in the value of the U.S. dollar versus local currencies.

 

Our primary exposure to movements in foreign currency exchange rates relates to non- U.S. dollar denominated sales and operating expenses worldwide. The Company does not use derivative instruments, such as foreign currency forward and option contracts, to hedge certain exposures to fluctuations in foreign currency exchange rates.

 

Our business could be negatively affected as a result of actions of activist shareholders, and such activism could impact the trading value of our securities.

 

Responding to activist shareholders can be costly and time-consuming, disrupting our operations and diverting the attention of management and our employees. Such activities could interfere with our ability to execute our strategic plan. In addition, a proxy contest for the election of directors at our annual meeting would require us to incur significant legal fees and proxy solicitation expenses and require significant time and attention by management and our board of directors. The perceived uncertainties as to our future direction also could affect the market price and volatility of our securities.

 

 

Item 1B.

Unresolved Staff Comments.

 

None

 

 

Item 2.

Properties (restated)

 

Our executive and administrative offices are located in Englewood Cliffs, New Jersey, where we lease approximately 13,400 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 900 square feet of general office space for approximately $1,300 per month. The lease expires on August 31, 2019.

 

Our New York City office occupies approximately 6,600 square feet for approximately $22,000 per month, including electricity. The lease expires in September 2017.

  

Our Conshocken, Pennsylvania office occupies approximately 5,800 square feet for approximately $15,000 per month, plus utilities. The lease expires in January 2020. This facility is classified as part of the Company's discontinued operations.

 

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.

 

Legal proceedings are subject to substantial uncertainties concerning the outcome of material factual and legal issues relating to the litigation. Accordingly, we cannot currently predict the manner and timing of the resolution of some of these matters and may be unable to estimate a range of possible losses or any minimum loss from such matters. 

 

Item 4.

Mine Safety Disclosures.

 

Not applicable.

 

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 12, 2016 there were 16 holders of record of our common stock. High and low sales prices of our common stock since October 1, 2015 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
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
2016
October 1, 2015 to December 31, 2015		$	8.85			$	7.51
January 1, 2016 to March 31, 2016			9.25				6.82
April 1, 2016 to June 30, 2016			10.98				9.42
July 1, 2016 to September 30, 2016			11.97				9.35

  

 

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 2016 and 2015.

 

Share Repurchase Program

 

On August 11, 2015, the Board of Directors approved the repurchase of up to $15 million of the Company’s common stock and authorized management of the Company to enter into the Shares Repurchase Plan under Sections 10b-18 and 10(b)5-1 of the Securities Exchange Act (the “Shares Repurchase Plan”). The Shares Repurchase Plan was to have been effective to December 31, 2015. On December 17, 2015 the Board of Directors approved the extension of the Shares Repurchase Plan to March 31, 2016. On March 17, 2016, having repurchased approximately $9.9 million of the Company’s common stock, the Board of Directors approved further extension of the Shares Repurchase Plan to December 31, 2016. On March 22, 2016, a Company shareholder commenced a tender offer for the Company’s common stock. Per the provisions of the Shares Repurchase Plan, it terminated immediately, and no further purchases were permitted under the Shares Repurchase Plan. For the year ended September 30, 2016, the Company purchased approximately 984,000 shares at an aggregate cost of approximately $8.4 million under the Shares Repurchase Plan.

 

On April 11, 2016, the Company commenced a Tender Offer to purchase of up to 3,000,000 shares of its common stock, par value $0.01 per share, pursuant to auction tenders at prices specified by the tendering shareholders of not greater than $10.25 per share nor less than $9.50 per share. The expiration date for the Company’s Tender Offer was May 12, 2016. On that date, the Company repurchased 274,284 shares at a price of $10.25 per share, for an aggregate cost of $2,811,411.

 

The following table sets forth information regarding our repurchases or acquisitions of common stock during the fiscal year ended September 30, 2016.

 

Period		Total Number of Shares) Purchased				Average Price Paid per Share				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
Repurchases from October 1, 2015 through September 30, 2016			1,258,484			$	8.86				1,258,484			$	—

 

 

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.

 

 

 

 

		2011				2012				2013				2014				2015				2016
ASTA FUNDING, INC.			100.00				116.86				111.57				103.04				107.05				131.78
NASDAQ MARKET INDEX			100.00				130.53				160.26				193.28				201.01				234.02
PEER GROUP INDEX			100.00				154.16				257.46				229.81				222.15				142.86
PEER GROUP INDEX + ASTA FUNDING, INC.			100.00				151.67				248.35				221.88				214.92				142.06

  

 

Item 6.

Selected Financial Data (restated)

 

The following tables set forth a summary of our consolidated financial data as of and for the five fiscal years ended September 30, 2016. The selected financial data for the five fiscal years ended September 30, 2016, 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 Amendment, including the information set forth in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. The data presented below is in thousands, except for (loss) earnings per share data.

 

		Year Ended September 30,
		2016				2015				2014					2013				2012
		(As Restated)				(As Restated)				(As Restated)				(As Restated)					(As Restated)
Income Statement Data:
Finance income, net		$	18,890			$	20,564			$	19,604			$	31,762			$	40,803
Personal injury claims income			—				—				—
Disability fee income			4,011				1,434				378				2				—
Total revenues			22,901				21,998				19,982				31,764				40,803
Forgiveness of non-recourse debt			—				—				26,101				—				—
Other income			1,704				1,569				1,397				1,609				2,256
			24,605				23,567				47,480				33,373				43,059
Expenses:
General and administrative expenses			29,308				24,378				20,530				19,806				22,149
Interest expense			—				—				18				1,300				2,539
Impairments of consumer receivables acquired for liquidation			164				—				19,591				10,990				1,771
Loss (earnings) from equity method investment			(10,551	)			54				(1,931	)			(1,626	)			(125	)
			18,921				24,432				38,208				30,470				26,334
Income before income tax from continued operations			5,684				(865	)			9,272				2,903				16,725
Income tax expense (benefit)			1,017				(56	)			4,139				894				6,797
Net (loss) income from continuing operations			4,667				(809	)			5,133				2,009				9,928
Net (loss) income from discontinued operations (net of income taxes)			2,906				1,776				371				—				—
Net income		$	7,573			$	967			$	5,504			$	2,009			$	9,928
Basic earnings (loss) per share from continuing operations		$	0.39			$	(0.06	)		$	0.39			$	0.16			$	0.71
Basic earnings per share from discontinuing operations			0.24				0.13				0.03				—				—
Basic earnings per share – Asta Funding, Inc.		$	0.63			$	0.07			$	0.42			$	0.16			$	0.71
Basic weighted average common shares outstanding			11,996,500				13,044,215				12,981,076				12,952,150				14,077,650
Diluted earnings (loss) per share from continuing operations		$	0.37			$	(0.06	)		$	0.39			$	0.15			$	0.69
Diluted earnings per share from discontinuing operations			0.23				0.13				0.03				—				—
Diluted earnings per share – Asta Funding, Inc.		$	0.60			$	0.07			$	0.42			$	0.15			$	0.69
Diluted weighted average common shares outstanding			12,508,561				13,314,605				13,205,933				13,216,051				14,321,381

 

 

		Year Ended September 30,
		2016 As Restated				2015 As Restated				2014 As Restated				2013				2012
Discontinued Operations Data (1):
Revenue		$	14,446			$	11,818			$	5,209			$	—			$	—
Operating profit			8,823				6,201				1,849				—				—
Interest and related financing fees, net			3,214				2,395				1,243				—				—
Income (loss) before income taxes			5,505				3,125				537				—				—
Income (loss) from discontinued operations			2,906				1,776				371				—				—

 

(1) See Note C - Discontinued Operations to our consolidated financial statements for further information regarding the above statement.

 

 

		Year Ended September 30,
		2016 As Restated				2015 As Restated				2014 As Restated					2013				2012
		(in millions)
Other Financial Data (Unaudited):
For the Year ended September 30
Cash collections		$	28.8			$	34.7			$	40.2				$	51.7			$	70.0
Portfolio purchases, at cost			8.2				2.1				5.1					3.3				2.5
Portfolio purchases, at face value			162.9				28.0				478.9					53.5				6.0
Return on average assets			3.2	%			0.4	%			2.6	%	(2)			0.9	%			4.1	%
Return on average stockholders’ equity(1)			5.5	%			1.9	%			4.9	%	(2)			1.6	%			5.9	%
Dividends declared per share		$	0.00			$	0.00			$	0.00				$	0.08			$	0.08
At September 30,
Total assets			255.0				240.3				217.2					211.3				237.2
Total debt and other liabilities			73.2				56.9				35.5					37.8				64.3
Total stockholders’ equity			181.8				183.4				181.7					173.3				173.0
Inception to date — September 30,
Cumulative aggregate purchases, at face value			32,628.2				32,465.3				32,437.3					31,958.3				31,904.9

  

---

(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.

 

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operation. (restated)

 

Caution Regarding Forward-Looking Statements

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Amendment contain forward-looking statements that involve risks and uncertainties. All forward-looking statements included in this Amendment 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 Amendment and elsewhere herein. The following should be read in conjunction with our annual and quarterly financial statements contained elsewhere in this Amendment.

 

Review of Restatement Items

 

Background

 

The Board’s decision to restate the financials contained in this filing arose from the Company’s re-evaluation of its historical conclusion to consolidate Pegasus Funding, LLC (“Pegasus”). The Company had an 80% interest in the Pegasus joint venture, which purchases interests in the claims from claimants who are party to personal injury litigation. Management determined that the Company lacked the requisite control to consolidate Pegasus in the Company's consolidated financial statements. As such, the Company should have reported its investment in Pegasus under the equity method in accordance with accounting principles generally accepted in the United States.

 

In connection with this restatement, the Company has corrected the financial statements for all known errors, including those that were previously corrected in prior filings as immaterial out-of-period adjustments. Additionally, the Company evaluated its historical and current practices with respect to accounting for Foreign Currency Matters under ASC 830 in accordance with accounting principles generally accepted in the United States. In connection with this evaluation, the Company has determined that its previous accounting treatment for certain foreign currency matters was not appropriate.

 

As a result of this restatement, the Company concluded there were material weaknesses in the Company’s internal control over financial reporting. Details of the material weaknesses and planned remedial actions are detailed in Item 9A. Controls and Procedures in this Amendment.

 

Change to Equity Method of Accounting

 

In connection with the Company determining it lacked the requisite control to consolidate Pegasus, the Company has corrected the presentation and has now accounted for its investment in Pegasus under the equity method in accordance with US GAAP. The correction of the error has resulted in a reduction in total revenues of $20,212,000, $8,482,000 and $7,134,000 for the years ended September 30, 2016, 2015 and 2014, respectively, a reduction in expenses of $7,151,000, $8,425,000 and $4,845,000 for the years ended September 30, 2016, 2015 and 2014, respectively, and a decrease in non-controlling interest of $2,612,000, $11,000 and $458,000 for the years ended September 30, 2016, 2015 and 2014, respectively. This change to the equity method of accounting had no effect on net income for the years ended September 30, 2016, 2015 and 2014. Additionally, there were other corrections made to the financial statements of Pegasus, but were not related to the change to the equity method of accounting.

 

Foreign Currency Matters

 

The Company improperly accounted for the foreign currency effect of certain transactions as if they were long-term investments by including the foreign currency effect in accumulated other comprehensive income instead of properly recording the effect as operating expenses as required under ASC 830 “Foreign Currency Matters.” The correction to properly apply U.S. GAAP to these foreign currency matters resulted in an increase in revenue and other income of $148,000 for the year ended September 30, 2016, a decrease in other income of $118,000 for the year ended September 30, 2015, a decrease in expenses of $165,000 for the year ended September 30, 2016, and an increase in expenses of $1,667,000 and $186,000 for the years ended September 30, 2015 and 2014, respectively. Income from continuing operations increased by $313,000 for the year ended September 30, 2016, and decreased by $1,780,000 and $186,000 for the years ended September 30, 2015 and 2014, respectively. Net assets decreased by $952,000 as of September 30, 2016, and increased $305,000 as of September 30, 2015. Net liabilities increased $18,000 and $565,000 as of September 30, 2016 and 2015, respectively. Accumulated other comprehensive income increased $718,000 and $1,705,000 as of September 30, 2016 and 2015, respectively.

 

 

Structured Settlements

 

The Company did not reflect the quarterly increase in certain underlying benchmark interest rates used in determining fair value of the Company’s structured settlements for the year ended September 30, 2016. Prior to the sale of its structured settlement business, the Company purchased periodic payments under structured settlements and annuity policies from individuals in exchange for a lump sum payment. The Company has elected to carry the structured settlements at fair value in accordance with the guidance of FASB ASC, Recognition and Measurement of Financial Assets and Financial Liabilities (ASC 822-10-50-28 through 50-22). The Company has revised the fair market of the structured settlements, which resulted in an increase to assets related to discontinued operations of $727,000 as of September 30, 2016, and an increase in income from discontinued operations of $727,000 for the year ended September 30, 2016.

 

Consumer Receivable Portfolios

 

The Company has determined that it had not accounted for certain unallocated payments reported on its consolidated balance sheet properly during the Non-Reliance Periods. The correction of this error resulted in a reduction in finance income of $195,000, $193,000 and $261,000 for the years ended September 30, 2016, 2015 and 2014, respectively. Net assets decreased by $648,000 and $453,000 as of September 30, 2016 and 2015, respectively.

 

Contingent Liability/Related Party

 

The Company discovered that it did not properly record an amortizable asset and related liability in conjunction with an asset purchase agreement entered into in June 2015 with a related party. The correction of this error resulted in a decrease in income from discontinued operations of $317,000, $56,000 and $69,000 for the years ended September 30, 2016, 2015 and 2014, respectively. Net assets related to discontinued operations increased by $307,000 and $997,000 as of September 30, 2016 and 2015, respectively. Net liabilities increased $756,000 and $1,078,000 as of September 30, 2016 and 2015, respectively.

 

Accrued Expenses and Other

 

The Company identified other liabilities that had not been properly accrued to the correct period and/or in improper amounts. The correction of this error resulted in increased general and administrative expense of $234,000 and $290,000 for the years ended September 30, 2016 and 2014, respectively, and a decrease in general and administrative expenses of $292,000 for the year ended September 30, 2015, as well as an increase in earnings from equity investment of $102,000 and $100,000 for the years ended September 30, 2016 and 2014, respectively, and a decrease in earnings from equity investment of $100,000 for the year ended September 30, 2015. For the year ended September 30, 2015 the correction of this error resulted in a decrease in income from discontinued operations of $40,000. Net liabilities increased $141,000 as of September 30, 2016, and net assets increased $67,000 as of September 30, 2015.

 

The Company identified other transactions that had been recorded to incorrect accounts and/or in improper amounts. The net corrections of these transactions resulted in an increase in net assets of $33,000 and $45,000 as of September 30, 2016 and 2015, respectively. Net liabilities decreased $11,000 as of September 30, 2016.   

 

Income Taxes

 

Some of the corrections noted above impacted earnings (loss) before taxes which, in turn, required a calculation of the tax impact. The net impact was a reduction to income taxes of $11,000, $523,000 and $474,000 for the years ended September 30, 2016, 2015 and 2014, respectively. The net effect of the reduction in income taxes to discontinued operations was a decrease to income from discontinued operations for $694,000 and $156,000 for the years ended September 30, 2016 and 2014, respectively, and an increase to income from discontinued operations of $305,000 in 2015.

 

Quarterly Information

 

In addition to the adjustments to the Company's annual consolidated financial statements noted above, the Company also had adjustments to its quarterly financial statements covering the interim periods within the years ended September 30, 2016, 2015 and 2014. These quarterly restatement adjustments are presented in Note S - “Summarized Quarterly Data” in the Company's notes to its consolidated financial statements.

 

Structured Settlement Business

 

On December 13, 2017, we sold all of our issued and outstanding equity capital in CBC, our wholly owned subsidiary engaging in structured settlements. As a result of this sale, all prior periods presented in our consolidated financial statements will account for CBC as a discontinued operation. This determination resulted in the reclassification of the assets and liabilities comprising our structured settlement business to assets and liabilities related to discontinued operations in the consolidated balance sheets, and a corresponding adjustment to our consolidated statements of operations to reflect discontinued operations for all periods presented. See Note C - Discontinued Operations in the notes to our consolidated financial statements.

 

 

Overview

 

We are engaged in the businesses of acquiring, managing, servicing and recovering on portfolios of consumer receivables, and, through our equity investment in Pegasus, funding of personal injury claims 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.

 

Personal Injury Claims

 

In 2011, the Company purchased an 80% interest in Pegasus. PLF, an unrelated third party, holds the other 20% interest. The Company and PLF each maintain 50% voting rights in the entity. 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 Company accounts for its investment in Pegasus under the equity method of accounting.

 

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.

 

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, 2016, the Company had a net invested balance of approximately $48.3 million in personal injury cases. During the fiscal year ended September 30, 2016, distributions of $1.5 million were made to PLF.

 

 On November 8, 2016, the Company entered into a binding Term Sheet (the “Term Sheet”) with ASFI Pegasus Holdings, LLC, Fund Pegasus, LLC, Pegasus Funding, LLC, Pegasus Legal Funding, LLC, Max Alperovich and Alexander Khanas. The Company and PLF have decided not to renew the Pegasus joint venture that, by its terms, terminates on December 28, 2016. The Term Sheet amends certain provisions to Pegasus’ operating agreement dated as of December 28, 2011 and governs the terms relating to the liquidation of the existing Pegasus portfolio.

 

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

 

 

In connection with the Term Sheet, the parties thereto have also entered into a customary mutual release and non-disparagement agreement as well as a release from the non-competition obligations under the Operating Agreement.

 

On November 11, 2016, the Company formed Simia, a wholly owned subsidiary. Simia will commence funding personal injury settlement claims in January 2017. Simia was formed in response to the Company’s decision not to renew its joint venture with PLF.

 

Divorce Funding

 

In 2012, the Company announced the formation of BP Case Management, LLC (“BPCM”), a wholly owned subsidiary of the Company. BPCM entered into a joint venture (the “Venture”) with California-based Balance Point Divorce Funding, LLC (“BP Divorce Funding”). 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. BP Divorce Funding's profits and losses will be distributed 60% to BPCM and 40% to BP Divorce Funding, after the return of BPCM’s investment on a case by case basis and after a 15% preferred return to us. BPCM’s initial investment in the Venture consisted 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 BPCM’s 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 BPCM’s 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 BPCM’s priority to a 15% preferred return. As of September 30, 2016, BPCM has invested $2.5 million, net of reserve charges, in cases managed by this Venture.

 

In 2012, BPCM provided a $1.0 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. 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 revolving line of credit is collateralized by BP Divorce Funding’s profits share in the venture and other assets. At September 30, 2016, the balance in the revolving line of credit was approximately $1.5 million. Effective August 14, 2016, BPCM extended its revolving line of credit with BP Divorce Funding until March 31, 2017, at substantially the same terms as the September 2014 amendment.

  

Disability Advocacy Business

 

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

  

Critical Accounting Policies

 

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

 

•

The interest method; or

 

•

The cost recovery method.

 

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 interest method under the guidance of FASB ASC, Receivables — Loans and Debt Securities Acquired with Deteriorated Credit Quality, (“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. Due to the substantial reduction of portfolios reported under the interest method, and the inability to reasonably estimate cash collections required to account for those portfolios under the interest method, the Company concluded the cost recovery method is the appropriate accounting method under the circumstances.

 

 

Under the guidance of ASC 310-30, the Company must analyze a portfolio upon acquisition to ensure which method is appropriate, and once a static pool is established for a quarter, individual receivable accounts are not added to the pool (unless replaced by the seller) or removed from the pool (unless sold or returned to the seller).

 

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

 

The Company accounts for its investments in personal injury claims at an agreed upon interest rate, in anticipation of a future settlement. The 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 Company recognizes revenue for GAR Disability Advocates when cases close and fees are collected.

   

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 Amendment. 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,
		2016				2015				2014
		As restated				As restated				As restated
Finance income, net			82.5	%			93.5	%			98.1	%
Disability fee income			17.5				6.5				1.9
Total revenues			100.0				100.0				100.0
Debt forgiveness			—				—				130.6
Other income			7.4				7.1				7.0
			107.4				107.1				237.6
General and administrative expenses			128.0				110.8				102.8
Interest expense			—				—				0.1
Impairments of consumer receivables acquired for liquidation			0.7				—				98.0
(Earnings) loss from equity method investment			(46.1	)			0.2				(9.7	)
			82.6				111.0				191.2
Income before income taxes from continuing operations			24.8				(3.9	)			46.4
Income taxes			4.4				(0.3	)			20.7
Income (loss) from continuing operations		20.4					(3.6	)			25.7
Income net of income taxes from discontinuing operations			12.7				8.0				1.8
Net income			33.1	%			4.4	%			27.5	%

 

 

(i) As a result of the restatement, personal injury claim income and expenses are now reflected summarily in (earnings) loss from equity method investment

 

(ii) As a result of the sale of CBC, structured settlements income and expenses are now reflected summarily as discontinued operations

 

 

Year Ended September 30, 2016 Compared to the Year Ended September 30, 2015

 

Finance income.     For the fiscal year ended September 30, 2016 (“fiscal year 2016”), finance income from consumer receivables decreased $1.7 million, or 8.3%, to $18.9 million from $20.6 million for the fiscal year ended September 30, 2015 (“fiscal year 2015”). During fiscal year 2016, we acquired $162.9 million in face value of new portfolios at a cost of $8.2 million as compared to $28.0 million of face value portfolios at a cost of approximately $2.1 million, during fiscal year 2015. The portfolios purchased during fiscal year 2016 are accounted for on the cost recovery method. 

 

Net collections decreased $7.7 million, or 21.0%, to $29.0 million for fiscal year 2016 from $36.7 million for fiscal year 2015. During fiscal year 2016, gross collections decreased 20.8% to $44.5 million from $56.2 million for fiscal year 2015, reflecting the lower level of purchases over the last few years. Commissions and fees associated with gross collections from our third party collection agencies and attorneys decreased $4.1 million, or 21.0% as compared to the same period in the prior year and averaged 35.1% of collections for fiscal year 2016 as compared to 34.8% in the same prior year period.  

 

Disability Fee income. Disability fee income of $4.0 million in fiscal year 2016 compared to $1.4 million in fiscal year 2015 is the result of a significant increase in cases being processed in fiscal year 2016, translating into a significant increase in closed cases.

 

  

Other income.     The following table summarizes other income for the years ended September 30, 2016 and 2015:

 

		2016 (restated)				2015 (restated)
Interest and dividend income		$	1,302,000			$	1,110,000
Realized gains			29,000				79,000
Other			373,000				380,000
		$	1,704,000			$	1,569,000

 

General and administrative expenses.     For fiscal year 2016, general and administrative expenses increased $4.9 million, or 20.1%, to $29.3 million from $24.4 million for the year ended September 30, 2015. The increase in general and administrative expenses is related to legal settlement costs of $2.3 million, increased personnel costs of $2.1 million, primarily related to the growth of GAR Disability Advocates, and a reserve for loss on other investments of $1.0 million, partially offset by a net decrease in other expenses.

 

Impairments.     For the fiscal ended September 30, 2016, an impairment of $0.2 million has been recorded. There were no impairments in the fiscal ended September 30, 2015.

 

Earnings (loss) from equity method investment. For the fiscal year ended September 30, 2016, earnings from equity method investment increased to $10.6 million from a loss of $54,000 in the fiscal year ended September 30, 2015.

 

Net income before taxes — Consumer Receivables.     Net income before taxes increased $0.3 million, from $13.8 million for the fiscal year ended September 30, 2015 as compared to $14.1 million for the fiscal year ended September 30, 2016, primarily due to decreased foreign exchange losses of $0.3 million, and other administrative expenses, partially offset by a class action suit settlement of $2.0 million during the current fiscal year.

 

Net loss before taxes — GAR Disability Advocates.     Net loss before taxes was $7.3 million in the 2016 fiscal year compared to a net loss of $5.8 million in the 2015 fiscal year. GAR Disability Advocates is continuing to build the business and has increased costs associated with acquiring disability cases, marketing and servicing its clients in the current year compared to the prior year. These costs were comprised of increased personnel costs, $3.0 million, advertising, $0.5 million, and postage, $0.3 million, travel expense $0.1 million, partially offset by increased revenues of $2.6 million.

 

Income tax expense (benefit).     Income tax expense of $3.6 million was recorded for fiscal year 2016, consisting of a $5.7 million current income tax expense and a $2.4 million deferred income tax benefit. Tax on discontinued operations was $2.6 million, and there was income tax of $1.0 million on continuing operations. The state portion of the income tax provision for the fiscal year 2015 has been offset against state net operating loss carry forwards, and, as a result, no state taxes were payable.

 

Discontinued operations. Earnings from discontinued operations increased $1.1 million or 61% to $2.9 million in the 2016 fiscal year, compared to $1.8 million in the 2015 fiscal year.

 

Net income.     As a result of the above, the Company had net income for the fiscal year ended September 30, 2016 and 2015 of $7.6 million, and $1.0 million, respectively.

  

 

The following table details non-controlling interest for the year ended September 30, 2016:

 

		Discontinued Operations (CBC)
Balance, beginning of period		$	793,000
Non-controlling interest			104,000
Purchase of CBC non-controlling interest			(897,000	)
Balance, end of period		$	—

 

The non-controlling interests are related to CBC, the Company's discontinued operation. During the first quarter of fiscal 2016, the Company purchased from the minority members their 20% interest in CBC. Other than the purchase of their non-controlling interest, no other distributions were made to the minority members.

 

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 $20.6 million from $19.6 million for the fiscal year ended September 30, 2014 (“fiscal year 2014”) , reflecting increased income from portfolios where the cost basis has been fully recovered. 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.

  

 

Disability Fee income. 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. 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 (restated)				2014 (restated)
Interest and dividend income		$	1,110,000			$	1,315,000
Realized gains			369,000				43,000
Other			90,000				39,000
		$	1,569,000			$	1,397,000

 

General and administrative expenses.     For the year ended September 30, 2015, general and administrative expenses increased $3.9 million, or 19.0%, to $24.4 million from $20.5 million for the year ended September 30, 2014. The increase in general and administrative expenses is related to the increase in the amount of the disability claims being handled by GAR Disability Advocates.

 

Impairments – There were no impairments in the fiscal year ended September 30, 2015 as compared to $19.6 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 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.

 

Earnings (loss) from equity method investment. For the fiscal year ended September 30, 2015, earnings from equity method investment decreased $2.0 million to $0.1 million from earnings of $1.9 million in the fiscal year ended September 30, 2014, due to increased bad debt write offs of personal claim advances and reduced interest income earned for fiscal 2015.

 

Net income before taxes — Consumer Receivables.     Net income before taxes decreased $6.6 million, from $22.9 million for the fiscal year ended September 30, 2014 as compared to $16.3 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 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 (benefit).     Income tax expense of $1.2 million recorded for fiscal year 2015 consists of a $7.3 million current income tax expense and a $6.0 million deferred income tax benefit. Tax on discontinued operations was $1.3 million, and there was a tax benefit of $0.1 million on continuing operations. 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.

 

Discontinued operations. Earnings from discontinued operations increased $1.4 million to $1.8 million in the 2015 fiscal year, compared to $0.4 million in the 2014 fiscal year.

 

Net income (loss).     For the year ended September 30, 2015, net income decreased $4.5 million to $1.0 million from $5.5 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, $3.9 million, in the current fiscal year, partially offset by the impairments of $19.6 million in the prior fiscal year. 

  

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

 

		Discontinued Operations CBC
Balance, beginning of period		$	115,000
Non-controlling interest			678,000
Distributions			—
Balance, end of period		$	793,000

 

The non-controlling interests are related to CBC, the Company's discontinued operation. 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 our equity investment in Pegasus. 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 (“RFA”) 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 was 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. During the month of June 2016, the Company received the balance of the $16.9 million, and, as of September 30, 2016, the Company recorded a liability to BMO of approximately $0.2 million. The funds were subsequently remitted to BMO on October 11, 2016. The liability to BMO is recorded when actual collections are received.

 

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 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 among the parties to the Loan Agreement. On March 30, 2016, the Company signed the First Amendment to the Loan Agreement (the “First Amendment”) with Bank Hapoalim which amended certain terms of their banking arrangement. The First Amendment includes (a) the reduction of the interest rate to LIBOR plus 225 basis points; (b) a decrease in the Net Equity requirement by $50 million, to $100 million and (c) modifies the No Net Loss requirement from a quarterly to an annual basis. All other terms of the original agreement remain in effect. As of September 30, 2016, the Company had not used this facility. The loan agreement requires the Company to maintain a minimum cash balance of $10 million, which are included as part of cash and cash equivalents in the accompanying consolidated balance sheets.

 

Tender Offer of Company Common Shares

 

On March 22, 2016, MPF InvestCo 4, LLC, a wholly owned subsidiary of The Mangrove Partners Master Fund, Ltd. (“Mangrove”), filed a Tender Offer Statement with the SEC, announcing the commencement of an unsolicited tender offer to acquire up to 3,000,000 shares of Asta common stock at price of $9.00 per share (“the Mangrove Offer”). The Mangrove Offer was sent to the holders of common stock of the Issuer. If the Offer were subscribed, the Mangrove Offer would represent approximately 25.0% of the issued and outstanding shares and would result in Mangrove owning an aggregate of approximately 5,102,427 shares, which would have represented approximately 42.5% of issued and outstanding shares, based on the 12,011,476 shares, issued and outstanding as of March 31, 2016.

 

On March 31, 2016, the Company announced that its Board of Directors, after careful consideration and in consultation with a special committee of the Board and its financial and legal advisors, has unanimously determined to recommend that shareholders reject the Mangrove Offer. Furthermore, the Company has announced its intention to commence an issuer tender offer for 3,000,000 shares of Asta common stock pursuant to a “Dutch Auction” format at a price range of $9.50 to $10.25 per share.

  

 

On April 11, 2016, the Company commenced a Tender Offer to purchase of up to 3,000,000 shares of its common stock, par value $0.01 per share, pursuant to auction tenders at prices specified by the tendering shareholders of not greater than $10.25 per share nor less than $9.50 per share. The expiration date for the Company’s Tender Offer was May 12, 2016. On that date, the Company repurchased 274,284 shares at a price of $10.25 per share, for an aggregate cost of $2,811,411.

 

On April 15, 2016, MPF InvestCo 4, LLC and Mangrove amended its previously announced unsolicited tender offer to acquire up to 3,000,000 shares of Asta’s common stock, increasing the price per share from $9.00 to $9.50, and extending the expiration date to May 9, 2016. In addition, the amendment added certain additional conditions to Mangrove’s obligation to consummate its offer. On April 21, 2016, the Company’s Board of Directors unanimously reaffirmed its recommendation to shareholders that they reject the unsolicited offer, citing the fact that the increased offer was still at the bottom of the range in the Company’s self-tender, as described above. On April 26, 2016, Mangrove announced the termination of its Tender Offer, which had been due to expire on May 9, 2016. Mangrove stated that it had terminated its offer because it determined that a condition of the offer would not be satisfied. None of the shares of the Company’s common stock were purchased under the Mangrove offer.

 

On May 25, 2016, the Company entered into a Mutual Confidentiality Agreement (the “Agreement”) with Mangrove Partners (“Mangrove”), pursuant to which Mangrove and the Company agreed to (1) provide certain Confidential Information (as defined below) to the other party to the Agreement and the other party’s representatives, (2) the confidentiality of the Confidential Information, and (3) certain restrictions on the activities of the parties to the Agreement.

 

Pursuant to the Agreement, the Company agreed to make available to Mangrove and its representatives certain confidential information relating to the Company or its subsidiaries, and Mangrove has agreed to make available to the Company and its representatives certain confidential information relating to Mangrove and its affiliates (collectively, the “Confidential Information”). The Company and Mangrove agreed not to disclose the Confidential Information, and to cause each of their representatives, respectively, not to disclose the Confidential Information, except as required by law. Pursuant to the Agreement, the Company provided information requested by Mangrove to one or more of Mangrove’s representatives and such representatives prepared summaries of such information (the “Summaries”). Following the Company’s approval of the Summaries, the approved Summaries were provided to Mangrove. The Company has agreed to release the approved Summaries publicly on or prior to the end of the Extended Period (as defined in the Agreement), to the extent that the information contained in the Summaries has not already been disclosed.

 

Further, under the terms of the Agreement, Mangrove and the Company have agreed to certain restrictions during the Discussion Period, which began on May 25, 2016 and the Extended Period (each as defined in the Agreement), including that, unless consented to by the other party to the Agreement or required by applicable law, neither party will, and shall cause its affiliates and representatives not to, (i) commence any litigation against the other party, (ii) make any filing with the Securities and Exchange Commission of proxy solicitation materials, preliminary proxy statement, definitive proxy statement or otherwise or call any annual or special meeting of stockholders of the Company, (iii) publicly refer to: (a) the Confidential Information or Discussion Information (as defined in the Agreement), (b) any annual or special meetings of stockholders of the Company or (c) any prior discussions between the parties, including in any filing with the Securities and Exchange Commission (including any proxy solicitation materials, preliminary proxy statement, definitive proxy statement or otherwise), in any press release or in any other written or oral disclosure to a third party, (iv) make any purchases of the Company’s securities, including, but not limited to, pursuant to any stock buyback plans, tender offers, open-market purchases, privately negotiated transactions or otherwise, (v) make any demand under Section 220 of the Delaware General Corporation Law, (vi) make or propose to make any amendments to the Company’s Certificate of Incorporation, as amended, or By-laws, as amended, (vii) adopt, renew, propose or otherwise enter into a Shareholder Rights Plan with respect to the Company’s securities, (viii) adopt or propose any changes to the Company’s capital structure or (ix) negotiate, discuss, enter into, propose or otherwise transact in any extraordinary transactions with respect to the Company, outside the ordinary course of business, including, but not limited to, any mergers, asset sales or asset purchases.

 

On November 21, 2016, Mangrove notified the Company that they were terminating the Agreement with the Company. Upon termination of the Discussion Period, the Agreement provides for a period of thirty (30) days thereafter, the Extended Period. Throughout the Extended Period of the Agreement, the parties are subject to the standstill provisions of the Agreement. Following the Discussion Period and the Extended Period, nothing in the Agreement shall prohibit any party from taking any of the activities referred to as the Restricted Activities, and specifically nothing shall restrict Mangrove or its representatives from calling a special meeting, nominating one or more candidates to serve as directors of the Company or commencing, or announcing its intention to commence, a “solicitation” of “proxies” (as such terms are used in Regulation 14A of the Securities Exchange Act of 1934, as amended) to vote with respect to any meeting of stockholders of the Company. The effective termination date of this Agreement is January 6, 2017.

 

 

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%. The Company accounts for this investment under the equity method of accounting.

 

On November 8, 2016, the Company entered into a binding Term Sheet (the “Term Sheet”) with Pegasus, and PLF. The Company and PLF have decided not to renew the Pegasus joint venture that by its terms terminates on December 28, 2016. The Term Sheet amends certain provisions to Pegasus’ operating agreement dated as of December 28, 2011 (as amended, the “Operating Agreement”) and governs the terms relating to the collection of its existing Pegasus portfolio (the “Portfolio”). 

 

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

 

In connection with the Term Sheet, the parties thereto have also entered into a customary mutual release and non-disparagement agreement as well as a release from the non-competition obligations under the Operating Agreement.

  

Divorce Funding

 

On May 18, 2012, the Company formed BP Case Management, LLC (“BPCM”), a wholly owned subsidiary of the Company. BPCM entered into 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 term of the loan was to end in May 2014, but had been extended to August 2016. Effective August 14, 2016, the Company extended its revolving line of credit with Balance Point until March 31, 2017, at substantially the same terms as the September 14, 2014 amendment. The revolving line of credit is collateralized by BP Divorce Funding’s profit share in BPCM and other assets.

  

 Cash Flow 

 

As of September 30, 2016, our cash and cash equivalents decreased $3.7 million to $16.3 million, from $20.0 million at September 30, 2015. Although our cash flow remains adequate, we have diversified some of our cash flow into other investments.

 

Net cash used by operating activities was $9.3 million during the fiscal year ended September 30, 2016, as compared to $22.0 million used in operating activities for the fiscal year ended September 30, 2015. Net cash used in investing activities was $0.5 million during the fiscal year ended September 30, 2016, as compared to $2.7 million during the fiscal year ended September 30, 2015. The change in cash in investing activities is primarily due to lower investments in structured settlements. Net cash provided by financing activities was $5.9 million during the fiscal year ended September 30, 2016, as compared to $18.0 million provided by financing activities in the same 2015 period. The increased use in financing activities for the purchase of treasury stock in the current year period was partially offset by the decrease in net CBC borrowings in the current 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, costs involved in the collections of consumer receivables, repayment of CBC debt and investment in consumer receivable portfolios. In addition, dividends could be paid if approved by the Board of Directors. Acquisitions recently have been financed through cash flows from operating activities. We believe we will be less dependent on a credit facility in the short-term, as our cash balances will be sufficient to invest in personal injury claims, purchase portfolios and finance the early stages of the disability advocacy business.

 

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 11, 2015, the Board of Directors of the Company (“Board of Directors”) approved the repurchase of up to $15 million of the Company’s common stock and authorized management of the Company to enter into the Shares Repurchase Plan under Sections 10b-18 and 10(b)5-1 of the Securities Exchange Act (the “Shares Repurchase Plan”). The Shares Repurchase Plan was to have been effective to December 31, 2015. On December 17, 2015 the Board of Directors approved the extension of the Shares Repurchased Plan to March 31, 2016. On March 17, 2016, having repurchased approximately $9.9 million of the Company’s common stock, the Board of Directors approved a further extension of the Shares Repurchased Plan to December 31, 2016. On March 22, 2016, a Company shareholder commenced a tender offer for the Company’s common stock. Per the provisions of the Shares Repurchase Plan, it terminated immediately, and no further purchases were permitted under the Shares Repurchase Plan. Through September 30, 2016, the Company purchased approximately 1,186,000 shares at an aggregate cost of approximately $10.1 million under the Shares Repurchase Plan. Through September 30, 2015, the Company had purchased 201,800 shares at a cost of approximately $1,751,000.

 

 On April 11, 2016, the Company commenced a Tender Offer to purchase of up to 3,000,000 shares of its common stock, par value $0.01 per share, pursuant to auction tenders at prices specified by the tendering shareholders of not greater than $10.25 per share nor less than $9.50 per share. The expiration date for the Company’s Tender Offer was May 12, 2016. On that date, the Company repurchased 274,284 shares at a price of $10.25 per share, for an aggregate cost of $2,811,411.

 

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		$	57,282,000			$	4,391,000			$	7,390,000			$	7,984,000			$	37,517,000
Operating Lease Obligations			1,871,000				690,000				892,000				289,000				—
Total		$	59,153,000			$	5,081,000			$	8,282,000			$	8,273,000			$	37,517,000

 

Off-Balance Sheet Arrangements

 

As of September 30, 2016, we did not have any off balance sheet arrangements.

   

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

 

		Year Ended September 30,
		2016				2015				2014				2013				2012
		(In millions)
Balance at beginning of period		$	15.1			$	28.6			$	64.3			$	94.2			$	122.7
Acquisitions of finance receivables, net of buybacks			8.2				2.1				5.1				3.3				2.5
Cash collections from customers applied to principal(1)			(9.7	)			(15.5	)			(20.8	)			(22.2	)			(29.1	)
Cash collections represented by account sales applied to principal(1)			—				(0.1	)			(0.1	)			—				(0.1	)
Impairments/Portfolio write down			(0.2	)			—				(19.9	)			(11.0	)			(1.8	)
Balance at end of period		$	13.4			$	15.1			$	28.6			$	64.3			$	94.2

 

---

 

(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,
		2016				2015				2014
		(In millions)
Aggregate Purchase Price		$	8.2			$	2.1			$	5.1
Aggregate Portfolio Face Amount			162.9				28.0				478.9

 

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 Cost Recovery Portfolios

 

		September 30, 2016				September 30, 2015				September 30, 2014
						(In millions)
Original Purchase Price (at period end)		$	1,264.9			$	1,256.7			$	1,254.6
Cumulative Aggregate Managed Portfolios (at period end)			32,628.2				32,465.3				32,437.3
Receivable Carrying Value (at period end)			14.3				15.1				28.6
Finance Income Earned (for the respective period)			18.9				20.6				19.6
Total Cash Flows (for the respective period)			29.0				36.7				40.2

 

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 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.

  

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

 

In 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 fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. The Company has reviewed this ASU and determined that it will not have a material impact on our consolidated financial statements.

 

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

 

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

 

 

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

 

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

 

In August 2016 the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments."  This ASU will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The new standard is effective for fiscal years beginning after December 15, 2017. Early adoption is permitted. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case the Company would be required to apply the amendments prospectively as of the earliest date practicable. The Company is in the process of evaluating the provisions of the ASU, but does not expect it to have a material effect on the Company’s consolidated statements of cash flows.

 

In January 2017, the FASB issued ASU 2017-04 Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The objective of this update is to simplify the subsequent measurement of goodwill, by eliminating step 2 from the goodwill impairment test. The amendments in this update are effective for annual periods beginning after December 15, 2019, and interim periods within those fiscal years. The Company does not believe this update will have a material impact on its consolidated financial statements.

 

Inflation

 

We believe that inflation has not had a material impact on our results of operations for the years ended September 30, 2016, 2015 and 2014.

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk (restated)

 

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 $67.4 million, consisting of $10.1 million through a line of credit, at a rate of LIBOR plus 4%, with a floor of 4.1%, from a financial institution, and $57.3 million of notes at varying rates, from 4.85% to 8.75%, issued by CBC’s subsidiaries. At September 30, 2016, the LIBOR rate was 0.5311%. 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 debt 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.

 

The Company sold CBC on December 31, 2017, and presents the entity as a discontinued operation in its consolidated financial statements.

 

 

Item 8.

Financial Statements And Supplementary Data. (restated)

 

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 Amendment located immediately preceding the signature page, and are incorporated herein by reference.

 

 

Item 9.

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

 

None.

 

Item 9A.

Controls and Procedures. (restated)

 

(a) Evaluation of Disclosure Controls and Procedures. 

 

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.

 

In connection with the preparation of this Amendment, our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, re-evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2016, 2015 and 2014. Based on that re-evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of September 30, 2016, 2015 and 2014 due to the existence of the material weaknesses in internal control over financial reporting described below (which we view as an integral part of our disclosure controls and procedures). 

 

 

(b) 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). Internal control over financial reporting (as defined in Rules 13a-15(f) and 15d(f) under the Exchange Act) is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. GAAP. Internal control over financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets, (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, (c) provide reasonable assurance that receipts and expenditures are being made only in accordance with appropriate authorization of management and the board of directors, and (d) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements.

 

In connection with this Amendment, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, management conducted a re-assessment of the effectiveness of our internal control over financial reporting as of September 30, 2016, 2015 and 2014. In making this re-assessment, management 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, management concluded that we did not maintain effective internal control over financial reporting as of September 30, 2016, 2015 and 2014 due to the material weaknesses identified below.

 

Mazars USA LLP, our independent registered public accounting firm for the fiscal years ended September 30, 2016, 2015 and 2014, has issued an audit report with respect to our internal control over financial reporting which included an adverse opinion. This audit report appears in this Amendment.

 

 

(e) Management Identified Material Weaknesses In Internal Control Over Financial Reporting

 

Management identified material weaknesses resulting from the lack of timely and effective review of the Company’s period-end closing process. Specifically, management concluded that the material weakness relates to the Company not having adequate personnel and resources in place to perform a timely and effective review of our period-end closing process. Additionally, management identified material weaknesses resulting from the following:

 

1.             The Company lacked a process to review key inputs into the period end valuation using underlying benchmark interest rates in determining fair value of the Company’s structured settlements.  The material weakness was first reported by the Company in its Quarterly Report on Form 10-Q/A (Amendment No. 1) for the quarter ended December 31, 2016, which was filed with the SEC on May 26, 2017, and was also identified as a material weakness in connection with the preparation of this Amendment.

 

Planned Remedial Actions:

 

●

Since the original determination regarding this material weakness, the Company retained and intends to continue to retain third-party specialists to perform independent valuations of its assets and liabilities, when warranted, particularly with respect to, those assets and liabilities which involve specific complex or intricate valuation techniques, and/or are outside the Company's traditional business model.

●

The Company plans on hiring additional personnel with financial reporting experience to supplement its existing accounting/finance department. Additionally, management will develop and train accounting/finance personnel in the use of formalized checklists, to identify key inputs associated with period end valuations.

 

2.             The Company did not maintain effective internal controls over financial reporting disclosures specifically associated with concentrations, foreign transactions, significant entities and related party transactions.  The material weaknesses related to financial reporting disclosures associated with significant and related party transactions at the subsidiary level, were first reported by the Company in its Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, which was filed with the SEC on May 26, 2017, and was also identified as a material weakness in connection with the preparation of this Amendment.

 

Planned Remedial Actions:

 

●

The Company has retained and intends to continue to retain the services of outside consultants, with relevant accounting experience, skills and knowledge, working under the supervision and direction of the Company’s management, to supplement the Company’s existing accounting personnel.

●

The Company plans to develop policies, procedures, and controls for the specific areas identified in this material weakness. The Company will also hire additional accounting and finance personnel with significant accounting and SEC reporting experience to join its finance team to ensure consistent application of these accounting principles and adherence to the Company’s newly adopted policies, procedures, and controls. The Company plans to review the current financial controls to assess if additional management review controls are necessary and work with all finance personnel to establish the appropriate documentation criteria for the existing controls including evidence of review, timeliness and variance thresholds.

●

The Company plans to have the Disclosure Committee, which now meets on a quarterly basis, meet more frequently throughout the year to assure that our SEC filings and other public disclosures are complete, accurate, and otherwise comply with applicable accounting principles and regulations. The Company’s Disclosure Committee reports to our Chief Executive Officer with oversight provided by our Audit Committee, and includes individuals knowledgeable about, among other things, SEC rules and regulations, financial reporting, and internal control matters. The Company will also document a formal disclosure policy and procedures to govern the work of the Disclosure Committee.

●

Since the original determination regarding the material weakness associated with significant and related party transactions at the subsidiary level, the Company has installed contract management software to manage all of its contracts and associated obligations under those contracts. Management from each department has been trained on the software, and all contracts require approvals of designated managers and the accounting department prior to execution. All contracts are reviewed by accounting personnel with requisite experience in identifying complex accounting transactional and disclosure issues,

 

3.           The Company did not maintain effective internal controls over regulatory compliance; specifically the Company did not have an effective whistleblower hotline or a formalized Foreign Corrupt Practices Act Policy.

 

Planned Remedial Actions:

 

●

In 2018, the Company implemented a whistleblower hotline it believes will be effective. Management will develop a formalized plan to test the independent system on a regular basis to ensure regulatory compliance.

 

●

The Company will formalize its Foreign Corrupt Practices Act Policy, and will ensure all employees are trained on, and adhere to the policy.

 

 

4.        The Company lacks a formal policy to assess the adequacy of the design and operating effectiveness of controls related to certain of the Company’s subsidiaries, third party service providers and third party advocates.

 

Planned Remedial Actions:

 

The Company will increase the frequency of onsite inspections of third party servicers and advocates throughout the year, utilizing existing accounting/finance personnel familiar with the specific accounting processes involved at each location. The Company will provide training to accounting personnel at subsidiary locations, and will develop detailed checklist and processes that can be used, and reviewed by management during period ends. Additionally, management will routinely visit subsidiary locations to ensure that the processes and guidelines developed are being strictly adhered to.

 

 5.        The Company did not maintain effective internal controls over accounting for complex transactions specifically associated with equity method investment.

 

Planned Remedial Actions:

 

●

The Company plans to develop policies, procedures, and controls to ensure the proper accounting for complex technical issues are identified, researched and brought to management's attention. The Company will also ensure that the appropriate personnel are appropriately trained on new and existing accounting pronouncements, Company policies, procedures, and controls.

 

6.        The Company did not maintain effective internal controls over accounting for foreign transactions specifically associated with accounting for transaction and translation adjustments, unallocated payments and cutoff.

 

Planned Remedial Actions:

 

●

The Company plans to develop and implement improved policies, procedures, processes and controls, as well as, conduct trainings to ensure the proper accounting for foreign currency matters in accordance with ASC 830, Foreign Currency Matters .

 

●

The Company plans to utilize an accounting system to ensure that all transactions are systematically re-measured and translated at the applicable foreign currency exchange rate and the associated gain or loss is appropriately recognized in earnings.

 

●

The Company plans to appropriately reconcile the AOCI account in a timely manner to ensure that the proper amounts for foreign currency transactions are being recorded in the Company's financial statements.

 

(f) Changes in Internal Controls over Financial Reporting.  

 

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, re-evaluated our internal control over financial reporting to determine whether any changes occurring during the fourth quarter of fiscal year 2016 that have materially affected, or are reasonably likely to affect, our internal control over financial reporting, and have concluded that there have been no changes that occurred during such quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

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, 2016, 2015 and 2014, 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 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 effective internal control over financial reporting was maintained in all material respects. Our audits of internal control over financial reporting 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 audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide 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.

 

A material weakness is a control deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment:

 

(1)  The Company lacked a process to review key inputs into the period end valuation using underlying benchmark interest rates in determining fair value of the Company’s structured settlements.

(2)  The Company did not maintain effective internal controls over financial reporting disclosures specifically associated with concentrations, foreign transactions, significant entities and related party transactions.

(3)  The Company did not maintain effective internal controls over regulatory compliance; specifically, the Company did not have an effective whistleblower hotline or a formalized Foreign Corrupt Practices Act Policy.

(4)  The Company lacked a formal policy to assess the adequacy of the design and operating effectiveness of controls related to certain of the Company’s subsidiaries, third party service providers and third-party advocates.

(5)  The Company did not maintain effective internal controls over accounting for complex transactions specifically associated with equity method investment.

(6)  The Company did not maintain effective internal controls over accounting for foreign transactions specifically associated with accounting for transaction and translation adjustments, unallocated payments and cutoff.

 

The above material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audits of the Company’s consolidated financial statements as of September 30, 2016 and 2015 and for each of the three years in the three-year period ended September 30, 2016, and this report does not affect our report dated September 17, 2018, on those consolidated financial statements.

 

In our opinion, management’s assessment that the Company did not maintain effective internal control over financial reporting as of September 30, 2016, 2015 and 2014, 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”). Also, in our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of September 30, 2016, 2015 and 2014, 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, 2016 and 2015, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the three-year period ended September 30, 2016, and our report dated September 17, 2018, expressed an unqualified opinion on those consolidated financial statements.

 

 

/s/ Mazars USA LLP

 

Edison, New Jersey

September 17, 2018

 

 

Item 9B.

Other Information.

 

None.

 

 

PART IV

 

Item 15.

Exhibits and Financial Statement Schedules. (restated)

 

(a) The following documents are filed or furnished as part of this Amendment:

 

Exhibit Number
2.1#		Membership Interest Purchase Agreement, dated December 31, 2013, by and among CBC Settlement Funding, LLC, CBC Management Services Group, LLC, Asta Funding, Inc. and the other parties thereto (incorporated by reference to Exhibit 10.1 to Asta Funding, Inc.’s Current Report on Form 8-K filed January 7, 2014).
2.2		Securities Purchase Agreement, dated December 13, 2017, by and between Asta Funding, Inc., and CBC Holdings LLC (incorporated by reference to Exhibit 10.1 to Asta Funding, Inc.’s Current Report on Form 8-K filed December 19, 2017).
2.3		Membership Interest Purchase Agreement, dated January 12, 2018, by and between ASFI Pegasus Holdings, LLC and Pegasus Legal Funding, LLC (incorporated by reference to Exhibit 10.1 to Asta Funding, Inc.’s Current Report on Form 8-K filed January 18, 2018).
2.4		Term Sheet, dated November 8, 2016, by and among Asta Funding, Inc., ASFI Pegasus Holdings, LLC, Fund Pegasus, LLC, Pegasus Funding, LLC, Pegasus Legal Funding, LLC, Max Alperovich and Alexander Khanas (incorporated by reference to Exhibit 10.1 to Asta Funding, Inc.’s Current Report on Form 8-K filed November 15, 2016).
3.1		Certificate of Incorporation of Asta Funding, Inc. (incorporated by reference to Exhibit 3.1 to Asta Funding, Inc.’s Quarterly Report on Form 10-Q filed August 9, 2016).
3.2		Certificate of Amendment to Certificate of Incorporation of Asta Funding, Inc. (incorporated by reference to Exhibit 3.1(a) to Asta Funding, Inc.’s Quarterly Report on Form 10-QSB filed May 15, 2002).
3.3		Certificate of Designation of Series A Junior Preferred Stock of Asta Funding, Inc. (incorporated by reference to Exhibit 3.1 to Asta Funding, Inc.’s Current Report on Form 8-K filed August 24, 2012).
3.4		Amended and Restated By-laws of Asta Funding, Inc. (incorporated by reference to Exhibit 3.3 to Asta Funding, Inc.’s Quarterly Report on Form 10-Q filed August 9, 2016).
4.1		Rights Agreement, dated August 23, 2012, by and between Asta Funding, Inc. and American Stock Transfer & Trust Co., LLC (incorporated by reference to Exhibit 4.1 to Asta Funding, Inc.’s Current Report on Form 8-K filed August 24, 2012).
10.1+		Asta Funding, Inc. 2002 Stock Option Plan (incorporated by reference to Exhibit 10.10 to Asta Funding, Inc.’s Quarterly Report on Form 10-QSB filed May 15, 2002).
10.2+		Asta Funding, Inc. Equity Compensation Plan (incorporated by reference to Exhibit 10.1 to Asta Funding, Inc.’s Current Report on Form 8-K filed March 3, 2006).
10.3+		Asta Funding, Inc. 2012 Stock Option and Performance Award Plan (incorporated by reference to Appendix A to Asta Funding, Inc.’s Definitive Proxy Statement filed February 17, 2012 for the March 21, 2012 Annual Meeting of Stockholders).
10.4		Form of Subordination and Intercreditor Agreement (incorporated by reference to Exhibit 10.26 to Asta Funding, Inc.’s Annual Report on Form 10-K for the year ended September 30, 2008).
10.5		Amended and Restated Management Agreement, dated January 16, 2009, by and between Palisades Collection, L.L.C. and the other party thereto (incorporated by reference to Exhibit 10.27 to Asta Funding, Inc.’s Annual Report on Form 10-K for the year ended September 30, 2008).
10.6		Amended and Restated Master Servicing Agreement, dated January 16, 2009, by and between Palisades Collection, L.L.C. and the other party thereto (incorporated by reference to Exhibit 10.28 to Asta Funding, Inc.’s Annual Report on Form 10-K for the year ended September 30, 2008).

 

 

Exhibit Number
10.7		First Amendment to Amended and Restated Master Servicing Agreement, by and among Palisades Collection and the other parties thereto (incorporated by reference to Exhibit 10.29 to Asta Funding, Inc.’s Annual Report on Form 10-K for the year ended September 30, 2008).
10.8		Indemnification Agreement, by and among Asta Funding, Inc., GMS Family Investors LLC and Judith R. Feder (incorporated by reference to Exhibit 10.32 to Asta Funding, Inc.’s Annual Report on Form 10-K for the year ended September 30, 2009).
10.9		Settlement Agreement and Omnibus Amendment, dated August 7, 2013, by and among Asta Funding, Inc., Palisades Acquisition XVI, LLC, Palisades Collection, L.L.C., Palisades Acquisition XV, LLC, BMO Capital Markets Corp., Fairway Finance Company, LLC and Bank of Montreal (incorporated by reference to Exhibit 10.1 to Asta Funding, Inc.’s Current Report on Form 8-K filed August 9, 2013).
10.10		Revolving Credit Agreement, dated December 28, 2011, by and between Pegasus Funding, LLC and Fund Pegasus, LLC (incorporated by reference to Exhibit 10.1 to Asta Funding, Inc.’s Current Report on Form 8-K filed January 4, 2012).
10.11		Security Agreement, dated December 28, 2011, by and between Pegasus Funding, LLC and Fund Pegasus, LLC (incorporated by reference to Exhibit 10.2 to Asta Funding, Inc.’s Current Report on Form 8-K filed January 4, 2012).
10.12		Secured Revolving Credit Note, dated December 28, 2011, by Pegasus Funding, LLC in favor of Fund Pegasus, LLC (incorporated by reference to Exhibit 10.3 to Asta Funding, Inc.’s Current Report on Form 8-K filed January 4, 2012).
10.13		Limited Liability Company Operating Agreement of Pegasus Funding, LLC (incorporated by reference to Exhibit 10.4 to Asta Funding, Inc.’s Current Report on Form 8-K filed January 4, 2012).
10.14#		Amended and Restated Operating Agreement of CBC Settlement Funding, LLC (incorporated by reference to Exhibit 10.2 to Asta Funding, Inc.’s Current Report on Form 8-K filed January 7, 2014).
10.15*		Consulting Agreement, dated September 17, 2015, by and between Asta Funding, Inc. and A. L. Piccolo & Co., Inc.
10.16		Lease Agreement, dated October 27, 2015, by and between ESL 200, LLC and Asta Funding, Inc. (incorporated by reference to Exhibit 10.1 to Asta Funding, Inc.’s Current Report on Form 8-K filed October 29, 2015).
10.17		First Amendment to Loan Documents, dated March 30, 2016, by and among Asta Funding, Inc., Palisades Collection, L.L.C. and Bank Hapoalim B.M. (incorporated by reference to Exhibit 10.1 to Asta Funding, Inc.’s Current Report on Form 8-K filed March 31, 2016).
10.18		Loan Agreement, dated May 2, 2014, by and among Asta Funding, Inc., Palisades Collection, L.L.C. and Bank Hapoalim B.M., dated May 2, 2014 (incorporated by reference to Exhibit 10.1 to Asta Funding, Inc.’s Current Report on Form 8-K filed May 8, 2014).
10.19		Security Agreement, dated May 2, 2014, by among Asta Funding, Inc., Palisades Collection, L.L.C., and Bank Hapoalim B.M. (incorporated by reference to Exhibit 10.2 to Asta Funding, Inc.’s Current Report on Form 8-K filed May 8, 2014).
10.20		Mutual Confidentiality Agreement, dated May 25, 2016, by and between Asta Funding, Inc. and Mangrove Partners (incorporated by reference to Exhibit 10.1 to Asta Funding, Inc.’s Current Report on Form 8-K filed May 26, 2016).
10.21		Employment Agreement, dated March 15, 2016, by and between Asta Funding, Inc. and Bruce Foster (incorporated by reference to Exhibit 10.1 to Asta Funding, Inc.’s Current Report on Form 8-K filed March 15, 2016).
21.1*		Subsidiaries of Asta Funding, Inc.
23.1*		Consent of Independent Registered Public Accounting Firm.
31.1*		Certification of Gary Stern, Chief Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

Exhibit Number
31.2*		Certification of Bruce R. Foster, Chief Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**		Certification of the Gary Stern, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**		Certification of Bruce R. Foster, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		XBRL Instance.
101.SCH		XBRL Taxonomy Extension Schema.
101.CAL		XBRL Taxonomy Extension Calculation.
101.DEF		XBRL Taxonomy Extension Definition.
101.LAB		XBRL Taxonomy Extension Labels.
101.PRE		XBRL Taxonomy Extension Presentation.

 

 

 

*	Filed herewith
**	This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (“Exchange Act”), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended or the Exchange Act.
+	Indicates management contract or compensatory plan.
#	Indicates schedules have been omitted pursuant to Item 6.01(b)(2) of Regulation S-K. Asta Funding Inc. agrees to furnish supplementally a copy of any omitted schedule or exhibit to the SEC upon request.

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

 

Contents 

	Page
Report of Independent Registered Public Accounting Firm		F-2
Consolidated Balance Sheets as of September 30, 2016 and 2015 (restated)		F-3
Consolidated Statements of Operations for the years ended September 30, 2016, 2015 and 2014 (restated)		F-4
Consolidated Statements of Comprehensive Income for the years ended September 30, 2016, 2015 and 2014 (restated)		F-5
Consolidated Statements of Stockholders’ Equity for the years ended September 30, 2016, 2015 and 2014 (restated)		F-6
Consolidated Statements of Cash Flows for the years ended September 30, 2016, 2015 and 2014 (restated)		F-7
Notes to Consolidated Financial Statements (restated)		F-8

 

 

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, 2016 and 2015, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the three-year period ended September 30, 2016. 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, 2016 and 2015, 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, 2016, in conformity with U.S. generally accepted accounting principles.

 

As described in Note A – Restatement of Previously Reported Consolidated Financial Statements, the Company restated its consolidated financial statements as of September 30, 2016 and 2015, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the three-year period ended September 30, 2016.

 

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, 2016, 2015 and 2014, 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 September 17, 2018 expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting.

 

 

/s/ Mazars USA LLP

 

Edison, New Jersey

September 17, 2018

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

 

Consolidated Balance Sheets

 

 

See notes to accompanying consolidated financial statements

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

 

Consolidated Statements of Operations

 

 

See notes to accompanying consolidated financial statements

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

 

Consolidated Statements of Comprehensive Income

 

 

See notes to accompanying consolidated financial statements

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES 

 

Consolidated Statements of Stockholders’ Equity 

 

For the years ended September 30, 2016, 2015 and 2014

 

 

See notes to accompanying consolidated financial statements

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

 

Consolidated Statements of Cash Flows

 

 

See notes to accompanying consolidated financial statements

 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

September 30, 2016 and 2015

 

 

 

 

  

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

 

 

 

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: September 17, 2018

 

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		Chairman of the Board, President, and Chief Executive		September 17, 2018
Gary Stern		Officer
/s/ Bruce R. Foster		Chief Financial Officer		September 17, 2018
Bruce R. Foster		(Principal Financial Officer and Accounting Officer)
/s/ David Slackman		Director		September 17, 2018
David Slackman
/s/ Louis A. Piccolo		Director		September 17, 2018
Louis A. Piccolo
/s/ Mark Levenfus		Director		September 17, 2018
Mark Levenfus
/s/ Timothy H. Bishop		Director		September 17, 2018
Timothy H. Bishop