Table Of Contents

 



 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 


FORM 10-Q

 


 

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

 

For the quarterly period ended June 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)

 

(IRS Employer
Identification No.)

   

210 Sylvan Ave., Englewood Cliffs, New Jersey

 

07632

(Address of principal executive offices)

 

(Zip Code)

 

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

 


 

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

 

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

 

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

 

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

 

Large accelerated filer

 

  

Accelerated filer

 

       

Non-accelerated filer

 

   (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

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

 

As of August 5, 2016, the registrant had 11,846,724 common shares outstanding.

 



 

 
 

Table Of Contents
 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

 

   

Part I-FINANCIAL INFORMATION

3

   

Item 1. Consolidated Financial Statements

3

   

Consolidated Balance Sheets as of June 30, 2016 (unaudited) and September 30, 2015

3

   

Consolidated Statements of Operations for the three and nine month periods ended June 30, 2016 and 2015 (unaudited)

4

   

Consolidated Statements of Comprehensive Income (Loss) for the three and nine month periods ended June 30, 2016 and 2015 (unaudited)

5

   

Consolidated Statements of Stockholders’ Equity for the nine month periods ending June 30, 2016 and 2015 (unaudited)

6

   

Consolidated Statements of Cash Flows for the nine month periods ended June 30, 2016 and 2015 (unaudited)

7

   

Notes to Consolidated Financial Statements (unaudited)

8

   

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

34

   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

47

   

Item 4. Controls and Procedures

47

   

Part II-OTHER INFORMATION

48

   

Item 1. Legal Proceedings

48

   

Item 1A. Risk Factors

48

   

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

49

   

Item 3. Defaults Upon Senior Securities

50

   

Item 4. Mine Safety Disclosures

50

   

Item 5. Other Information

50

   

Item 6. Exhibits

50

   

Signatures

51

   

Exhibit 31.1

 

Exhibit 31.2

 

Exhibit 32.1

 

Exhibit 32.2

 

  

 
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Table Of Contents
 

  

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

ASTA FUNDING, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(rounded to the nearest thousand, except share data)

 

   

(Unaudited)

         
   

June 30,
2016

   

September 30,
2015

 

ASSETS

               

Cash and cash equivalents

  $ 17,111,000     $ 24,315,000  

Available for sale investments

    56,744,000       59,727,000  

Consumer receivables acquired for liquidation (at net realizable value)

    14,540,000       15,608,000  

Structured settlements

    79,884,000       64,635,000  

Investment in personal injury claims

    43,684,000       36,668,000  

Other investments, net

    3,426,000       4,239,000  

Due from third party collection agencies and attorneys

    1,081,000       1,422,000  

Prepaid and income taxes receivable

    4,680,000       6,744,000  

Furniture and equipment, net

    219,000       480,000  

Deferred income taxes

    12,270,000       12,279,000  

Goodwill

    2,770,000       2,770,000  

Other assets

    9,370,000       8,485,000  

Total assets

  $ 245,779,000     $ 237,372,000  

LIABILITIES

               

Other debt – CBC (including non-recourse notes payable of $44.4 million at June 30, 2016 and $47.0 million at September 30, 2015)

  $ 62,667,000     $ 51,611,000  

Other liabilities

    6,622,000       4,441,000  

Total liabilities

    69,289,000       56,052,000  

Commitments and contingencies

               

STOCKHOLDERS’ EQUITY

               

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

           

Common stock, $.01 par value, authorized 30,000,000 shares; issued 13,297,508 at June 30, 2016 and 13,061,673 at September 30, 2015; and outstanding 11,837,224 at June 30, 2016 and 12,859,873 at September 30, 2015

    133,000       131,000  

Additional paid-in capital

    66,575,000       65,011,000  

Retained earnings

    123,782,000       120,611,000  

Accumulated other comprehensive loss

    (173,000

)

    (1,685,000

)

Treasury stock (at cost) 1,460,284 shares at June 30, 2016 and 201,800 shares at September 30, 2015

    (12,925,000

)

    (1,751,000

)

Non-controlling interest

    (902,000

)

    (997,000

)

Total stockholders’ equity

    176,490,000       181,320,000  

Total liabilities and stockholders’ equity

  $ 245,779,000     $ 237,372,000  

 

See Notes to Consolidated Financial Statements

 

 
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ASTA FUNDING, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited)

(rounded to the nearest thousand, except share data)

 

   

Three Months

Ended

June 30, 2016

   

Three Months

Ended

June 30, 2015

   

Nine Months

Ended

June 30, 2016

   

Nine Months

Ended

June 30, 2015

 

Revenues:

                               

Finance income, net

  $ 4,612,000     $ 5,156,000     $ 14,668,000     $ 15,688,000  

Personal injury claims income

    9,838,000       1,729,000       14,769,000       6,084,000  

Unrealized gain on structured settlements

    1,422,000       1,239,000       4,586,000       4,260,000  

Interest income on structured settlements

    1,765,000       1,356,000       4,473,000       3,314,000  

Disability fee income

    1,169,000       552,000       2,700,000       911,000  

Total revenues

    18,806,000       10,032,000       41,196,000       30,257,000  

Other income — includes ($32,000) and ($159,000) during the three month periods ended June 30, 2016 and 2015, respectively, and ($63,000) and ($120,000) during the nine month periods ended June 30, 2016 and 2015, respectively, of accumulated other comprehensive income reclassification for unrealized net gains / (losses) on available for sale securities

    215,000       185,000       1,108,000       1,216,000  
      19,021,000       10,217,000       42,304,000       31,473,000  

Expenses:

                               

General and administrative

    10,591,000       9,177,000       32,039,000       27,793,000  

Interest

    832,000       632,000       2,348,000       1,710,000  

Impairment of consumer receivables

                124,000        
      11,423,000       9,809,000       34,511,000       29,503,000  

Income before income tax

    7,598,000       408,000       7,793,000       1,970,000  

Income tax expense — includes tax expense benefit of ($13,000) and ($64,000) during the three month periods ended June 30, 2016 and 2015, respectively and ($24,000) and ($27,000) during the nine month periods ended June 30, 2016 and 2015, respectively, of accumulated other comprehensive income reclassifications for unrealized net gains / (losses) on available for sale securities

    2,853,000       155,000       2,461,000       901,000  

Net income

    4,745,000       253,000       5,332,000       1,069,000  

Less: net income attributable to non-controlling interests

    1,549,000       92,000       2,161,000       193,000  

Net income attributable to Asta Funding, Inc.

  $ 3,196,000     $ 161,000     $ 3,171,000     $ 876,000  

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

                               

Basic

  $ 0.27     $ 0.01     $ 0.26     $ 0.07  

Diluted

  $ 0.26     $ 0.01     $ 0.26     $ 0.07  

Weighted average number of common shares outstanding:

                               

Basic

    11,897,139       13,060,839       12,023,156       13,044,905  

Diluted

    12,433,424       13,313,406       12,294,073       13,311,776  

 

 

See Notes to Consolidated Financial Statements

 

 
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ASTA FUNDING, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss)

June 30, 2016 and 2015

(Unaudited)

(rounded to the nearest thousand)

 

 

   

Three Months
Ended
June 30, 2016

   

Three Months
Ended
June 30, 2015

   

Nine Months
Ended
June 30, 2016

   

Nine Months
Ended
June 30, 2015

 

Comprehensive income is as follows:

                               

Net income

  $ 4,745,000     $ 253,000     $ 5,332,000     $ 1,069,000  

Net unrealized securities (loss)/gain, net of tax (expense)/benefit of ($364,000) and $61,000 during the three month periods ended June 30, 2016 and 2015, respectively, and ($647,000) and $213,000 during the nine month periods ended June 30, 2016 and 2015, respectively.

    543,000       (310,000 )     1,046,000       (547,000

)

Reclassification adjustments for securities sold, net of tax benefit of $13,000 and $36,000 during the three month periods ended June 30, 2016 and 2015, and $24,000 and $27,000 during the nine month periods ended June 30, 2016 and 2015, respectively.

    (19,000

)

    (123,000

)

    (39,000

)

    (93,000

)

Foreign currency translation, net of tax benefit of $93,000 and $0 during the three month periods ended June 30, 2016 and 2015, respectively, and $650,000 and $0 during the nine month periods ended June 30, 2016 and 2015, respectively.

    9,000             505,000        

Other comprehensive income (loss)

    533,000       (433,000 )     1,512,000       (640,000

)

Total comprehensive income (loss)

  $ 5,278,000     $ (180,000 )   $ 6,844,000     $ 429,000  

 

See Notes to Consolidated Financial Statements

 

 
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ASTA FUNDING, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity

(Unaudited)

(rounded to the nearest thousand, except share data)

 

   

Common Stock

   

Additional

           

Accumulated
Other

           

Non-

   

Total

 
   

Issued
Shares

   

Amount

   

Paid-in
Capital

   

Retained
Earnings

   

Comprehensive
Loss

   

Treasury
Stock

   

Controlling
Interests

   

Stockholders’
Equity

 

Balance, September 30, 2015

    13,061,673     $ 131,000     $ 65,011,000     $ 120,611,000     $ (1,685,000

)

  $ (1,751,000

)

  $ (997,000

)

  $ 181,320,000  

Exercise of options

    107,531       1,000       871,000                                       872,000  

Stock based compensation expense

                567,000                               567,000  

Restricted stock

    5,000                                            

Net income

                      3,171,000                   2,161,000       5,332,000  

Unrealized gain on marketable securities, net

                            1,007,000                   1,007,000  

Purchase of treasury stock

                                  (11,174,000

)

          (11,174,000

)

Foreign currency translation, net

                            505,000                   505,000  

Purchase of subsidiary shares from non-controlling interest

                (873,000

)

                      (927,000

)

    (1,800,000

)

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

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

Distributions to non-controlling interest

                                        (1,139,000

)

    (1,139,000

)

Balance, June 30, 2016

    13,297,508     $ 133,000     $ 66,575,000     $ 123,782,000     $ (173,000

)

  $ (12,925,000

)

  $ (902,000

)

  $ 176,490,000  

 

 

 

 

 

                                   

Accumulated

                 
                   

Additional

           

Other

   

Non-

   

Total

 
   

Common Stock

   

Paid-in

   

Retained

   

Comprehensive

   

Controlling

   

Stockholders’

 
   

Shares

   

Amount

   

Capital

   

Earnings

   

Income (Loss)

   

Interests

   

Equity

 

Balance, September 30, 2014

    12,985,839     $ 130,000     $ 63,102,000     $ 118,595,000     $ 142,000     $ (713,000

)

  $ 181,256,000  

Exercise of options

    60,000             469,000                         469,000  

Stock based compensation expense

                1,136,000                         1,136,000  

Restricted stock

    15,000                                      

Net income

                      876,000             193,000       1,069,000  

Unrealized gain on marketable securities, net

                            (640,000

)

          (640,000

)

Distributions to non-controlling interest

                                  (754,000

)

    (754,000

)

Balance, June 30, 2015

    13,060,839     $ 130,000     $ 64,707,000     $ 119,471,000     $ (498,000

)

  $ (1,274,000

)

  $ 182,536,000  

 

 

See Notes to Consolidated Financial Statements

 

 
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ASTA FUNDING, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

(rounded to the nearest thousand)

 

   

Nine Months Ended

 
   

June 30, 2016

   

June 30, 2015

 

Cash flows from operating activities:

               

Net income

  $ 5,332,000     $ 1,069,000  

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

               

Depreciation and amortization

    442,000       459,000  

Deferred income taxes

    (662,000

)

    (485,000

)

Impairment of consumer receivables acquired for liquidation

    124,000        

Stock based compensation

    567,000       1,136,000  

Loss on sale of available-for-sale securities

    63,000       120,000  

Structured settlements – accrued interest

    (3,907,000

)

    (3,055,000

)

Structured settlements – gains

    (4,586,000

)

    (4,260,000

)

Unrealized gain on other investments

    (246,000

)

    (296,000

)

Unrealized foreign exchange loss on other investments

    59,000       884,000  

Reserve for loss on other investments

    1,000,000        

Operating lease adjustment

    21,000        

Changes in:

               

Prepaid and income taxes receivable

    2,064,000       430,000  

Due from third party collection agencies and attorneys

    341,000       38,000  

Other assets

    (964,000

)

    (1,681,000

)

Income taxes payable

          523,000  

Other liabilities

    2,686,000       372,000  

Net cash provided by (used in) operating activities

    2,334,000       (4,746,000

)

Cash flows from investing activities:

               

Purchase of consumer receivables acquired for liquidation

    (6,470,000

)

    (2,009,000

)

Principal collected on receivables acquired for liquidation

    7,414,000       12,567,000  

Principal collected on receivables accounts represented by account sales

          2,000  

Purchase of available-for-sale securities

    (11,704,000

)

    (17,564,000

)

Proceeds from sale of available-for-sale securities

    16,302,000       13,677,000  

Purchase of other investments

          (5,000,000

)

Purchase of non-controlling interest

    (800,000

)

     

Investments in personal injury claims – advances

    (27,689,000

)

    (18,270,000

)

Investments in personal injury claims – receipts

    20,673,000       13,467,000  

Capital expenditures

    (123,000

)

    (138,000

)

Investments in structured settlements – advances

    (12,264,000

)

    (10,782,000

)

Investments in structured settlements – receipts

    5,508,000       3,609,000  

Net cash used in investing activities

    (9,153,000

)

    (10,441,000

)

Cash flows from financing activities:

               

Proceeds from exercise of stock options

    872,000       469,000  

Purchase of treasury stock

    (11,174,000

)

     

Distribution to non-controlling interest

    (1,139,000

)

    (754,000

)

Borrowings of other debt – CBC

    14,431,000       33,923,000  

Repayment of other debt – CBC

    (3,375,000

)

    (19,514,000

)

Net cash (used in) provided by financing activities

    (385,000

)

    14,124,000  

Net decrease in cash and cash equivalents

    (7,204,000

)

    (1,063,000

)

Cash and cash equivalents at beginning of period

    24,315,000       28,710,000  

Cash and cash equivalents at end of period

  $ 17,111,000     $ 27,647,000  

Supplemental disclosure of cash flow information :

               

Cash paid for: Interest

  $ 2,353,000       1,736,000  

Supplemental disclosure of non-cash flow investing activities :

               

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

  $ 1,000,000     $  

 

See Notes to Consolidated Financial Statements

 

 
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ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1—Business and Basis of Presentation

 

Business

 

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

 

Consumer receivables

 

The Company started out in the consumer receivables business in 1994. Recently, our effort has been in the international areas (mainly South America), as we have curtailed our active purchasing of consumer receivables in the United States. We define consumer receivables as primary charged-off, semi-performing and distressed depending on their collectability. We acquire these consumer receivables at substantial discounts to their face values, based on the characteristics of the underlying accounts of each portfolio.

 

Personal injury claims

 

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.

 

Structured settlements

 

CBC purchases structured settlement and annuity policies through privately negotiated direct consumer purchases and brokered transactions across the United States. CBC funds the purchases primarily from cash, and its securitized debt, issued through its Blue Bell Receivables (“BBR”) subsidiaries.

 

Social security benefit advocacy

 

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

 

Basis of Presentation

 

The consolidated balance sheet as of June 30, 2016, the consolidated statements of operations for the three and nine month periods ended June 30, 2016 and 2015, the consolidated statements of comprehensive income (loss) for the three and nine month periods ended June 30, 2016 and 2015, the consolidated statements of stockholders’ equity as of and for the nine months ended June 30, 2016 and 2015, and the consolidated statements of cash flows for the nine month periods ended June 30, 2016 and 2015, are unaudited. The September 30, 2015 financial information included in this report was derived from our audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2015. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly our financial position at June 30, 2016, the results of operations for the three and nine month periods ended June 30, 2016 and 2015 and cash flows for the nine month periods ended June 30, 2016 and 2015 have been made. The results of operations for the three and nine month periods ended June 30, 2016 and 2015 are not necessarily indicative of the operating results for any other interim period or the full fiscal year.

 

Palisades XVI is a variable interest entity (“VIE”). Asta Funding, Inc. is considered the primary beneficiary because it has the power to direct the significant activities of the VIE via its ownership and service contract. Palisades XVI holds the Great Seneca portfolio, a $300 million portfolio purchased in March 2007 (the “Portfolio Purchase”), which, as of June 30, 2016, had a value of $5.4 million.

 

 
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ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1—Business and Basis of Presentation (continued)

 

Basis of Presentation (continued)

 

Blue Bell Receivables I, LLC (“BBR I”), Blue Bell Receivables II, LLC (“BBR II”), Blue Bell Receivables III, LLC (“BBR III”), Blue Bell Receivables IV, LLC (“BBR IV”) and Blue Bell Receivables V, LLC (“BBR V”), collectively the “Blue Bell Entities”, are VIEs. CBC is considered the primary beneficiary because it has the power to direct the significant activities of the VIEs via its ownership and service contract. It also has the rights to receive benefits from the collections that exceed the payments to the note holders. The Blue Bell Entities hold structured settlements of $79.9 million and the non-recourse notes payable of $44.4 million as of June 30, 2016.

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission and therefore do not include all information and note disclosures required under generally accepted accounting principles. The Company suggests that these financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2015 filed with the Securities and Exchange Commission.

 

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

 

Concentration of Credit Risk – Cash

 

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

 

Cash balances are maintained at various depository institutions and are insured by the Federal Deposit Insurance Corporation (“FDIC”). The Company had cash balances with 4 banks at June 30, 2016 that exceeded the balance insured by the FDIC by approximately $13.0 million. The Company does not believe it is exposed to any significant credit risk due to concentration of cash.

 

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. The Company is currently evaluating the impact this update will have on its consolidated financial statements.

 

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

  

 
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Table Of Contents
 

  

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 Note 1—Business and Basis of Presentation (continued)

 

Basis of Presentation (continued)

 

Recent Accounting Pronouncements (continued)

 

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 that entities may elect to apply. The Company is currently evaluating the impact of adopting this update on its consolidated financial statements and expects that most of its operating leases will be subject to the accounting standard update and will recognize as operating lease liabilities and right-of-use assets upon adoption.

 

In March 2016, the FASB issued 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.

 

Note 2—Principles of Consolidation

 

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

 

Note 3—Available-for-Sale Investments

 

Investments classified as available-for-sale at June 30, 2016 and September 30, 2015, consist of the following:

 

   

Amortized
Cost

   

Unrealized
Gains

   

Unrealized
Losses

   

Fair Value

 

June 30, 2016

  $ 55,408,000     $ 1,341,000     $ (5,000

)

  $ 56,744,000  

September 30, 2015

  $ 60,069,000     $ 98,000     $ (440,000

)

  $ 59,727,000  

 

The available-for-sale investments do not have any contractual maturities. The Company sold three investments during the nine months ended June 30, 2016, with a realized loss of $63,000. The Company received $47,000 in capital gains distributions during the nine months ended June 30, 2016. For the nine months ended June 30, 2015, the Company sold four investments with a realized loss of $120,000 and also received $234,000 in capital gains distributions during that period. The Company recorded an aggregate realized loss of $16,000 and gain of $114,000 related to its available-for-sale securities for the nine months ended June 30, 2016 and 2015, respectively. The Company sold one investment for the three months ended June 30, 2016 with a realized loss of $32,000. For the three months ended June 30, 2015, the Company sold one investment with a realized loss of $159,000.

 

 
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Table Of Contents
 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 3—Available-for-Sale Investments (continued)

 

At June 30, 2016, there were six investments, one of which was in an unrealized loss position that had existed for 12 months or more. All of these securities are considered to be acceptable credit risks. Based on the evaluation of the available evidence, including recent changes in market rates and credit rating information, management believes the aggregate decline in fair value for these instruments is temporary. In addition, management has the ability to hold these investment securities for a period of time sufficient to allow for an anticipated recovery or maturity. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period in which the other-than-temporary impairment is identified. 

 

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

 

Note 4—Consumer Receivables Acquired for Liquidation

 

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

 

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

 

 

 

the interest method; or

 

 

 

the cost recovery method.

 

The Company accounts for certain of its investments in finance receivables using the interest method in accordance with the guidance of ASC 310-30. Under the guidance of ASC 310-30, static pools of accounts are established. These pools are aggregated based on certain common risk criteria. Each static pool is recorded at cost and is accounted for as a single unit for the recognition of income, principal payments and loss provision. 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 in 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 has extensive liquidating experience in the field of distressed credit card receivables, telecommunication receivables, consumer loan receivables, retail installment contracts, consumer receivables, and auto deficiency receivables.

 

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

 

 
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ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 4—Consumer Receivables Acquired for Liquidation (continued)

 

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

 

   

For the Three Months Ended June 30,

 
   

2016

   

2015

 

Balance, beginning of period

  $ 16,784,000     $ 22,178,000  

Acquisitions of receivable portfolios

    329,000       388,000  

Net cash collections from collection of consumer receivables acquired for liquidation

    (7,095,000

)

    (8,762,000

)

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

    (83,000

)

    (76,000

)

Effect of foreign currency translation

    (7,000

)

     

Finance income recognized

    4,612,000       5,156,000  

Balance, end of period

  $ 14,540,000     $ 18,884,000  

Finance income as a percentage of collections

    64.3

%

    58.3

%

 

   

For the Nine Months Ended June 30,

 
   

2016

   

2015

 

Balance, beginning of period

  $ 15,608,000     $ 29,444,000  

Acquisitions of receivable portfolios

    6,470,000       2,009,000  

Net cash collections from collection of consumer receivables acquired for liquidation

    (21,869,000

)

    (28,178,000

)

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

    (83,000

)

    (79,000

)

Impairment

    (124,000

)

     

Effect of foreign currency translation

    (130,000

)

     

Finance income recognized

    14,668,000       15,688,000  

Balance, end of period

  $ 14,540,000     $ 18,884,000  

Finance income as a percentage of collections

    66.8

%

    55.5

%

 

During the three and nine month periods ended June 30, 2016, the Company purchased $2.2 million and $123.2 million, respectively, of face value portfolios at a cost of $0.3 million and $6.5 million, respectively. During the three and nine month periods ended June 30, 2015, the Company purchased $3.6 million and $28.0 million, respectively, of face value portfolios, at a cost of $0.4 million and $2.0 million, respectively.

 

The following table summarizes collections received by the Company’s third-party collection agencies and attorneys, less commissions and direct costs, for the three and nine month periods ended June 30, 2016 and 2015, respectively.

 

   

For the Three Months Ended June 30,

   

For the Nine Months Ended June 30,

 
   

2016

   

2015

   

2016

   

2015

 

Gross collections (1)

  $ 11,097,000     $ 13,917,000       33,965,000       43,697,000  

Commissions and fees (2)

    3,919,000       5,079,000       12,013,000       15,440,000  

Net collections

  $ 7,178,000     $ 8,838,000     $ 21,952,000     $ 28,257,000  

 

(1)

Gross collections include: collections from third-party collection agencies and attorneys, collections from in-house efforts, and collections represented by account sales.

(2)

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

 

 

 
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ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 5—Acquisition of CBC

 

On December 31, 2013, the Company acquired 80% ownership of CBC and its affiliate, CBC Management Services, LLC for approximately $5.9 million.

 

On December 31, 2015, the Company acquired the remaining 20% ownership of CBC for $1,800,000, through the issuance of restricted stock valued at $1,000,000 and $800,000 in cash. Each of the two original principals received 61,652 shares of restricted stock at an agreed upon market price of $8.11 and $400,000 in cash. An aggregate of 123,304 shares of restricted stock were issued as part of the transaction. These shares are subject to a one year lock-up period in which the holders cannot sell the shares. In addition, the shares are subject to certain sales restrictions following the initial lock-up period. (see Note 15 – Stock Based Compensation).

 

On January 1, 2016, the Company renewed the expiring two-year employment agreements of the two CBC principals for additional one-year terms (see Note 11 – Commitments and Contingencies).

 

Net income attributable to Asta Funding, Inc., as reported, for the nine month period ended June 30, 2016 was $3,171,000. Had the Company owned 100% of CBC for the entire reporting period, net income attributable to Asta Funding, Inc. would have been $3,327,000. Net income attributable to Asta Funding Inc., as reported, for the nine month period ended June 30, 2015 was $876,000. Had the Company owned 100% of CBC for the entire period, net income attributable to Asta Funding, Inc. would have been $1,162,000. Net income attributable to Asta Funding Inc., as reported, for the three month period ended June 30, 2015 was $161,000. Had the Company owned 100% of CBC for the entire period, net income attributable to Asta Funding, Inc., would have been $269,000.

 

Note 6—Structured Settlements (At Fair Value)

 

CBC purchases periodic payments under structured settlements and annuity policies from individuals in exchange for a lump sum payment. The Company elected to carry the structured settlements at fair value. Unearned income on structured settlements is recognized as interest income using the effective interest method over the life of the related structured settlement. Changes in fair value are recorded in unrealized gain (loss) on structured settlements in the Company’s statements of operations. Unrealized gains on structured settlements is comprised of both unrealized gains resulting from fair market valuation at the date of acquisition of the structured settlements and the subsequent fair value adjustments resulting from the change in the discount rate. Of the $4.6 million of unrealized gains recognized in the nine month period ended June 30, 2016, approximately $5.8 million is due to day one gains on new structured settlements financed during the period, offset by a decrease of $1.2 million in realized gains recognized as realized interest income on structured settlements during the period. There were no other changes in assumptions during the period.

 

The Company elected the fair value treatment under ASC 825-10-50-28 through 50-32 to be transparent to the user regarding the underlying fair value of the structured settlement which collateralizes the debt of CBC. The Company believes any change in fair value is driven by market risk as opposed to credit risk associated with the underlying structured settlement annuity issuer.

 

The purchased personal injury structured settlements result in payments over time through an annuity policy. Most of the annuities acquired involve guaranteed payments with specific defined ending dates. CBC also purchases a small number of life contingent annuity payments with specific ending dates but the actual payments to be received could be less due to the mortality risk associated with the measuring life. CBC records a provision for loss each period. The life contingent annuities are not a material portion of assets at June 30, 2016 and revenue for the three and nine month periods ended June 30, 2016.

 

 
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ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 6—Structured Settlements (At Fair Value) (continued)

 

Structured settlements consist of the following as of June 30, 2016 and September 30, 2015:

 

   

June 30,
2016

   

September 30,
2015

 

Maturity (1) (2)

  $ 124,279,000     $ 99,135,000  

Unearned income

    (44,395,000

)

    (34,500,000

)

Net collections

  $ 79,884,000     $ 64,635,000  

 

(1)

The maturity value represents the aggregate unpaid principal balance at June 30, 2016 and September 30, 2015.

(2)

There are no amounts of structured settlements that are past due, or in nonaccrual status at June 30, 2016 and September 30, 2015.

 

Encumbrances on structured settlements as of June 30, 2016 and September 30, 2015 are as follows:

 

   

June 30,
2016

   

September 30,
2015

 

Notes payable secured by settlement receivables with principal and interest outstanding payable until June 2025 (3)

  $ 1,918,000     $ 2,270,000  

Notes payable secured by settlement receivables with principal and interest outstanding payable until August 2026 (3)

    4,369,000       4,713,000  

Notes payable secured by settlement receivables with principal and interest outstanding payable until April 2032 (3)

    4,128,000       4,497,000  

Notes payable secured by settlement receivables with principal and interest outstanding payable until February 2037 (3)

    19,173,000       20,147,000  

Notes payable secured by settlement receivables with principal and interest outstanding payable until March 2034 (3)

    14,773,000       15,361,000  

$25,000,000 revolving line of credit (3)

    18,306,000       4,623,000  

Encumbered structured settlements

    62,667,000       51,611,000  

Structured settlements not encumbered

    17,217,000       13,024,000  

Total structured settlements

  $ 79,884,000     $ 64,635,000  

 

(3)

See Note 10 – Other Debt – CBC

 

At June 30, 2016, the expected cash flows of structured settlements based on maturity value are as follows:

 

September 30, 2016 (3 months)

  $ 2,273,000  

September 30, 2017

    9,237,000  

September 30, 2018

    7,589,000  

September 30, 2019

    7,670,000  

September 30, 2020

    7,038,000  

Thereafter

    90,472,000  

Total

  $ 124,279,000  

 

 

 
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Table Of Contents
 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 7—Litigation Funding

 

Personal Injury Claims

 

On December 28, 2011, the Company entered into a joint venture with Pegasus Legal Funding, LLC (“PLF”) in the operating subsidiary of Pegasus. Pegasus purchases interests in claims from claimants who are a party to personal injury litigation. Pegasus advances, to each claimant, funds, on a non-recourse basis at an agreed upon interest rate, in anticipation of a future settlement. The interest in each claim purchased by Pegasus consists of the right to receive, from such claimant, part of the proceeds or recoveries which such claimant receives by reason of a settlement, judgment or award with respect to such claimant’s claim. The Company, through Pegasus, earned $14.8 million and $9.8 million in interest and fees during the nine and three month periods ending June 30, 2016, respectively, compared to $6.1 million and $1.7 million, respectively, during the nine and three month periods ending June 30, 2015. The Company had a net invested balance of $43.7 million and $36.7 million on June 30, 2016 and September 30, 2015, respectively. Pegasus records reserves for bad debts, which, at June 30, 2016 and 2015, amounted to $7.0 million and $5.0 million, as follows:

 

   

Three Months
Ended June 30,
2016

   

Three Months
Ended June 30,
2015

   

Nine Months
Ended June 30,
2016

   

Nine Months
Ended June 30,
2015

 

Balance at beginning of period

  $ 6,175,000     $ 4,446,000     $ 5,459,000     $ 2,474,000  

Provisions for losses

    1,087,000       690,000       2,223,000       3,011,000  

Write offs

    (268,000

)

    (121,000

)

    (688,000

)

    (470,000

)

Balance at end of period

  $ 6,994,000     $ 5,015,000     $ 6,994,000     $ 5,015,000  

 

Matrimonial Claims (included in Other Assets)

 

On May 18, 2012, the Company formed BP Case Management, LLC (“BPCM”), a joint venture with California-based Balance Point Divorce Funding, LLC (“BP Divorce Funding”). A BPCM agreement provides non-recourse funding to a spouse in a matrimonial action. Through a revised agreement, 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. In September 2014, the agreement was revised to extend the term of the loan to August 2016, increase the line from $1.0 million to $1.5 million and include a personal guarantee of the principal of BP Divorce Funding. The loan balance at June 30, 2016, was approximately $1.4 million. The revolving line of credit is collateralized by BP Divorce Funding’s profit share in BPCM and other assets. As of June 30, 2016, the Company’s investment in cases through BPCM was approximately $3.1 million. There was no income recognized for the nine months ended June 30, 2016 and 2015.

 

Note 8—Furniture & Equipment

 

Furniture and equipment consist of the following as of the dates indicated:

 

   

June 30,

2016

   

September 30,

2015

 

Furniture

  $ 417,000     $ 414,000  

Equipment

    202,000       3,622,000  

Software

    1,330,000       1,210,000  

Leasehold improvements

          99,000  
      1,949,000       5,345,000  

Less accumulated depreciation

    1,730,000       4,865,000  

Balance, end of period

  $ 219,000     $ 480,000  

 

 
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Table Of Contents
 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 9—Non Recourse Debt

 

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

 

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

 

On August 7, 2013, Palisades XVI, a 100% owned bankruptcy remote subsidiary, entered into a Settlement Agreement and Omnibus Amendment (the “Settlement Agreement”) with BMO as an amendment to the RFA. In consideration for a $15 million prepayment funded by the Company, BMO agreed to significantly reduce minimum monthly collection requirements and the interest rate. BMO also agreed that if and when BMO receives the next $15 million of collections from the Portfolio Purchase or from voluntary prepayments by Asta Funding, Inc., less certain credits for payments made prior to the consummation of the Settlement Agreement (the “Remaining Amount”), Palisades XVI and its affiliates would be automatically released from liability in connection with the RFA (subject to customary exceptions). A condition to the release was Palisade XVI’s agreement to grant BMO, as of the time of the payment of the Remaining Amount, the right to receive 30% of net collections from the Portfolio Purchase once Palisades XVI has received from future net collections, the sum of $15 million plus voluntary prepayments included in the payment of the Remaining Amount (the “Income Interest”). On June 3, 2014, Palisades XVI paid the Remaining Amount. The final principal payment of $2,901,199 included a voluntary prepayment of $1,866,036 provided from funds of the Company. Accordingly, Palisades XVI will be entitled to receive $16.9 million of future collections from the Portfolio Purchase before BMO is entitled to receive any payments with respect to its Income Interest.

 

During the month of June 2016, the Company received the balance of the $16.9 million. As of June 30, 2016, the Company recorded a liability to BMO of approximately $109,000, which represents 30% of the net collections after $16.9 million collections were received. The funds were subsequently remitted to BMO on July 11, 2016. The liability to BMO is only recorded when actual collections are received.

 

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

 

On May 2, 2014, the Company obtained a $20 million line of credit facility from Bank Hapoalim, pursuant to a Loan Agreement (the “Loan Agreement”) among the Company and its subsidiary, Palisades Collection, LLC, as borrowers (“the Borrowers”), and Bank Hapoalim, as agent and lender. The Loan Agreement provides for a $20.0 million committed line of credit and an accordion feature providing an increase in the line of credit of up to $30 million, at the discretion of the lenders. The facility 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, with property of the Borrowers serving as collateral. On March 30, 2016, the Company signed the First Amendment to the Loan Agreement (the “First Amendment”) with Bank Hapoalim which amended certain terms of their banking arrangement. The First Amendment 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. The Company has not borrowed against the facility and no amounts were outstanding as of June 30, 2016.

 

 
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Table Of Contents
 

  

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 10—Other Debt—CBC

 

The Company assumed $25.9 million of debt related to the CBC acquisition (see Note 5) on December 31, 2013, including a $12.5 million line of credit with an interest rate floor of 5.5%. Between March 27, 2014 and September 29, 2014, CBC entered into three amendments (Sixth Amendment through Eighth Amendment), resulting in the line of credit increasing to $22.0 million and the interest rate floor reduced to 4.75%. On March 11, 2015, CBC entered into the Ninth Amendment. This amendment, effective March 1, 2015, extended the maturity date on its credit line from February 28, 2015 to March 1, 2017. Additionally, the credit line was increased from $22.0 million to $25.0 million and the interest rate floor was decreased from 4.75% to 4.1%. Other terms and conditions were materially unchanged. On November 26, 2014, CBC completed its fourth private placement, backed by structured settlement and fixed annuity payments. CBC issued, through its subsidiary, BBR IV, LLC, approximately $21.8 million of fixed rate asset-backed notes with a yield of 5.4%. On September 25, 2015, CBC completed its fifth private placement, backed by structured settlement and fixed annuity payments. CBC issued, through its subsidiary, BBR V, LLC, approximately $16.6 million of fixed rate asset-backed notes with a yield of 5.1%. On July 8, 2016, CBC completed its sixth private placement, backed by structured settlements and fixed annuity payments. (see Note 21 – Subsequent Events).

 

As of June 30, 2016, the remaining debt amounted to $62.7 million, which consisted of $18.3 million drawdown from a line of credit from an institutional source and $44.4 million notes issued by entities 100%-owned and consolidated by CBC. These entities are bankruptcy-remote entities created to issue notes secured by structured settlements. The following table details the CBC debt at June 30, 2016 and September 30, 2015:

 

   

Interest Rate

   

June 30,
2016

   

September 30,
2015

 

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

    8.75

%

  $ 1,918,000     $ 2,270,000  

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

    7.25

%

    4,369,000       4,713,000  

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

    7.125

%

    4,128,000       4,497,000  

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

    5.39

%

    19,173,000       20,147,000  

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

    5.07

%

    14,773,000       15,361,000  

Subtotal notes payable

            44,361,000       46,988,000  

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

    4.1

%

    18,306,000       4,623,000  

Total debt – CBC

          $ 62,667,000     $ 51,611,000  

 

 

Note 11—Commitments and Contingencies

 

Employment Agreements

 

On March 10, 2016, the Company entered into an employment agreement with an executive of the Company. Under this Agreement, he will receive a base salary of $275,000, subject to annual increases, and will be eligible to receive cash and non-cash bonuses. The Agreement has an 18 month non-compete and non-solicitation provision and has a one (1) year term, and the term will be automatically extended by one year on each anniversary date of the Agreement.

 

On January 1, 2016, the Company renewed the expiring two-year employment agreements of the two CBC principals for additional one-year terms. The new agreements provide each of the two CBC principals with a base salary of $250,000. Other terms remain unchanged from the original agreements, including:

 

 

Sixty day notification required by either party to terminate the employment agreement; and

 

 

Standard non-compete clause during the term of the employment agreement and for two years thereafter (see Note 5—Acquisition of CBC).

 

 
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Table Of Contents
 

  

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 11—Commitments and Contingencies (continued)

 

Leases

 

The Company leases its facilities in Englewood Cliffs, NJ, Houston, TX, New York, NY and Conshohocken, PA.

 

Legal Matters

 

In June 2015, a punitive class action complaint was filed against the Company, and one of its third-party law firm servicers, alleging violation of the federal Fair Debt Collection Practice Act and Racketeer Influenced and Corrupt Organization Act (“RICO”) and state law arising from debt collection activities and default judgments obtained against certain debtors.

 

The Company filed a motion to strike the class action allegations and compel arbitration or, to the extent the court declines to order arbitration, to dismiss the RICO claims. On or about March 31, 2015, the court denied the Company’s motion. The Company filed an appeal with the United States Court of Appeals for the Second Circuit. A mediation session was held in July 2015, at which the Company agreed to settle the action on an individual basis for a payment of $13,000 to each named plaintiff, for a total payment of $39,000. Payment was made on or about July 24, 2015. The third-party law firm servicer has not yet settled and remains a defendant in the case.

 

The plaintiffs’ attorneys advised that they are contemplating the filing of another punitive class action complaint against the Company alleging substantially the same claims as those that were asserted in this matter. In anticipation of such an eventuality, the Company agreed to non-binding mediation in order to reach a global settlement with other putative class members, which would avert the possibility of further individual or class actions with respect to the affected accounts. To date, the parties have attended two mediation sessions and are continuing to discuss a global settlement. In connection with such discussions, the current settlement demand from plaintiffs is $4 million and the current counteroffer from the Company and its third-party law firm servicer is $3.875 million (which would be split equally between the Company and the law firm servicer). The Company and law firm servicer have also offered, as part of the current counteroffer, to cease collection activity on the affected accounts.

 

Accordingly, the Company set up a reserve for settlement costs of $2.0 million during the three months ended March 31, 2016, which was included in general and administrative expenses in the Company’s statement of operations. The Company reassessed the situation as of June 30, 2016 and deemed that no change was necessary at that time.

 

In the ordinary course of the Company’s business, it is involved in numerous legal proceedings. The Company regularly initiates collection lawsuits, using its network of third party law firms, against consumers. Also, consumers occasionally initiate litigation against the Company, in which they allege that the Company has violated a federal or state law in the process of collecting their account. The Company does not believe that these ordinary course matters are material to its business and financial condition. As of the date of this Form 10-Q, the Company is not involved in any other material litigation in which it is a defendant.

 

Note 12—Income Recognition, Impairments, and Commissions and Fees

 

Income Recognition

 

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

 

 
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ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 12—Income Recognition, Impairments, and Commissions and Fees (continued)

 

Income Recognition (continued)

 

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

 

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

 

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

 

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

 

Impairments

 

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

 

In October 2014, the Company invested $5.0 million in Class A shares of the Topaz MP Fixed Income Fund (“Topaz Fund”), a closed end fund. The Topaz Fund invests indirectly in various portfolios of Non-Performing Small Consumer Loans. The objective of the fund is to obtain a fixed return cash flow representing interest on the invested capital. According to the investment memorandum of the fund, the Topaz Fund proposed to make semi-annual distributions of 14% annual compounded interest on June and December of each year. The December 2015 distribution, scheduled to be paid in February was not received by the Company. The Company received a letter from the fund’s General Partner on April 12, 2016, explaining that the December distribution was not made due to the negative performance of the fund for the period June to December 2015.

 

For the nine months ended June 30, 2016, the Company recorded an impairment loss on this investment of $1.0 million, which is included in general and administrative expenses in the consolidated statements of operations. The carrying value of this investment amounted to $3,426,000 at June 30, 2016.

 

Commissions and fees

 

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

 

 
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 ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 13—Income Taxes

 

The Company files consolidated Federal and state income tax returns. Substantially all of the Company’s subsidiaries are single member limited liability companies and, therefore, do not file separate tax returns. Majority and minority owned subsidiaries file separate partnership tax returns.

 

Deferred federal and state taxes principally arise from (i) recognition of finance income collected for tax purposes, but not yet recognized for financial reporting; (ii) provision for impairments/credit losses; and (iii) stock based compensation expense for stock option grants and restricted stock awards recorded in the statement of operations for which no cash distribution has been made. Other components consist of state net operating loss (“NOL”) carryforwards, which expire in September 2029. The New Jersey NOL carryforward balance as of June 30, 2016 was approximately $90.5 million. The provision for income tax expense for the three month periods ended June 30, 2016 and 2015 was $2,853,000 and $155,000, respectively. The provision for income tax expense for the nine month periods ended June 30, 2016 and 2015 was $2,461,000 and $901,000, respectively.

 

The corporate federal income tax returns of the Company for 2014 and 2015 are subject to examination by the Internal Revenue Service (“IRS”) generally for three years after they are filed. The state income tax returns and other state filings of the Company are subject to examination by the state taxing authorities, for various periods, generally up to four years after they are filed.

 

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

 

The Company does not have any uncertain tax positions.

 

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

 

 
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ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 14—Net Income per Share

 

Basic per share data is calculated by dividing net income by the weighted average shares outstanding during the period. Diluted earnings per share is calculated similarly, except that it includes the dilutive effect of the assumed exercise of securities, including the effect of shares issuable under the Company’s stock based compensation plans. With respect to the assumed proceeds from the exercise of dilutive options, the treasury stock method is calculated using the average market price for the period.

 

 The following table presents the computation of basic and diluted per share data for the three months ended June 30, 2016 and 2015:

 

   

Three Months Ended June 30, 2016

   

Three Months Ended June 30, 2015

 
   

Net
Income

   

Weighted

Average
Shares

   

Per

Share
Amount

   

Net
Income

   

Weighted

Average
Shares

   

Per

Share
Amount

 

Basic

  $ 3,196,000       11,897,139     $ 0.27     $ 161,000       13,060,839     $ 0.01  

Effect of Dilutive Stock

            536,285       (0.01

)

            252,567        

Diluted

  $ 3,196,000       12,433,424     $ 0.26     $ 161,000       13,313,406     $ 0.01  

 

The following table presents the computation of basic and diluted per share data for the nine months ended June 30, 2016 and 2015:

 

   

Nine Months Ended June 30, 2016

   

Nine Months Ended June 30, 2015

 
   

Net
Income

   

Weighted

Average
Shares

   

Per

Share
Amount

   

Net
Income

   

Weighted

Average
Shares

   

Per

Share
Amount

 

Basic

  $ 3,171,000       12,023,156     $ 0.26     $ 876,000       13,044,905     $ 0.07  

Effect of Dilutive Stock

            270,917                     266,871        

Diluted

  $ 3,171,000       12,294,073     $ 0.26     $ 876,000       13,311,776     $ 0.07  

  

For the three months ended June 30, 2016, 56,007 options at a weighted average exercise price of $12.55 were not included in the diluted earnings per share calculation as they were antidilutive.

 

For the nine months ended June 30, 2016, 186,082 options at a weighted average exercise price of $10.88 were not included in the diluted earnings per share calculation as they were antidilutive.

 

For the three months ended June 30, 2015, 442,500 options at a weighted average exercise price of $9.51 were not included in the diluted earnings per share calculation as they were antidilutive.

 

For the nine months ended June 30, 2015, 413,387 options at a weighted average exercise price of $9.59 were not included in the diluted earnings per share calculation as they were antidilutive.

 

 
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ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 15—Stock Based Compensation

 

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

 

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

 

Risk-free interest rate

    0.12

%

Expected term (years)

    5.9  

Expected volatility

    32.7

%

Dividend yield

    0.00

%

 

On December 16, 2015, the Compensation Committee granted 67,100 stock options to non-officer employees of the Company, of which 9,100 options vested immediately and the remaining 58,000 stock options vest in three equal annual installments and accounted for as one graded vesting award. The exercise price of these options was at the market price on that date. The weighted average assumptions used in the option pricing model were as follows:

 

Risk-free interest rate

    0.24

%

Expected term (years)

    6.25  

Expected volatility

    23.4

%

Dividend yield

    0.00

%

 

On December 16, 2015, the Compensation Committee granted 5,000 restricted shares to a non-officer employee of the Company. These shares vested fully. On December 31, 2015, the Company issued an aggregate of 123,304 shares to the two former CBC principals (see Note 5 – Acquisition of CBC). These shares are subject to a one year lock up period in which the holders cannot sell the shares. In addition, the shares are subject to certain sales restrictions following the initial lock-up period (see Note 5 – Acquisition of CBC).

 

 
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ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 16—Stock Option Plans

 

2012 Stock Option and Performance Award Plan

 

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

 

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

 

The Company authorized 2,000,000 shares of Common Stock for issuance under the 2012 Plan. Under the 2012 Plan, the Company has granted options to purchase an aggregate of 484,200 shares, an award of 245,625 shares of restricted stock, and has cancelled 53,200 options, leaving 1,323,375 shares available as of June 30, 2016. As of June 30, 2016, approximately 112 of the Company’s employees were able to participate in the 2012 Plan.

 

Equity Compensation Plan

 

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

 

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

 

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

 

2002 Stock Option Plan

 

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

 

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

 

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

 

Summary of the Plans

 

Compensation expense for stock options and restricted stock is recognized over the vesting period. Compensation expense for restricted stock is based upon the market price of the shares underlying the awards on the grant date.

 

 
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ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 16—Stock Option Plans (continued)

 

The following table summarizes stock option transactions under the 2012 Plan, the 2002 Plan, and the Equity Compensation Plan:

 

   

Nine Months Ended June 30,

 
   

2016

   

2015

 
   

Number
Of
Shares

   

Weighted
Average
Exercise
Price

   

Number
of
Shares

   

Weighted
Average
Exercise
Price

 

Outstanding options at the beginning of period

    1,043,566     $ 8.47       1,403,259     $ 10.78  

Options granted

    67,100       7.93       45,400       8.37  

Options exercised

    (107,531

)

    8.11       (60,000

)

    7.83  

Options forfeited/cancelled

    (8,300

)

    8.14       (344,259

)

    17.99  

Outstanding options at the end of period

    994,835     $ 8.47       1,044,400     $ 8.47  

Exercisable options at the end of period

    874,826     $ 8.51       861,725     $ 8.41  

 

   

Three Months Ended June 30,

 
   

2016

   

2015

 
   

Number
Of
Shares

   

Weighted
Average
Exercise
Price

   

Number
of
Shares

   

Weighted
Average
Exercise
Price

 

Outstanding options at the beginning of period

    1,094,867     $ 8.45       1,044,400     $ 8.47  

Options granted

                       

Options exercised

    (100,032 )     8.24              

Options forfeited/cancelled

                       

Outstanding options at the end of period

    994,835     $ 8.47       1,044,400     $ 8.47  

Exercisable options at the end of period

    874,826     $ 8.51       861,725     $ 8.41  

 

The following table summarizes information about the 2012 Plan, 2002 Plan, and the Equity Compensation Plan outstanding options as of June 30, 2016:

 

           

Options Outstanding

   

Options Exercisable

 

Range of Exercise Price

   

Number
of Shares
Outstanding

   

Weighted
Remaining
Contractual
Life (in Years)

   

Weighted
Average
Exercise
Price

   

Number
of Shares
Exercisable

   

Weighted
Average
Exercise
Price

 
$ 2.8751 - $5.7500       3,900       2.8     $ 2.95       3,900     $ 2.95  
$ 5.7501 - $8.6250       827,934       5.7       7.97       707,925       7.93  
$ 8.6251 - $11.5000       148,001       6.6       9.39       148,001       9.39  
$ 11.5000 - $28.7500       15,000       0.5       28.75       15,000       28.75  
              994,835       5.7     $ 8.47       874,826     $ 8.51  

 

The Company recognized $453,000 and $126,000 of compensation expense related to the stock option grants during the nine and three month periods ended June 30, 2016, respectively. The Company recognized $858,000 and $202,000 of compensation expense related to the stock option grants during the nine and three month periods ended June 30, 2015, respectively. As of June 30, 2016, there was $269,000 of unrecognized compensation cost related to stock option awards. The weighted average period over which such costs are expected to be recognized is 1.1 years.

 

 
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Table Of Contents
 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 16—Stock Option Plans (continued)

 

The intrinsic value of the outstanding and exercisable options as of June 30, 2016 was approximately $2,359,000 and $2,075,000, respectively. The weighted average remaining contractual life of exercisable options is 5.4 years. The intrinsic and fair value of the stock options exercised during the nine month periods ended June 30, 2016 was approximately $241,000 and $1,137,000, respectively. The intrinsic and fair value of the stock options exercised during the three month periods ended June 30, 2016 was approximately $221,000 and $1,057,000, respectively. The intrinsic and fair value of options exercised during the nine month period ended June 30, 2015 was approximately $76,000 and $525,000, respectively. There were no options exercised in the three month period ended June 30, 2015. The fair value of the stock options that vested during the nine and three month periods ended June 30, 2016 was approximately $1,368,000 and $120,000, respectively. The fair value of the stock options that vested during the nine and three month periods ended June 30, 2015 was approximately $3,145,000 and $95,000, respectively. The fair value of the options granted during the nine and three month periods ended June 30, 2016 was approximately $709,000 and $0, respectively. The fair value of the options granted during the nine and three month periods ended June 30, 2015 was approximately $405,000 and $0, respectively.

 

The following table summarizes information about restricted stock transactions:

 

   

Nine Months Ended June 30,

 
   

2016

   

2015

 
   

Number of
Shares

   

Weighted
Average
Grant Date
Fair Value

   

Number of
Shares

   

Weighted
Average
Grant Date
Fair Value

 

Unvested at the beginning of period

    44,107     $ 9.28       68,214     $ 9.57  

Awards granted

    128,304       7.89       15,000       8.30  

Vested

    (39,107

)

    9.57       (34,107

)

    9.57  

Forfeited

                       

Unvested at the end of period

    133,304     $ 7.92       49,107     $ 9.18  

 

 

   

Three Months Ended June 30,

 
   

2016

   

2015

 
   

Number of
Shares

   

Weighted
Average
Grant Date
Fair Value

   

Number of
Shares

   

Weighted
Average
Grant Date
Fair Value

 

Unvested at the beginning of period

    138,304     $ 7.92       49,107     $ 9.18  

Awards granted

                       

Vested

    (5,000

)

                 

Forfeited

                         

Unvested at the end of period

    133,304     $ 7.92       49,107     $ 9.18  

 

The Company recognized $114,000 and $13,000 of compensation expense related to the restricted stock awards during the nine and three month periods ended June 30, 2016, respectively. The Company recognized $278,000 and $93,000 of compensation expense related to the restricted stock awards during the nine and three month periods ended June 30, 2015, respectively. As of June 30, 2016, there was $81,000 of unrecognized compensation cost related to restricted stock awards. The weighted average remaining period over which such costs are recognized is 1.7 years. An aggregate of 5,000 shares of restricted stock was granted during the first nine months of fiscal year 2016, all of which were granted to a non-officer employee. The fair value of the restricted rewards granted during both the nine and three month periods ended June 30, 2015 was $125,000. The fair value of the awards vested during the nine month periods ended June 30, 2016 and 2015 was $326,000 in both periods.

 

The Company recognized an aggregate total of $567,000 and $139,000 in compensation expense for the nine and three month periods ended June 30, 2016, respectively, for the stock options and restricted stock grants. The Company recognized an aggregate total of $1,136,000 and $295,000 in compensation expense for the nine and three month periods ended June 30, 2015, respectively, for the stock options and restricted stock grants. As of June 30, 2016, there was a total of $350,000 of unrecognized compensation cost related to unvested stock options and restricted stock grants. The method used to calculate stock based compensation is the straight line pro-rated method.

 

 
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Table Of Contents
 

 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 17—Stockholders’ Equity

 

Dividends are declared at the discretion of the Board of Directors and depend upon the Company’s financial condition, operating results, capital requirements and other factors that the Board of Directors deems relevant. In addition, agreements with the Company’s lenders may, from time to time, restrict the ability to pay dividends. As of June 30, 2016, there were no such restrictions. No dividends were declared during the nine and three month periods ended June 30, 2016 and 2015.

 

On August 11, 2015, the Board of Directors approved the repurchase of up to $15,000,000 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 and 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 Plan to March 31, 2016 and reset the maximum to an additional $15 million in repurchases. 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 Plan to December 31, 2016 and reset the maximum to an additional $15 million in repurchases. On March 22, 2016, a Company shareholder commenced a tender offer on 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 June 30, 2016, the Company purchased approximately 1,186,000 shares at an aggregate cost of approximately $10.1 million under the Shares Repurchase Plan. No shares were repurchased during the first nine months of fiscal year 2015.

 

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 Company. If the Offer were fully 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 represent approximately 43.1% of outstanding shares, based on the 12,011,476 shares 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 of Directors and its financial and legal advisors, had unanimously determined to recommend that shareholders reject the Mangrove Offer. Furthermore, the Company announced its intention to commence an issuer tender offer for 3,000,000 shares of the Company’s 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, 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 May 12, 2016, 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 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, previously due to expire on May 9, 2016. Mangrove stated that it 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, 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.

 

As of June 30, 2016, Mangrove due to their ownership in the Company's common stock, which was acquired in a series of OTC transactions, was deemed to be a related party.

  

 
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ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 17—Stockholders’ Equity

 

Pursuant to the Agreement, the Company has 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 have 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 will provide information requested by Mangrove to one or more of Mangrove’s representatives and such representatives will prepare summaries of such information (the “Summaries”). If the Company approves the Summaries, the approved Summaries will be 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 and the Extended Period, 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.

 

 
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ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 18—Fair Value of Financial Measurements and Disclosures

 

Disclosures about Fair Value of Financial Instruments

 

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

 

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

 

   

June 30, 2016

   

September 30, 2015

 
   

Carrying
Amount

   

Fair
Value

   

Carrying
Amount

   

Fair
Value

 

Financial assets

                               

Cash and cash equivalents (Level 2)

  $ 17,111,000     $ 17,111,000     $ 24,315,000     $ 24,315,000  

Available-for-sale investments (Level 1)

    56,744,000       56,744,000       59,727,000       59,727,000  

Consumer receivables acquired for liquidation (Level 3)

    14,540,000       44,752,000       15,608,000       31,339,000  

Structured settlements (Level 3)

    79,884,000       79,884,000       64,635,000       64,635,000  

Other investments, net (1)

    3,426,000       3,426,000       4,239,000       4,239,000  

Financial liabilities

                               

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

    18,306,000       18,306,000       4,623,000       4,623,000  

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

    44,361,000       44,361,000       46,988,000       46,988,000  

 

(1)

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

 

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

 

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

 

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

 

Consumer receivables acquired for liquidation – The Company computed the fair value of the consumer receivables acquired for liquidation using its proprietary forecasting model. The Company’s forecasting model utilizes a discounted cash flow analysis. The Company’s cash flows are an estimate of collections for consumer receivables based on variables fully described in Note 4: Consumer Receivables Acquired for Liquidation. These cash flows are discounted to determine the fair value.

 

Structured settlements – The Company determined the fair value based on the discounted forecasted future collections of the structured settlements. Unrealized gains on structured settlements is comprised of both unrealized gains resulting from fair market valuation at the date of acquisition of the structured settlements and the subsequent fair value adjustments resulting from the change in the discount rate. Of the $4.6 million of unrealized gains recognized in the nine month period ended June 30, 2016, approximately $5.8 million is due to day one gains on new structured settlements financed during the period, offset by a decrease of $1.2 million in realized gains recognized as realized interest income on structured settlements during the period. There were no other changes in assumptions during the period.

 

 
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ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 18—Fair Value of Financial Measurements and Disclosures (continued)

 

Other investments – The Company estimated the fair value using the net asset value per share of the investment. There are no unfunded commitments and the investment cannot be redeemed for 5 years from the date of the initial investment (October 2014).

 

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

 

Other debt CBC, notes payable with varying installments – The fair value at June 30, 2016 was based on the discounted forecasted future collections of the structured settlements.

 

Fair Value Hierarchy

 

The Company recorded its available-for-sale investments at estimated fair value on a recurring basis. The accompanying consolidated financial statements include estimated fair value information regarding its available-for-sale investments as of June 30, 2016, as required by FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s level within the fair value hierarchy is based on the lowest level of input significant to the fair value measurement.

 

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

 

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

 

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

 

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

 

The Company’s available-for-sale investments are classified as Level 1 financial instruments based on the classifications described above. The Company did not have transfers into or (out of) Level 1 investments during the nine month period ended June 30, 2016. The Company had no Level 2 or Level 3 available-for-sale investments during the first nine months of fiscal year 2016.

 

 
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ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 18—Fair Value of Financial Measurements and Disclosures (continued)

 

Fair Value Hierarchy (continued)

 

The following table sets forth the Company’s quantitative information about its Level 3 fair value measurements as of June 30, 2016:

 

   

Fair Value

   

Valuation
Technique

 

Unobservable
Input

 

Rate

 

Structured settlements at fair value

  $ 79,884,000     Discounted cash flow  

Discount rate

    5.07

%

 

The changes in structured settlements at fair value using significant unobservable inputs (Level 3) during the nine months ended June 30, 2016 were as follows:

 

Balance at September 30, 2015

  $ 64,635,000  

Total gains included in earnings

    4,586,000  

Purchases

    12,264,000  

Sales

     

Interest accreted

    3.907,000  

Payments received

    (5,508,000

)

Total

  $ 79,884,000  

The amount of total gains for the nine months ended June 30, 2016 included in earnings attributable to the change in unrealized gains (losses) relating to assets held at June 30, 2016

  $ 4,586,000  

 

Realized and unrealized gains and losses included in earnings in the accompanying consolidated statements of operations for the nine months ended June 30, 2016 are reported in the following revenue categories:

 

Total gains (losses) included in the nine months ended June 30, 2016

  $ 4,586,000  

Change in unrealized gains (losses) relating to assets still held at June 30, 2016

  $ 4,586,000  

 

 
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ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 19—Segment Reporting

 

The Company operates through strategic business units that are aggregated into four reportable segments: consumer receivables, personal injury claims, structured settlements, and GAR Disability Advocates. The four reportable segments consist of the following:

 

 

 

Consumer receivables - segment is engaged in the business of purchasing, managing for its own account and servicing distressed consumer receivables, including judgment receivables, charged off receivables and semi-performing receivables. Judgment receivables are accounts where outside attorneys have secured judgments directly against the consumer. Primary charged-off receivables are accounts that have been written-off by the originators and may have been previously serviced by collection agencies. Semi-performing receivables are accounts where the debtor is currently making partial or irregular monthly payments, but the accounts may have been written-off by the originators. Distressed consumer receivables are the unpaid debts of individuals to banks, finance companies and other credit providers. A large portion of our distressed consumer receivables are MasterCard ® , Visa ® and other credit card accounts which were charged-off by the issuers or providers for non-payment. We acquire these and other consumer receivable portfolios at substantial discounts to their face values. The discounts are based on the characteristics (issuer, account size, debtor location and age of debt) of the underlying accounts of each portfolio. The business conducts its activities primarily under the name Palisades Collection, LLC.

 

 

 

Personal injury claims – Pegasus Funding, LLC, an 80% owned subsidiary, purchases interests in personal injury claims from claimants who are a party to personal injury litigation. Pegasus advances to each claimant funds on a non-recourse basis at an agreed upon interest rate, in anticipation of a future settlement. The interest in each claim purchased by Pegasus consists of the right to receive, from such claimant, part of the proceeds or recoveries which such claimant receives by reason of a settlement, judgment or award with respect to such claimant’s claim.

 

 

 

Structured settlements – CBC purchases periodic structured settlements and annuity policies from individuals in exchange for a lump sum payment.

 

 

 

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

 

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

 

 
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ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 19—Segment Reporting

 

The following table shows results by reporting segment for the three and nine month period ended June 30, 2016 and 2015.

 

(Dollars in millions)

 

Consumer
Receivables

   

Personal

Injury
Claims

   

Structured
Settlements

   

GAR

Disability
Advocates

   

Corporate

   

Total
Company

 

Three Months Ended June 30,

                                               

2016:

                                               

Revenues

  $ 4.6     $ 9.8     $ 3.2     $ 1.2     $     $ 18.8  

Other income

                            0.2       0.2  

Segment profit (loss)

    5.8       7.7       1.0       (1.8

)

    (5.1

)

    7.6  

2015:

                                               

Revenues

    5.2       1.7       2.6       0.5             10.0  

Other income

                            0.2       0.2  

Segment profit (loss)(1)

    3.2       (0.3 )     0.5       (1.4

)

    (1.6

)

    0.4  

Nine Months Ended June 30,

                                               

2016:

                                               

Revenues

    14.7       14.8       9.0       2.7             41.2  

Other income

                            1.1       1.1  

Segment profit (loss)

    10.6       10.0       2.4       (6.3 )     (8.9

)

    7.8  

Segment Assets(2)

 

19.4

      45.3       76.4       1.6       103.1       245.8  

2015:

                                               

Revenues

    15.7       6.1       7.6       0.9             30.3  

Other income

                            1.2       1.2  

Segment profit (loss)(1)

    10.2       (0.5

)

    1.4       (4.0

)

    (5.1

)

    2.0  

Segment Assets(2)

 

19.9

      38.2       54.8       2.5       118.3       233.7  

 

The Company does not have any intersegment revenue transactions and has reallocated expenses between segments.

 

(1)

Third quarter of fiscal year 2015 was revised to reflect the proper period of recognizing the unrealized foreign exchange loss on other investments.

 

(2)

Includes other amounts in other line items on the consolidated balance sheet.

 

 
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ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 20—Related Party Transactions

 

Piccolo Business Advisory (“Piccolo”), which is owned by Louis Piccolo, a director of the Company, provides consulting services which include, but are not limited to, analysis of proposed debt and equity transactions, due diligence and financial analysis and management consulting services. The Company paid Piccolo $20,000 and $60,000, respectively, for the three and nine months ended June 30, 2016. The Company made no payments to Piccolo during the three and nine months ended June 30, 2015.

 

In addition, A. L. Piccolo & Co., Inc. (“ALP”), which is also owned by Louis Piccolo, receives a fee from Pegasus which is calculated based on amounts loaned to Pegasus by Fund Pegasus up to maximum of $700,000. The fee is payable over six years including interest at 4% per annum from Pegasus during the term of the Pegasus Operating Agreement that expires December 28, 2016, and, thereafter, by PLF and its affiliates. For both the three and nine months ended June 30, 2016 and 2015, Pegasus paid ALP $33,000 and $100,000, respectively, which includes fees and interest paid during the periods. As of June 30, 2016, the Company owed Piccolo $224,000, which has been recorded in other liabilities on the Company’s consolidated balance sheet.

 

On July 1, 2015, Mr. Arthur Stern, former Chairman Emeritus of the Company, retired from the Board of Directors and became a consultant to the Company. As of April 30, 2016, the consulting agreement with Mr. Stern was terminated. For the three and nine months ended June 30, 2016, Mr. Stern was paid $13,000 and $88,000, respectively.

 

Note 21—Subsequent Events

 

On July 8, 2016, CBC completed its sixth private placement, backed by structured settlement and fixed annuity payments. CBC issued, through its subsidiary, BBR VI, LLC, approximately $14.8 million of fixed asset-backed notes, with a yield of 4.85% and a maturity date of January 15, 2057. The original loan balance at the time of closing was approximately $13.7 million (see Note 10 – Other Debt – CBC).

 

 
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Item 2.

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

 

Caution Regarding Forward Looking Statements

 

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

 

We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are not guarantees and are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Important factors which could materially affect our results and our future performance include, without limitation, our ability to purchase defaulted consumer receivables at appropriate prices, changes in government regulations that affect our ability to collect sufficient amounts on our defaulted consumer receivables, our ability to employ and retain qualified employees, changes in the credit or capital markets, changes in interest rates, deterioration in economic conditions, negative press regarding the debt collection industry which may have a negative impact on a debtor’s willingness to pay the debt we acquire, and statements of assumption underlying any of the foregoing, as well as other factors set forth under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2015 and Item 1A of this Quarterly Report on Form 10-Q.

 

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.

 

Overview

 

Asta Funding, Inc., together with its wholly owned significant operating subsidiaries Palisades Collection LLC, Palisades Acquisition XVI, LLC (“Palisades XVI”), VATIV Recovery Solutions LLC (“VATIV”), ASFI Pegasus Holdings, LLC (“APH”), Fund Pegasus, LLC (“Fund Pegasus”), GAR Disability Advocates, LLC (“GAR Disability Advocates”), CBC Settlement Funding, LLC (“CBC”) and other subsidiaries, not all wholly owned (the “Company,” “we” or “us”), is engaged in several business segments in the financial services industry including structured settlements, through our wholly owned subsidiary CBC, funding of personal injury claims, through our 80% owned subsidiary Pegasus Funding, LLC (“Pegasus”), social security and disability advocates, through our wholly owned subsidiary GAR Disability Advocates and the business of purchasing, servicing and managing for its own account, distressed consumer receivables, including charged off receivables, and semi-performing receivables. The Company started out in the consumer receivable business in 1994 as a subprime auto lender. The primary charged-off receivables are accounts that have been written-off by the originators and may have been previously serviced by collection agencies. Semi-performing receivables are accounts where the debtor is currently making partial or irregular monthly payments, but the accounts may have been written-off by the originators. Our more recent 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.

 

The Company owns 80% of Pegasus, which invests in funding personal injury claims. 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.

 

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

 

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.

 

The Company operates principally in the United States in four reportable business segments.

 

 
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Financial Information About Operating Segments

 

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

 

 

Consumer receivables – segment is engaged in the business of purchasing, managing for its own account and servicing distressed consumer receivables, including charged off and semi-performing receivables, primarily in the international sector. The charged-off receivables are accounts that have been written-off by the originators and may have been previously serviced by collection agencies. Semi-performing receivables are accounts where the debtor is currently making partial or irregular monthly payments, but the accounts may have been written-off by the originators. Distressed consumer receivables are the unpaid debts of individuals to banks, finance companies and other credit providers. These receivables were acquired at substantial discounts to their face values. The discounts are based on the characteristics (issuer, account size, debtor location and age of debt) of the underlying accounts of each portfolio. Litigation related receivables are semi-performing investments whereby the Company is assigned the revenue stream from the proceeds received. The business conducts its activities primarily under the name Palisades Collection, LLC. 

 

 

Personal injury claims – Pegasus, an 80% owned subsidiary, purchases interests in personal injury claims from claimants who are a party to personal injury litigation. Pegasus advances to each claimant funds on a non-recourse basis at an agreed upon interest rate, in anticipation of a future settlement. The interest in each claim purchased by Pegasus consists of the right to receive, from such claimant, part of the proceeds or recoveries which such claimant receives by reason of a settlement, judgment or award with respect to such claimant’s claim.

 

 

Structured settlements – CBC purchases periodic structured settlements and annuity policies from individuals in exchange for a lump sum payment.

 

 

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

 

Three of the Company’s business segments accounted for 10% or more of consolidated net revenue for the three and nine month periods ended June 30, 2016 and 2015. The following table summarizes total revenues by percentage from the four lines of business for the three and nine month periods ended June 30, 2016 and 2015:

 

 

   

Three Month Periods Ended
June 30,

   

Nine Month Periods Ended
June 30,

 
   

2016

   

2015

   

2016

   

2015

 

Finance income (consumer receivables)

    24.5

%

    51.4

%

    35.6

%

    51.9

%

Personal injury claims

    52.3

%

    17.2

%

    35.8

%

    20.1

%

Structured settlements

    17.0

%

    25.9

%

    22.0

%

    25.0

%

GAR Disability Advocates

    6.2

%

    5.5

%

    6.6

%

    3.0

%

Total revenues

    100.0

%

    100.0

%

    100.0

%

    100.0

%

 

The Company has no reportable segment information from international operations.

 

 
-35-

Table Of Contents
 

 

Financial Information About Operating Segments (continued)

 

Information about the results of each of the Company’s reportable segments for the three and nine month periods ended June 30, 2016 and 2015, reconciled to the consolidated results, is set forth below:

(Dollars in millions)

 

Consumer
Receivables

   

Personal

Injury
Claims

   

Structured
Settlements

   

GAR

Disability
Advocates

   

Corporate

   

Total
Company

 

Three Months Ended June 30,

                                               

2016:

                                               

Revenues

  $ 4.6     $ 9.8     $ 3.2     $ 1.2     $     $ 18.8  

Other income

                            0.2       0.2  

Segment profit (loss)

    5.8       7.7       1.0       (1.8

)

    (5.1

)

    7.6  

2015:

                                               

Revenues

    5.2       1.7       2.6       0.5             10.0  

Other income

                            0.2       0.2  

Segment profit (loss)(1)

    3.2       (0.3 )     0.5       (1.4

)

    (1.6

)

    0.4  

Nine Months Ended June 30,

                                               

2016:

                                               

Revenues

    14.7       14.8       9.0       2.7             41.2  

Other income

                            1.1       1.1  

Segment profit (loss)

    10.6       10.0       2.4       (6.3 )     (8.9

)

    7.8  

Segment Assets(2)

 

19.4

      45.3       76.4       1.6       103.1       245.8  

2015:

                                               

Revenues

    15.7       6.1       7.6       0.9             30.3  

Other income

                            1.2       1.2  

Segment profit (loss)(1)

    10.2       (0.5

)

    1.4       (4.0

)

    (5.1

)

    2.0  

Segment Assets(2)

 

19.9

      38.2       54.8       2.5       118.3       233.7  

 

The Company does not have any intersegment revenue transactions and has reallocated expenses between segments.

 

(1)

Third quarter of fiscal year 2015 was revised to reflect the proper period of recognizing the unrealized foreign exchange loss on other investments.

 

(2)

Includes other amounts in other line items on the consolidated balance sheet.

 

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.

 

 
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Litigation Funding Business

 

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

 

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

 

Pegasus’s profits and losses are distributed at 80% to the Company and 20% to PLF. These distributions are made only after the repayment of Fund Pegasus’ principal amount loaned, plus an amount equal to advances for overhead expenses. As of June 30, 2016, the Company’s net investment in personal injury cases was approximately $43.7 million.

 

On May 18, 2012, BP Case Management, LLC (“Balance Point”) was formed, a joint venture (the “Venture”) with California-based Balance Point Divorce Funding, LLC (“Balance Point Management”). The Venture provides non-recourse funding to a spouse in a matrimonial action where the marital assets exceed $2.0 million. Such funds can be used for legal fees, expert costs and necessary living expenses. The Venture receives an agreed percentage of the proceeds received by such spouse upon final resolution of the case. Balance Point’s profits and losses are distributed 60% to us and 40% to Balance Point Management, after the return of our investment on a case by case basis and after a 15% preferred return to us. Our initial investment in the Venture 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 our option, there could be an additional $35 million investment in divorce claims in tranches of $10 million, $10 million, and $15 million, also with a 15% preferred return and such investments may even exceed a total of $50 million, at our sole option. Should the preferred return be less than 15% on any $5 million tranche, the 60%/40% profit and loss split would be adjusted to reflect our priority to a 15% preferred return. As of June 30, 2016, we have invested $3.1 million in cases managed by the Venture.

 

In 2012, we provided a $1.0 million revolving line of credit to partially fund Balance Point Management’s operations with such loan bearing interest at the prevailing prime rate with an initial term of twenty four months. In September 2014, the agreement was revised to extend the term of the loan to August 2016, increase the credit line to $1.5 million and include a personal guarantee of the principal of Balance Point management. The revolving line of credit is collateralized by Balance Point management’s profits share in the venture and other assets. At June 30, 2016, the balance in the revolving line of credit was approximately $1.4 million.

 

Structured Settlement Business

 

On December 31, 2013, the Company acquired 80% ownership of CBC and its affiliate, CBC Management Services, LLC, for approximately $5.9 million. In addition, the Company agreed to provide financing to CBC of up to $5.0 million, amended to $7.5 million in March 2015. On December 31, 2015, the Company acquired the remaining 20% ownership of CBC for $1.8 million, through the issuance of restricted stock valued at $1.0 million and $800,000 in cash. Each of the two original principals received 61,652 shares of restricted stock at an agreed upon market price of $8.11 and $400,000 in cash. An aggregate of 123,304 shares of restricted stock were issued.

 

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

 

CBC has a portfolio of structured settlements which is financed by approximately $62.7 million of debt, consisting of an $18.3 million line of credit with an institutional source and $44.4 million in notes issued by CBC to third party investors.

 

Disability Advocacy Business

 

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

 

 
-37-

Table Of Contents
 

 

Critical Accounting Policies

 

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

 

 

the interest method; or

 

 

the cost recovery method.

 

As we believe our extensive liquidating experience in certain asset classes such as distressed credit card receivables, consumer loan receivables and mixed consumer receivables has matured, we use the interest method when we believe we can reasonably estimate the timing of the cash flows. In those situations where we diversify our acquisitions into other asset classes and we do not possess the same expertise, 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 Accounting Standards Codification (“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 consists of the right to receive from such claimant part of the proceeds or recoveries which such claimant receives by reason of a settlement, judgment or 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.

 

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

 

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

 

 
-38-

Table Of Contents
 

 

In the following discussions, most percentages and dollar amounts have been rounded to aid in the presentation. As a result, all figures are approximations.

 

Results of Operations

 

Nine Months Ended June 30, 2016, Compared to the Nine Months Ended June 30, 2015

 

Finance income. For the nine months ended June 30, 2016, finance income decreased $1.0 million, or 6.5%, to $14.7 million from $15.7 million for the nine months ended June 30, 2015. For the nine months ended June 30, 2016 and 2015, the Company purchased $123.2 million and $28.0 million of face value portfolios at a cost of $6.5 million and $2.0 million, respectively. Net collections for the nine months ended June 30, 2016 decreased 22.3% to $22.0 million from $28.3 million for the nine months ended June 30, 2015. For the nine months ended June 30, 2016, gross collections decreased 22.3%, or $9.7 million, to $34.0 million from $43.7 million for the nine months ended June 30, 2015. Commissions and fees associated with gross collections from our third party collection agencies and attorneys decreased $3.4 million, or 22.2%, to $12.0 million for the nine months ended June 30, 2016 compared to $15.4 million for the nine months ended June 30, 2015. Commissions and fees for the nine months ended June 30, 2016 and 2015, remained consistent at 35.4% of gross collections.

 

Personal injury claims income. For the nine months ended June 30, 2016, personal injury claims income increased $8.7 million, or 142.8%, from $6.1 million in the prior year period to $14.8 million, as a result of additional interest income earned on its investment in personal injury claims. Additionally, investment in personal injury claims in fiscal year 2014 translated into more closed cases in the fiscal year 2016 period than the same prior year period (cases take an average of 18 months to mature).

 

Structured settlement income. Structured settlement income of $9.1 million includes $4.6 million of unrealized gains and $4.5 million of interest income for the nine months ended June 30, 2016. Structured settlement income of $7.6 million included $4.3 million of unrealized gains and $3.3 million of interest income for the nine months ended June 30, 2015. This increase in income is the result of increased investments in structured settlements in the current fiscal year. Unrealized gains on structured settlements is comprised of both unrealized gains resulting from fair market valuation at the date of acquisition of the structured settlements and the subsequent fair value adjustments resulting from the change in the discount rate. Of the $4.6 million of unrealized gains recognized for the nine months ended June 30, 2016, approximately $5.8 million is due to day one gains on new structured settlements financed during the period, offset by a decrease of $1.2 million in realized gains recognized as interest income on structured settlements during the period. There were no other changes in assumptions during the period.

 

Disability fee income. Disability fee income increased $1.8 million, or 200%, from $0.9 million for the nine months ended June 30, 2015 to $2.7 million for the nine months ended June 30, 2016, due to an increase in closed cases.

 

Other income. The following table summarizes other income for the nine months ended June 30, 2016 and 2015:

 

   

June 30,

 
   

2016

   

2015

 

Interest and dividend income

  $ 866,000     $ 789,000  

Realized loss

    (16,000

)

    114,000  

Other

    258,000       313,000  
    $ 1,108,000     $ 1,216,000  

 

General and administrative expenses. For the nine months ended June 30, 2016, general and administrative expense increased $4.2 million, or 15.3%, to $32.0 million from $27.8 million for the nine months ended June 30, 2015, primarily attributable to expected settlement costs, $2.0 million, increased personnel costs, $2.8 million, primarily related to the growth of GAR Disability Advocates, reserve for loss on other investments, $1.0 million, and increased professional fees, $0.6 million, partially offset by foreign exchange gains, $0.9 million, decreased outside services costs, $0.7 million, and stock based compensation expense, $0.6 million.

 

Interest expense. For the nine months ended June 30, 2016, interest expense increased $0.6 million to $2.3 million from $1.7 million for the nine months ended June 30, 2015. The increased interest expense is attributable to the additional CBC debt raised in the prior fiscal year in support of the increased investment in structured settlements.

 

Segment profit – Consumer Receivables. Segment profit increased $0.4 million to $10.6 million for the nine months ended June 30, 2016 from $10.2 million for the nine months ended June 30, 2015. The improved results were attributable to decreased foreign exchange losses, $0.9 million, and other expenses, partially offset by a class action suit settlement of $2.0 million during the current period.

 

 
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Segment profit (loss) – Personal Injury Claims. Segment profit was $10.0 million for the nine months ended June 30, 2016 as compared to a ($0.5) million segment loss for the nine months ended June 30, 2015. The improved results are attributable to increased revenues, $8.7 million, decreased general and administrative expenses, $1.8 million, primarily bad debt expense, $0.8 million, and outside services, $0.8 million.

 

Segment profit – Structured Settlements. Segment profit was $2.4 million for the nine months ended June 30, 2016 compared to $1.4 million for the nine months ended June 30, 2015. The increase in profit was substantially attributed to increased revenues for the period.

 

Segment loss – GAR Disability Advocates. Segment loss was $6.3 million for the nine months ended June 30, 2016 as compared to a $4.0 million segment loss for the nine months ended June 30, 2015. 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, $2.4 million, advertising, $0.8 million, and postage, $0.2 million, partially offset by increased revenues $1.8 million.

 

Income tax expense. Income tax expense, consisting of federal and state income taxes, for the nine months ended June 30, 2016, was $2.5 million as compared to $0.9 million for the nine months ended June 30, 2015. The increase in income tax expense is attributed to the increase in taxable income for the nine months ended June 30, 2016. The state portion of the income tax provision for the first nine months of fiscal years 2016 and 2015 has been offset against state net operating loss carryforwards, and, as a result, no state taxes are currently payable.

 

Net income. As a result of the above, the Company had net income for the nine months ended June 30, 2016 and 2015 of $5.3 million, and $1.1 million, respectively.

 

Income attributable to non-controlling interest. The income attributable to non-controlling interest of $2.2 million is the portion of results attributable to Pegasus and CBC for the nine months ended June 30, 2016 as compared to $0.2 million for the nine months ended June 30, 2015.

 

Net income attributable to Asta Funding, Inc. Net income attributable to Asta Funding, Inc. was $3.2 million for the nine months ended June 30, 2016 as compared to net income of $0.9 million for the nine months ended June 30, 2015.

 

The following tables detail non-controlling interest for the nine months ended June 30, 2016 and 2015:

 

   

Nine Months Ended June 30, 2016

   

Nine Months Ended June 30, 2015

 
   

Pegasus
Funding, LLC

   

CBC
Settlement
Funding, LLC

   

Total
Non-Controlling
Interests

   

Pegasus
Funding, LLC

   

CBC
Settlement
Funding, LLC

   

Total
Non-Controlling
Interests

 

Balance, beginning of period

  $ (1,768,000

)

  $ 771,000     $ (997,000

)

  $ (783,000

)

  $ 70,000     $ (713,000

)

Purchase of subsidiary shares from non-controlling interest

          (927,000

)

    (927,000

)

                 

Income from non-controlling interest

    2,005,000       156,000       2,161,000       (93,000

)

    286,000       193,000  

Distributions to non-controlling interest

    (1,139,000

)

          (1,139,000

)

    (754,000

)

          (754,000

)

Balance, end of period

  $ (902,000

)

  $     $ (902,000

)

  $ (1,630,000

)

  $ 356,000     $ (1,274,000

)

 

The non-controlling interests are related to Pegasus and CBC. The distribution to non-controlling interests is the distributions made to the 20% non-controlling interest owners of Pegasus. The distribution, based upon the profitability of the closed personal injury cases using the formula included in the operating agreement signed December 28, 2011, as revised, are calculated with a 20% deduction for overhead expenses of the Pegasus Funding operation unit and a 20% write off of the personal injury cases deemed to be lost. The 20% write off amount is deducted directly from the distribution amount. Distributions have been greater than the net income attributable to Asta Funding, primarily due to bad debt reserves reducing the net income attributable to Asta Funding, but not specifically factored into the formula to determine the distributions to non-controlling interest owners based on the operating agreement. Ultimately, this timing difference will reverse when personal injury cases are actually written-off. No distributions have been made to CBC. On December 31, 2015, the Company acquired the remaining 20% ownership of CBC for $1.8 million, through the issuance of restricted stock valued at $1.0 million and $800,000 in cash. Each of the two original principals received 61,652 shares of restricted stock at an agreed upon market price of $8.11 and $400,000 in cash. An aggregate of 123,304 shares of restricted stock was issued.

 

 
-40-

Table Of Contents
 

 

Three Months Ended June 30, 2016, Compared to the Three-Months Ended June 30, 2015

 

Finance income. For the three months ended June 30, 2016, finance income decreased $0.6 million, or 10.6%, to $4.6 million from $5.2 million for the three months ended June 30, 2015. During the third quarter ended June 30, 2016 and 2015, the Company purchased $2.2 million and $3.6 million of face value portfolios at a cost of $0.3 million and $0.4 million, respectively. Net collections for the three months ended June 30, 2016 decreased 18.8% to $7.2 million from $8.8 million for the three months ended June 30, 2015. For the three months ended June 30, 2016 gross collections decreased 20.3% or $2.9 million to $11.1 million from $14.0 million for the three months ended June 30, 2015. Commissions and fees associated with gross collections from our third party collection agencies and attorneys decreased to $3.9 million for the three months ended June 30, 2016 from $5.1 million for the three months ended June 30, 2015. Commissions and fees amounted to 35.3% of gross collections for the three months ended June 30, 2016, compared to 36.5% for the three months ended June 30, 2015 resulting from lower commissionable collections in the current year.

 

Personal injury claims income. For the three months ended June 30, 2016, personal injury claims income increased $8.1 million to $9.8 million from $1.7 million for the three months ended June 30, 2015, as a result of additional interest income earned on its investment in personal injury claims.

 

Structured settlement income. Structured settlement income of $3.2 million includes $1.4 million of unrealized gains and $1.8 million of interest income for the three months ended June 30, 2016. Structured settlement income of $2.6 million included $1.2 million of unrealized gains and $1.4 million of interest income for the three months ended June 30, 2015. This increase in income is the result of increased investments in structured settlements in the current year. Unrealized gains on structured settlements is comprised of both unrealized gains resulting from fair market valuation at the date of acquisition of the structured settlements and the subsequent fair value adjustments resulting from the change in the discount rate. Of the $1.4 million of unrealized gains recognized for the three months ended June 30, 2016, approximately $1.8 million is due to day one gains on new structured settlements financed during the period, offset by a decrease of $0.4 million in realized gains recognized as interest income on structured settlements during the period. There were no other changes in assumptions during the period.

 

Disability Fee income. Disability fee income increased $0.6 million, or 100%, to $1.2 million for the three months ended June 30, 2016 from $0.6 million for the three months ended June 30, 2015, due to an increase in closed cases.

 

Other income. The following table summarizes other income for the three months ended June 30, 2016 and 2015:

 

   

June 30,

 
   

2016

   

2015

 

Interest and dividend income

  $ 199,000     $ 375,000  

Realized gain (loss)

    (32,000

)

    (159,000 )

Other

    48,000

 

    (31,000 )
    $ 215,000     $ 185,000  

 

 

General and administrative expenses. For the three months ended June 30, 2016, general and administrative expense increased $1.4 million, or 15.4 %, to $10.6 million from $9.2 million for the three months ended June 30, 2015, primarily due to an increase in bad debt expense, $0.4 million, and increased personnel costs; $1.0 million primarily related to the growth of GAR Disability Advocates.

 

Interest expense. For the three months ended June 30, 2016, interest expense increased $0.2 million to $0.8 million from $0.6 million for the three months ended June 30, 2015. The increased interest expense is a result of the additional CBC debt required to expand the investment in structured settlements.

 

Segment profit – Consumer Receivables. Segment profit increased $2.6 million to $5.8 million for the three months ended June 30, 2016 from $3.2 million for the three months ended June 30, 2015, as a result decreased expenses, $3.2 million, partially offset by decreased revenues $0.6 million.

 

Segment profit (loss)– Personal Injury Claims. Segment profit was $7.7 million for the three months ended June 30, 2016 as compared to a $0.3 segment loss for the three months ended June 30, 2015. The improved results are primarily attributable to higher revenues in the current year period, $8.1 million, attributed to interest income earned on its personal injury claims.

 

Segment profit – Structured Settlements. Segment profit was $1.0 million for the three months ended June 30, 2016 compared to $0.5 million for the three months ended June 30, 2015. The $0.5 million increase is a result of higher revenues derived from the increased investment in Structured Settlements.

 

 
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Table Of Contents
 

  

Segment loss – GAR Disability Advocates. The Segment loss was $1.8 million for the three months ended June 30, 2016 as compared to a $1.4 million segment loss for the three months ended June 30, 2015. GAR Disability Advocates is continuing to build the business through increased costs associated with marketing and servicing its clients in the current period compared to the prior year period. These expenses were attributable to increased payroll related costs, $0.6 million, advertising costs, 0.2 million, and other operating expenses, net, $0.2 million, partially offset by higher revenues in the current period, $0.6 million.

 

Income tax expense. Income tax expense, consisting of federal and state components, for three months ended June 30, 2016, was $2.9 million as compared to $0.3 million for the three months ended June 30, 2015.

 

Net income. As a result of the above, the Company had net income for the three months ended June 30, 2016 and 2015 of $4.7 million and $0.2 million, respectively.

 

Income attributable to non-controlling interest. The income attributable to non-controlling interest of $1.5 million is the portion attributable to Pegasus for the three months ended June 30, 2016 as compared to $92,000 for the three months ended June 30, 2015.

 

Net income attributable to Asta Funding, Inc. Net income attributable to Asta Funding, Inc. was $3.2 million for the three months ended June 30, 2016 as compared to net income of $0.2 million for the three months ended June 30, 2015.

 

The following table details non-controlling interest for the three months ended June, 2016 and 2015:

 

   

Three Months Ended June 30, 2016

   

Three Months Ended June 30, 2015

 
   

Pegasus
Funding, LLC

   

CBC
Settlement
Funding, LLC

   

Total
Non-Controlling
Interests

   

Pegasus
Funding, LLC

   

CBC
Settlement
Funding, LLC

   

Total
Non-Controlling
Interests

 

Balance, beginning of period

  $ (2,101,000

)

  $     $ (2,101,000

)

  $ (1,326,000

)

  $ 248,000     $ (1,078,000

)

Income from non-controlling interest

    1,549,000             1,549,000       (16,000

)

    108,000       92,000  

Distributions to non-controlling interest

    (350,000

)

          (350,000

)

    (288,000

)

          (288,000

)

Balance, end of period

  $ (902,000

)

  $     $ (902,000

)

  $ (1,630,000

)

  $ 356,000     $ (1,274,000

)

 

 
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Liquidity and Capital Resources

 

Our primary source of cash from operations is collections on the receivable portfolios we have acquired and the funds generated from the Pegasus and CBC business segments. Our primary uses of cash include repayments of debt, our purchases of consumer receivable portfolios, interest payments, costs involved in the collections of consumer receivables, funding of the GAR Disability Advocates operations, 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 (“RFA”)

 

In March 2007, Palisades XVI borrowed approximately $227 million under the RFA, 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, and Fifth Amendments and the Settlement Agreement discussed below.

 

On August 7, 2013, Palisades XVI, a 100% owned bankruptcy remote subsidiary, entered into a Settlement and Omnibus Amendment (the “Settlement Agreement”) with BMO as an amendment to the RFA. In consideration for a $15 million prepayment funded by the Company, BMO agreed to significantly reduce minimum monthly collection requirements and the interest rate. BMO also agreed that 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 RFA and the Settlement Agreement.

 

On June 3, 2014, Palisades XVI paid the Remaining Amount. The final principal payment of $2.9 million included a voluntary prepayment of $1.9 million provided from funds of the Company. Accordingly, Palisades XVI was entitled to receive $16.9 million of future collections from the Portfolio Purchase before BMO would be entitled to receive any payments with respect to its Income Interest.

 

During the month of June 2016, the Company received the balance of the $16.9 million, and, as of June 30, 2016, the Company recorded a liability to BMO of approximately $109,000 which represents 30% of the net collection after $16.9 million collections were received. The funds were subsequently remitted to BMO on July 11, 2016.

 

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. The Company has no outstanding balances against the facility as of June 30, 2016.

 

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 the Company's 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 Company. If the Offer is fully 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 43.1% of issued and outstanding shares, based on the 11,837,224 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 of Directors and its financial and legal advisors, had unanimously determined to recommend that shareholders reject the Mangrove Offer. Furthermore, the Company announced its intention to commence an issuer tender offer for 3,000,000 shares of the Company's common stock pursuant to a “Dutch Auction” format at a price range of $9.50 to $10.25 per share.

 

 
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 On April 11, 2016, the Company commenced a Tender Offer to purchase of up to 3,000,000 shares of its common stock, 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 the Company’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 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, previously due to expire on May 9, 2016. Mangrove stated that it 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. The following summary of the Agreement does not purport to be complete and is qualified in its entirety by reference to the Agreement, a copy of which was previously filed on May 26, 2016, as Exhibit 10.1, to the Company’s Current Report on Form 8-K.

  

Pursuant to the Agreement, the Company has 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 have 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 will provide information requested by Mangrove to one or more of Mangrove’s representatives and such representatives will prepare summaries of such information (the “Summaries”). If the Company approves the Summaries, the approved Summaries will be 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 (as defined in the Agreement) and the Extended Period, 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.

 

Personal Injury Claims

 

On December 28, 2011, we formed the Pegasus joint venture with 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 consists of the right to receive from such claimant part of the proceeds or recoveries which such claimant receives by reason of a settlement, judgment or award with respect to such claimant’s claim. The profits from the joint venture are distributed based on the ownership percentage of the parties – The Company receives 80% and PLF receives 20%.

 

 
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Divorce Funding

 

On May 18, 2012, we formed BP Case Management, LLC (“BPCM”), a joint venture with California-based Balance Point Divorce Funding, LLC (“BP Divorce Funding”). BPCM provides non-recourse funding to a spouse in a matrimonial action. The Company provides a $1.4 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 has been extended to August 2016. The revolving line of credit is collateralized by BP Divorce Funding’s profit share in BPCM and other assets.

 

Structured Settlements

 

On December 31, 2013, the Company acquired 80% ownership of CBC and its affiliate, CBC Management Services, LLC for approximately $5.9 million. The principals of CBC, William J. Skyrm, Esq. and James Goodman, each retained a 10% interest in CBC. In addition, the Company agreed to provide financing to CBC of up to $5 million, amended to $7.5 million in March 2015. Through the transaction we acquired structured settlements valued at $30.4 million and debt that totaled $23.4 million, consisting of $9.6 million of a revolving line of credit with a financial institution and $13.8 million of non-recourse notes issued by CBC’s subsidiaries. On December 31, 2015, the Company acquired the remaining 20% ownership of CBC for $1.8 million, through the issuance of restricted stock valued at $1.0 million and $0.8 million in cash. Each of the two principals received 61,652 shares of restricted stock at an agreed upon market price of $8.11 and $400,000 in cash. An aggregate of 123,304 shares of restricted stock were issued. As of June 30, 2016, CBC had structured settlements valued at $79.9 million and debt valued at $62.7 million, consisting of an $18.3 million line of credit and an aggregate of $44.4 million of non-recourse notes.

 

Cash Flow

 

At June 30, 2016, our cash decreased $7.2 million to $17.1 million from $24.3 million at September 30, 2015.

 

Net cash provided by operating activities was $2.3 million for the nine months ended June 30, 2016 compared to $4.7 million used in operating activities for the nine months ended June 30, 2015. Net cash used in investing activities was $9.2 million for the nine month period ended June 30, 2016 compared to $10.4 million for the nine months ended June 30, 2015. Net cash used in financing activities was $0.4 million for the nine month period ended June 30, 2016 as compared to cash provided by financing activities of $14.1 million for the nine month period ended June 30, 2015. 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, investment in structured settlements, 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. Recent acquisitions have been financed through cash flows from operating activities. We believe we will be less dependent on a credit facility (with the exception of CBC) in the short-term, as our cash balances will be sufficient to invest in personal injury claims, purchase portfolios and finance the early stages of the disability advocacy business. Structured settlements are financed through the use of a credit line, warehouse facility, and private placement financing.

 

We believe our available cash resources and expected cash flows from operations will be sufficient to fund operations for the next twelve months. We do not expect to incur any material capital expenditures during the next twelve months.

 

We are cognizant of the current market fundamentals in the debt purchase and company acquisition markets which, because of significant supply and tight capital availability, could result in increased buying opportunities. The outcome of any future transaction(s) is subject to market conditions. In addition, due to these opportunities, we continue to seek opportunities with banking organizations and others on a possible financing loan facility

 

Off Balance Sheet Arrangements

 

As of June 30, 2016, we did not have any relationships with unconsolidated entities or financial partners, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

 

 
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Additional Supplementary Information:

 

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

 

For additional information regarding our methods of accounting for our investment in finance receivables, the qualitative and quantitative factors we use to determine estimated cash flows, and our performance expectations of our portfolios, see “ Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies ” above.

 

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. The Company is currently evaluating the impact this update will have on its consolidated financial statements.

 

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

  

In 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 subject to the accounting standard update and will recognize as operating lease liabilities and right-of-use assets upon adoption.

 

In March 2016, the FASB issued 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.

 

 
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Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

We are exposed to various types of market risk in the normal course of business, including the impact of interest rate changes and foreign exchange rates and changes in corporate tax rates. At June 30, 2016, the debt associated with our acquisition of CBC, had a balance of approximately $62.7 million, consisting of $18.3 million through a line of credit, at a rate of LIBOR plus 3%, with a floor of 4.1%, from a financial institution, and $44.4 million of notes at varying rates, from 5.07% to 8.75%, issued by CBC’s subsidiaries. At June 30, 2016, the LIBOR rate was 0.46505%. 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 (3.71505%) would still have been below the 4.1% floor. We do not currently invest in derivative financial or commodity instruments.

 

Item 4.

Controls and Procedures

 

a. Disclosure Controls and Procedures

 

Based on criteria for effective internal control over financial reporting described in the standards promulgated by the Public Company Accounting Oversight Board and in the Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO 2013”), we conducted an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of December 31, 2015. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based on their evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2016.

 

b. Changes in Internal Controls over Financial Reporting.

 

There have been certain improvements in our internal control over financial reporting during the nine months ended June 30, 2016. These changes have not materially affected, or are reasonably likely to affect, our internal control over financial reporting.

 

 
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PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

 

In June 2015, a punitive class action complaint was filed against the Company, and one of its third-party law firm servicers, alleging violation of the federal Fair Debt Collection Practice Act and Racketeer Influenced and Corrupt Organization Act (“RICO”) and state law arising from debt collection activities and default judgments obtained against certain debtors.

 

The Company filed a motion to strike the class action allegations and compel arbitration or, to the extent the court declines to order arbitration, to dismiss the RICO claims. On or about March 31, 2015, the court denied the Company’s motion. The Company filed an appeal with the United States Court of Appeals for the Second Circuit. A mediation session was held in July 2015, at which the Company agreed to settle the action on an individual basis for a payment of $13,000 to each named plaintiff, for a total payment of $39,000. Payment was made on or about July 24, 2015. The third-party law firm servicer has not yet settled and remains a defendant in the case.

 

The plaintiffs’ attorneys advised that they are contemplating the filing of another punitive class action complaint against the Company alleging substantially the same claims as those that were asserted in this matter. In anticipation of such an eventuality, the Company agreed to non-binding mediation in order to reach a global settlement with other putative class members, which would avert the possibility of further individual or class actions with respect to the affected accounts. To date, the parties have attended two mediation sessions and are continuing to discuss a global settlement. In connection with such discussions, the current settlement demand from plaintiffs is $4 million and the current counteroffer from the Company and its third-party law firm servicer is $3.875 million (which would be split equally between the Company and the law firm servicer). The Company and law firm servicer have also offered, as part of the current counteroffer, to cease collection activity on the affected accounts.

 

Accordingly, the Company set up a reserve for settlement costs of $2.0 million during the nine months ended June 30, 2016, which has been included in general and administrative expenses in the Company’s consolidated statement of operations.

 

In the ordinary course of our business, we are involved in numerous legal proceedings. We regularly initiate collection lawsuits, using our network of third party law firms, against consumers. Also, consumers occasionally initiate litigation against us, in which they allege that we have violated a federal or state law in the process of collecting their account. We do not believe that these ordinary course matters are material to our business and financial condition. As of the date of this Form 10-Q, we are not involved in any other material litigation in which we are a defendant.

 

 

Item 1A.

Risk factors

 

For a discussion of our potential risks and uncertainties, see the information previously disclosed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K, for the year ended September 30, 2015 filed with the SEC on December 14, 2015. There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K.

 

 

 
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Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Common Stock.

 

The following table sets forth information regarding our repurchases or acquisitions of common stock during the three months ended June 30, 2016:

 

 

Period

 

Total
Number of
Shares
(or Units)
Purchased(1)

   

Average
Price Paid
per Share
(or Unit)

   

Total Number
of Shares
Purchased as
Part
of Publicly
Announced
Plans
or Programs

   

Maximum Number
(or Approximate
Dollar Value)
of Shares that
May Yet Be
Purchased
Under the Plans
or Programs(
2)

 

April 1, 2016 through April 30, 2016

        $           $  

May 1, 2016 through May 31, 2016

    274,284     $ 10.25       274,284     $  

June 1, 2016 through June 30, 2016

        $           $  

 

(1)

On March 31, 2016, the Company announced its intention to commence an issuer tender offer for 3,000,000 shares of its 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 up to 3,000,000 shares of its common stock 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 “Tender Offer”). The expiration date for the 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.

 

(2)

On August 17, 2015, our board of directors authorized the repurchase of up to $15.0 million of shares of our common stock through a non-discretionary stock repurchase plan under Sections 10-b18 and 10b5-1 of the Securities and Exchange Act (the “Plan”) to expire on December 31, 2015. On December 17, 2015, our board of directors approved an extension of the Plan to March 31, 2016 and reset the original $15.0 million repurchase level, as of the extension date. On March 17, 2016, our board of directors approved a further extension of the Plan to December 31, 2016 and reset the maximum to an additional $15 million in repurchases. On March 22, 2016, a Company shareholder commenced a tender offer on the Company’s common stock. Per the provisions of the Plan, it terminated immediately and no further purchases were permitted under the Plan.

 

Item 3.

Default Upon Senior Securities

 

None

 

Item 4.

Mine Safety Disclosures

 

Not applicable

 

Item 5.

Other Information

 

None

 

 
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Item 6.

Exhibits

 

(a) Exhibits.

 

3.1   Certificate of Incorporation. (1)
     
3.2   Amendment to Certificate of Incorporation. (2)
     
3.3   Amended and Restated Bylaws. (3)
     

31.1

  

Certification of the Registrant’s Chief Executive Officer, Gary Stern, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

   

31.2

  

Certification of the Registrant’s Chief Financial Officer, Bruce R. Foster, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

   

32.1

  

Certification of the Registrant’s Chief Executive Officer, Gary Stern, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

   

32.2

  

Certification of the Registrant’s Chief Financial Officer, Bruce R. Foster, 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

 

(1)

The certificate of Incorporation of Asta Funding, Inc. was previously filed as Exhibit 3.1 to Asta Funding’s Registration Statement on Form SB-2 (File No. 33-97212), but is being re-filed as an Exhibit to this Quarterly Report on Form 10-Q to make it available on the Electronic Data Gathering, Analysis and Retrieval website.

 

(2)

Incorporated by reference to Exhibit 3.1(a) to Asta Funding’s Quarterly Report on Form 10-Q filed on May 15, 2002.

 

(3)

The Amended and Restated Bylaws reflect the bylaws of Asta Funding, Inc. previously filed as Exhibit 3.01 to Asta Funding’s Current Report on Form 8-K filed on October 31, 2007, as amended by the amendment to the bylaws of Asta Funding, Inc. previously filed as Exhibit 3.2 to Asta Funding’s Current Report on Form 8-K filed on August 24, 2012.

 

 
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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

             
 

 

 

 

ASTA FUNDING, INC.

(Registrant)

       

Date: August 9, 2016

 

 

 

By:

 

/s/ Gary Stern

 

 

 

 

 

 

Gary Stern, President, Chief Executive Officer

 

 

 

 

 

 

(Principal Executive Officer)

       

Date: August 9, 2016

 

 

 

By:

 

/s/ Bruce R. Foster

 

 

 

 

 

 

Bruce R. Foster, Chief Financial Officer

 

 

 

 

 

 

(Principal Financial Officer and Principal Accounting Officer)

 

 
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EXHIBIT INDEX

 

     

Exhibit

Number

  

Description

   
3.1   Amended and Restated Certificate of Incorporation. (1)
     
3.2   Amendment to Certificate of Incorporation. (2)
     
3.3   Amended and Restated Bylaws. (3)
     

31.1

  

Certification of the Registrant’s Chief Executive Officer, Gary Stern, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

   

31.2

  

Certification of the Registrant’s Chief Financial Officer, Bruce R. Foster, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

   

32.1

  

Certification of the Registrant’s Chief Executive Officer, Gary Stern, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

   

32.2

  

Certification of the Registrant’s Chief Financial Officer, Bruce R. Foster, 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


(1)

The certificate of Incorporation of Asta Funding, Inc. was previously filed as Exhibit 3.1 to Asta Funding’s Registration Statement on Form SB-2 (File No. 33-97212), but is being re-filed as an Exhibit to this Quarterly Report on Form 10-Q to make it available on the Electronic Data Gathering, Analysis and Retrieval website.

 

(2)

Incorporated by reference to Exhibit 3.1(a) to Asta Funding’s Quarterly Report on Form 10-Q filed on May 15, 2002.

 

(3)

The Amended and Restated Bylaws reflect the bylaws of Asta Funding, Inc. previously filed as Exhibit 3.01 to Asta Funding’s Current Report on Form 8-K filed on October 31, 2007, as amended by the amendment to the bylaws of Asta Funding, Inc. previously filed as Exhibit 3.2 to Asta Funding’s Current Report on Form 8-K filed on August 24, 2012.

  

 

-52-

                                               Exhibit 3.1

 

CERTIFICATE OF INCORPORATION
OF
ASTA FUNDING, INC.

 

First:          The name of the Corporation is ASTA FUNDING, INC (hereinafter the “Corporation”).

 

Second:     The address of the registered office of the Corporation in the State of Delaware is 32 Loockerman Square, Suite L-100 City of Dover, County of Kent. The name of its registered agent at that address is The Prentice-Hall Corporation System, Inc.

 

Third:        The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of the State of Delaware as set forth in Title 8 of the Delaware Code (the “GCL”).

 

Fourth:     The total number of shares of stock which the Corporation shall have authority to issue is 10,000,000 shares of Common Stock, par value one cent ($.01) per share.

 

Fifth:         The name and mailing address of the Sole Incorporator is as follows:

 

Name

Mailing Address

   

Madeline A. Stirber

250 Park Avenue
New York, NY 10177

 

Sixth:     The following provisions are inserted for the management of the business and the conduct of the affairs of the Corporation, and for further definition, limitation and regulation of the powers of the Corporation and of its directors and stockholders:

 

(1)     The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors.

 

(2)     The directors shall have concurrent power with the stockholders to make, alter, amend, change, add to or repeal the By-Laws of the Corporation.

 

(3)     The number of directors of the Corporation shall be as from time to time fixed by, or in the manner provided in, the By-Laws of the Corporation. Election of directors need not be by written ballot unless the By-Laws so provide.

 

(4)     No director shall be personally liable to the Corporation or any of its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director’s duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the GCL, or (iv) for any transaction from which the director derived an improper personal benefit. If the GCL shall hereafter be amended so as to authorize the further elimination or limitation of the liability of directors, then the liability of a director of the Corporation, in addition to the limitation on personal liability provided herein, shall be limited to the fullest extent permitted by the GCL, as then amended. Any repeal or modification of this Article SIXTH (4) by the stockholders of the Corporation shall not adversely affect any right of protection of a director of the Corporation existing at the time of such repeal or modification with respect to acts or omissions occurring prior to such repeal or modification.

 

 

 
 

 

 

(5)     The directors of the Corporation in their discretion may submit any contract or act for approval or ratification at any annual meeting of the stockholders or at any meeting of the stockholders called for the purpose of considering any such act or contract, and any contract or act that shall be approved or ratified by the vote of the holders of a majority of the voting power of the stock of the Corporation which is represented in person or by proxy at such meeting and entitled to vote thereat (provided that a lawful quorum of stockholders be there represented in person or by proxy) shall be as valid and as binding upon the Corporation and upon all the stockholders as though it had been approved or ratified by every stockholder of the Corporation, whether or not the contract or act would otherwise be open to legal attack because of directors’ interest, or for any other reason.

 

(6)     In addition to the powers and authority hereinbefore or by statute expressly conferred upon them, the directors are hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation, subject, nevertheless, to the provisions of the GCL, this Certificate of Incorporation, and any By-Laws adopted by the stockholders; provided, however, that no By-Laws hereafter adopted by the stockholders shall invalidate any prior act of the directors which would have been valid if such By-Laws had not been adopted.

 

Seventh:     (a) The Corporation shall indemnify and hold harmless each director and officer of the Corporation and all of such directors and officers to the fullest extent permitted by the GCL as the same currently exists or may hereafter be amended.

 

(b)     Expenses incurred by an officer or director in defending a civil or criminal action, suit or proceeding brought by any party other than the Corporation against any such officer, director or any person who has ceased to serve as such, in respect of any such person’s acts or actions in his official capacity with the Corporation, shall be advanced by the Corporation poor to final disposition of the action.

 

(c)     The indemnification and advancement of expenses provided by this Article SEVENTH shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any By-Law, agreement, vote of stockholders or disinterested directors, or otherwise, and shall inure to the benefit of the heirs, executors and administrators of any person entitled to indemnification to the fullest extent permitted by the GCL as the same currently exists or may hereafter be amended.

 

Eighth:     Meetings of stockholders may be held within or without the State of Delaware, as the By-Laws may provide. The books of the Corporation may be kept (subject to any provision contained in the GCL) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the By-Laws of the Corporation.

 

Ninth:     The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon the stockholders herein are granted subject to this reservation.

 

I, THE UNDERSIGNED, being the Sole Incorporator hereinbefore named, for the purpose of forming a corporation pursuant to the GCL, do make this Certificate, hereby declaring and certifying that this is my act and deed and the facts herein stated are true, and accordingly have hereunto set my hand this 2 day of August, 1995.

 

 

 

/s/ Madeline A. Stirber                                          

 

Madeline A. Stirber, Sole Incorporator

 

 


- 2 -

 

Exhibit 3.3

AMENDED AND RESTATED

 

BY-LAWS

 

OF

 

ASTA FUNDING, INC.

 

(Hereinafter called the “Corporation”)

 

August 20, 2012

 

ARTICLE I

 

OFFICES

 

Section 1. Registered Office. The registered office of the Corporation shall be in the City of Dover, County of Kent. State of Delaware.

 

Section 2. Other Offices. The Corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine.

 

ARTICLE II

 

MEETINGS OF STOCKHOLDERS

 

Section 1. Place of Meetings. Meetings of the stockholder for the election of directors or for any other purpose shall be held at such time and place, either within or without the State of Delaware as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting or in a duly executed waiver of notice thereof.

 

Section 2. Annual Meetings. The Annual Meetings of stockholders for the election of directors or for any other purpose shall be held at such time and place, either within or without the State of Delaware as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting, at which meetings the stockholders shall elect by a plurality vote a Board of Directors, and transact such other business as may properly be brought before the meeting.

 

Section 3. Special Meetings. Unless otherwise prescribed by law or by the Certificate of Incorporation, Special Meetings of Stockholders, for any purpose or purposes, may be called by either (i) the President, (ii) the Secretary or (iii) any Assistant Secretary, if there be one, and shall be called by any such officer at the request in writing of any one or more members of the Board of Directors or upon the affirmative vote, verified in writing, of the holders of twenty-five (25%) percent of the outstanding shares of Common Stock.

 

Section 4. Notice. Notice of the place, if any, date, hour, the record date for determining the stockholders entitled to vote at the meeting (if such date is different from the record date for stockholders entitled to notice of the meeting) and means of remote communication, if any, of every meeting of stockholders shall be given by the Corporation not less than ten days nor more than 60 days before the meeting (unless a different time is specified by law) to every stockholder entitled to vote at the meeting as of the record date for determining the stockholders entitled to notice of the meeting. Notices of special meetings shall also specify the purpose or purposes for which the meeting has been called. Except as otherwise provided herein or permitted by applicable law, notice to stockholders shall be in writing and delivered personally or mailed to the stockholders at their address appearing on the books of the Corporation. Without limiting the manner by which notice otherwise may be given effectively to stockholders, notice of meetings may be given to stockholders by means of electronic transmission in accordance with applicable law. Notice of any meeting need not be given to any stockholder who shall, either before or after the meeting, submit a waiver of notice or who shall attend such meeting, except when the stockholder attends for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Any stockholder so waiving notice of the meeting shall be bound by the proceedings of the meeting in all respects as if due notice thereof had been given.

  

 
 

 

 

Section 5. Advance Notice of Stockholder Proposals and Nominations.

(a) Timely Notice. At a meeting of the stockholders, only such nominations of persons for the election of directors and such other business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, nominations or such other business must be: (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the board of directors or any committee thereof, (ii) otherwise properly brought before the meeting by or at the direction of the board of directors or any committee thereof, or (iii) otherwise properly brought before an annual meeting by a stockholder who is a stockholder of record of the Corporation at the time such notice of meeting is delivered, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this Article II, Section 5. In addition, any proposal of business (other than the nomination of persons for election to the board of directors) must be a proper matter for stockholder action. For business (including, but not limited to, director nominations) to be properly brought before an annual meeting by a stockholder, the stockholder or stockholders of record intending to propose the business (the “ Proposing Stockholder ”) must have given timely notice thereof pursuant to this Article II, Section 5 (a) or Article II, Section 5 (c) below, as applicable, in writing to the secretary of the Corporation even if such matter is already the subject of any notice to the stockholders or Public Disclosure from the board of directors. To be timely, a Proposing Stockholder’s notice must be delivered to or mailed and received at the principal executive offices of the Corporation: (x) not later than the close of business on the 60th day, nor earlier than the close of business on the 120th day in advance of the anniversary of the previous year’s annual meeting if such meeting is to be held on a day which is not more than 30 days in advance of the anniversary of the previous year’s annual meeting or not later than 60 days after the anniversary of the previous year’s annual meeting; and (y) with respect to any other annual meeting of stockholders, the close of business on the tenth day following the date of Public Disclosure of the date of such meeting. In no event shall the Public Disclosure of an adjournment or postponement of an annual meeting commence a new notice time period (or extend any notice time period). For purposes of this Article II, Section 5 (a), “Public Disclosure” means a disclosure made in a press release reported by the Dow Jones News Services, The Associated Press or a comparable national news service or in a document filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

 

(b) Stockholder Nominations. For the nomination of any person or persons for election to the board of directors, a Proposing Stockholder’s notice to the secretary of the Corporation shall set forth (i) the name, age, business address and residence address of each nominee proposed in such notice, (ii) the principal occupation or employment of each such nominee, (iii) the number of shares of capital stock of the Corporation which are owned of record and beneficially by each such nominee (if any), (iv) such other information concerning each such nominee as would be required to be disclosed in a proxy statement soliciting proxies for the election of such nominee as a director in an election contest (even if an election contest is not involved) or that is otherwise required to be disclosed, under Section 14(a) of the Exchange Act and the rules and regulations promulgated thereunder, (v) the consent of the nominee to being named in the proxy statement as a nominee and to serving as a director if elected, and (vi) as to the Proposing Stockholder: (A) the name and address of the Proposing Stockholder as they appear on the Corporation’s books and of the beneficial owner, if any, on whose behalf the nomination is being made, (B) the class and number of shares of the Corporation which are owned by the Proposing Stockholder (beneficially and of record) and owned by the beneficial owner, if any, on whose behalf the nomination is being made, as of the date of the Proposing Stockholder’s notice, and a representation that the Proposing Stockholder will notify the Corporation in writing of the class and number of such shares owned of record and beneficially as of the record date for the meeting promptly following the later of the record date or the date notice of the record date is first publicly disclosed, (C) a description of any agreement, arrangement or understanding with respect to such nomination between or among the Proposing Stockholder and any of its affiliates or associates, and any others (including their names) acting in concert with any of the foregoing, and a representation that the Proposing Stockholder will notify the Corporation in writing of any such agreement, arrangement or understanding in effect as of the record date for the meeting promptly following the later of the record date or the date notice of the record date is first publicly disclosed, (D) a description of any agreement, arrangement or understanding (including any derivative or short positions, profit interests, options, hedging transactions, and borrowed or loaned shares) that has been entered into as of the date of the Proposing Stockholder’s notice by, or on behalf of, the Proposing Stockholder or any of its affiliates or associates, the effect or intent of which is to mitigate loss to, manage risk or benefit of share price changes for, or increase or decrease the voting power of the Proposing Stockholder or any of its affiliates or associates with respect to shares of stock of the Corporation, and a representation that the Proposing Stockholder will notify the Corporation in writing of any such agreement, arrangement or understanding in effect as of the record date for the meeting promptly following the later of the record date or the date notice of the record date is first publicly disclosed, (E) a representation that the Proposing Stockholder is a holder of record of shares of the Corporation entitled to vote at the meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice, and (F) a representation whether the Proposing Stockholder intends to deliver a proxy statement and/or form of proxy to holders of at least the percentage of the Corporation’s outstanding capital stock required to approve the nomination and/or otherwise to solicit proxies from stockholders in support of the nomination. The Corporation may require any proposed nominee to furnish such other information as it may reasonably require to determine the eligibility of such proposed nominee to serve as an independent director of the Corporation or that could be material to a reasonable stockholder’s understanding of the independence, or lack thereof, of such nominee.

  

 
 

 

 

(c) Other Stockholder Proposals. For all business other than director nominations, a Proposing Stockholder’s notice to the secretary of the Corporation shall set forth as to each matter the Proposing Stockholder proposes to bring before the annual meeting: (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) any other information relating to such stockholder and beneficial owner, if any, on whose behalf the proposal is being made, required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for the proposal and pursuant to and in accordance with Section 14(a) of the Exchange Act and the rules and regulations promulgated thereunder and (iii) the information required by Section Article II, Section 5 (b)(vi) above.

 

(d) Proxy Rules. The foregoing notice requirements of Article II, Section 5 (c) shall be deemed satisfied by a stockholder with respect to business other than a nomination if the stockholder has notified the Corporation of his, her or its intention to present a proposal at an annual meeting in compliance with the applicable rules and regulations promulgated under Section 14(a) of the Exchange Act and such stockholder’s proposal has been included in a proxy statement that has been prepared by the Corporation to solicit proxies for such annual meeting.

 

(e) Special Meetings of Stockholders. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation’s notice of meeting. Nominations of persons for election to the board of directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation’s notice of meeting (x) by or at the direction of the board of directors or any committee thereof or (y) provided that the board of directors has determined that directors shall be elected at such meeting, by any stockholder of the Corporation who is a stockholder of record at the time the notice provided for in this Article II, Section 5 is delivered to the secretary of the Corporation, who is entitled to vote at the meeting and upon such election and who complies with the notice procedures set forth in this Article II, Section 5. In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the board of directors, any such stockholder entitled to vote in such election of directors may nominate a person or persons (as the case may be) for election to such position(s) as specified in the Corporation’s notice of meeting, if the stockholder’s notice required by this Article II, Section 5 shall be delivered to the secretary at the principal executive offices of the Corporation not later than the close of business on the 60th day prior to such special meeting and not earlier than the close of business on the later of the 120th day prior to such special meeting or the tenth (10th) day following the date of Public Disclosure of the date of the special meeting and of the nominees proposed by the board of directors to be elected at such meeting. In no event shall the Public Disclosure of an adjournment or postponement of a special meeting commence a new time period (or extend any notice time period).

 

(f) Effect of Noncompliance. Notwithstanding anything in these By-laws to the contrary: (i) no nominations shall be made or business shall be conducted at any annual meeting except in accordance with the procedures set forth in this Article II, Section 5, and (ii) unless otherwise required by law, if a Proposing Stockholder intending to propose business or make nominations at an annual meeting pursuant to this Article II, Section 5 does not provide the information required under this Article II, Section 5 to the Corporation promptly following the later of the record date or the date notice of the record date is first publicly disclosed, or the Proposing Stockholder (or a qualified representative of the Proposing Stockholder) does not appear at the meeting to present the proposed business or nominations, such business or nominations shall not be considered, notwithstanding that proxies in respect of such business or nominations may have been received by the Corporation. The requirements of this Article II, Section 5 shall apply to any business or nominations to be brought before an annual meeting by a stockholder whether such business or nominations are to be included in the Corporation’s proxy statement pursuant to Rule 14a-8 of the Exchange Act or presented to stockholders by means of an independently financed proxy solicitation. The requirements of Article II, Section 5 are included to provide the Corporation notice of a stockholder’s intention to bring business or nominations before an annual meeting and shall in no event be construed as imposing upon any stockholder the requirement to seek approval from the Corporation as a condition precedent to bringing any such business or make such nominations before an annual meeting.

 

 
 

 

 

Section 6. Quorum. Except as otherwise provided by law or by the Certificate of Incorporation, the holders of a majority of the capital stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder entitled to vote at the meeting.

 

Section 7. Voting. Unless otherwise required by law, the Certificate of Incorporation or these By-laws, any question brought before any meeting of stockholders shall be decided by the vote of the holders of a majority of the stock represented and entitled to vote thereat. Each stockholder represented at a meeting of stockholders shall be entitled to cast one vote for each share of the capital stock entitled to vote thereat held by such stockholder. Such votes may he cast in person or by proxy but no proxy shall be voted on or after three years from its date, unless such proxy provides for a longer period. The Board of Directors, in its discretion, or the officer of the Corporation presiding at a meeting of stockholders, in his discretion, may require that any votes cast at such meeting shall be cast by written ballot.

 

Section 8. Consent of Stockholders in Lieu of Meeting. Unless otherwise provided in the Certificate of Incorporation, any action required or permitted to be taken at any Annual or Special Meeting of Stockholders of the Corporation, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Such written consent shall be deemed effective upon receipt by the Secretary of the Corporation of a copy of such written consent executed by each stockholder of record by facsimile, telex, telegram or cable. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing.

 

Section 9. List of Stockholders Entitled to Vote. The officer of the Corporation who has charge of the stock ledger of the Corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meetings arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder of the Corporation who is present.

 

Section 10. Stock Ledger. The stock ledger of the Corporation shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by Section 9 of this Article II or the books of the Corporation, or to vote in person or by proxy at any meeting of stockholders.

 

 
 

 

  

ARTICLE III

 

DIRECTORS

 

Section 1. Number and Election of Directors. The Board of Directors shall consist of one or more members. The number of directors may be changed from time to time by resolution of the Board of Directors. Except as provided in Section 2 of this Article, directors shall be elected by a plurality of the votes cast at Annual Meetings of Stockholders, and each director so elected shall hold office until the next Annual Meeting and until his successor is duly elected and qualified or until his earlier resignation or removal. Any director may resign at any time upon notice to the Corporation. Directors need not be stockholders.

 

Section 2. Removal and Vacancies. At any time, the stockholders may remove any director or the entire Board of Directors and elect directors to fill the vacancies created by such removal, unless otherwise provided by law. A director may be so removed, with or without cause, at any time. Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director, and the directors so chosen shall hold office until the next annual election and until their successors are duly elected and shall qualify, unless sooner displaced. If there are no directors in office, then an election of directors may be held in the manner provided by statute. If, at the time of filling any vacancy or any newly created directorship, the directors then in office shall constitute less than a majority of the whole Board of Directors (as constituted immediately prior to any such increase), the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office.

 

Section 3. Duties and Powers. The business, operations and affairs of the Corporation shall be managed by the Board of Directors; provided, however, that the Board of Directors may delegate such management responsibilities to such officer(s) as they may appoint to the extent permitted by the Certificate of Incorporation, these By-laws and the laws of the State of Delaware. All decisions concerning the affairs, operations and policies of the Corporation shall be decided by the Board of Directors.

 

Section 4. Meetings. The Board of Directors of the Corporation may hold meetings, both regular and special, either within or without the State of Delaware. Regular meetings of the Board of Directors may be held without notice at such time and at such place as may from time to time be determined by the Board of Directors. Any one or more members of the Board of Directors, or the stockholders, acting by a majority vote, may call a meeting of the Board of Directors or require action by consent for the Directors, including a meeting by written consent, at any time. Notice thereof stating the place, date and hour of the meeting shall be given to each director either by mail not less than forty-eight (48) hours before the date of the meeting, by telephone or telegram on twenty-four (24) hours’ notice, or on such shorter notice as the person or persons calling such meeting may deem necessary or appropriate in the circumstances.

 

Section 5. Quorum. Except as may be otherwise specifically provided by law, the Certificate of Incorporation or these By-laws, at all meetings of the Board of Directors, a majority of the entire Board of Directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present.

 

Section 6. Actions of Board. Unless otherwise provided by the Certificate of Incorporation or these By-laws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all the members of the Board of Directors or committee, as the case may be, consent thereto in writing, and the writing or writings are flied with the minutes of proceedings of the Board of Directors or committee. Such written consent shall be deemed effective upon receipt by the Secretary of the Corporation of a copy of such written consent by facsimile, telex, telegram or cable executed by each director.

 

Section 7. Meetings by Means of Conference Telephone. Unless otherwise provided by the Certificate of Incorporation or these By-laws, members of the Board of Directors of the Corporation, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors or such committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 7 shall constitute presence in person at such meeting.

 

 
 

 

 

Section 8. Committees. The Board of Directors may, by resolution passed by a majority of the entire Board of Directors, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of any such committee. In the absence or disqualification of a member of a committee, and in the absence of a designation by the Board of Directors of an alternate member to replace the absent or disqualified member, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any absent or disqualified member. Any committee, to the extent allowed by law and provided in the resolution establishing such committee, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation. Each committee shall keep regular minutes and report to the Board of Directors when required.

 

Section 9. Compensation. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefore. Members of special or standing committees may be allowed like compensation for attending committee meetings.

 

Section 10. Interested Directors. No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association, or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose if (i) the material facts as to his or their relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board of Directors or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (ii) the material facts as to his or their relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (iii) the contract or transaction is fair as to the Corporation as of the time it’s authorized, approved or ratified, by the Board of Directors, a committee thereof or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee, which authorizes the contract or transaction.

 

ARTICLE IV

 

OFFICERS

 

Section 1. General. The officers of the Corporation shall be chosen by the Board of Directors and shall be a President, Vice President, Secretary and Treasurer. The Board of Directors, in its discretion, may also choose a Chairman of the Board of Directors (who must be a director), Assistant Secretaries, Assistant Treasurers and other officers. Any number of offices may be held by the same person, unless otherwise prohibited by law, the Certificate of Incorporation or these By-laws. The officers of the Corporation need not be stockholders of the Corporation nor, except in the case of the Chairman of the Board of Directors, need such officers be directors of the Corporation.

 

Section 2. Election. The Board of Directors at its first meeting held after each Annual Meeting of Stockholders shall elect the officers of the Corporation who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors; and all officers of the Corporation shall hold office until their successors are chosen and qualified, or until their earlier resignation or removal. Any officer elected by the Board of Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors. Any vacancy occurring in any office of the Corporation shall be filled by the Board of Directors. The salaries of all officers of the Corporation shall be fixed by the Board of Directors.

 

 
 

 

 

Section 3. Voting Securities Owned by the Corporation. Powers of attorney, proxies, waivers of notice of meeting, consents and other instruments relating to securities owned by the Corporation may be executed in the name of and on behalf of the Corporation by the President or any Vice President and any such officer may, in the name of and on behalf of the Corporation, take all such action as any such officer may deem advisable to vote in person or by proxy at any meeting of security holders of any corporation in which the Corporation may own securities and at any such meeting shall possess and may exercise any and all rights and power incident to the ownership of such securities. The President shall be the Chief Executive Officer of the Corporation and shall preside at all meetings of the stockholders and of the Board of Directors. He shall have such powers and perform such duties as are prescribed by the Board of Directors. Subject to the control and direction of the Board of Directors, the President may enter into any contract or execute and deliver any instrument in the name and on behalf of the Corporation. In general, he shall perform all duties incident to the office of President, as herein defined, and all such other duties as from time to time may be assigned to him by the Board of Directors.

 

Section 4. Vice-Presidents. At the request of the President or in his absence or in the event of his inability or refusal to act (and if there be no Chairman of the Board of Directors), the Vice-President or the Vice-Presidents if there is more than one (in the order designated by the Board of Directors) shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. Each Vice-President shall perform such other duties and have such other powers as the Board of Directors from time to time may prescribe. If there be no Chairman of the Board of Directors and no Vice President, the Board of Directors shall designate the officer of the Corporation who, in the absence of the President or in the event of the inability or refusal of the President to act, shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President.

 

Section 5. Secretary. The Secretary shall attend all meetings of the stockholders and record all the proceedings thereat in a book or books to be kept for that purpose; the Secretary shall also perform like duties for the Board of Directors and for standing committees when required. The Secretary shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or President, under whose supervision he shall be. If the Secretary shall be unable or shall refuse to cause to be given notice or all meetings of the stockholders and special meetings of the Board of Directors, and if there be no Assistant Secretary, then either the Board of Directors or the President may choose another officer to cause such notice to be given. The Secretary shall have custody of the seal of the Corporation and the Secretary or any Assistant Secretary, if there be one, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by the signature of the Secretary or by the signature of any such Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing by his signature. The Secretary shall see that all books, reports, statements, certificates and other documents and records required by law to be kept or filed are properly kept or filed, as the case may be.

 

Section 6. Treasurer. The Treasurer shall have the custody of the corporate funds and securities and shall keep full accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. The Treasurer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the President and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as Treasurer and of the financial condition of the Corporation. If required by the Board of Directors, the Treasurer shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of his office and for the restoration to the Corporation, in the case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the Corporation.

 

Section 7. Assistant Secretaries. Except as may be otherwise provided in these By-laws, Assistant Secretaries, if there be any, shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors, the President, any Vice-President, if there be one, or the Secretary, and in the absence of the Secretary or in the event of his disability or refusal to act, shall perform the duties of the Secretary, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Secretary.

 

 
 

 

 

Section 8. Assistant Treasurers. Assistant Treasurers, if there be any, shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors, the President, any Vice-President, if there be one, or the Treasurer, and in the absence of the Treasurer or in the event of his disability or refusal to act, shall perform the duties of the Treasurer, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Treasurer. If required by the Board of Directors, an Assistant Treasurer shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the Corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the Corporation.

 

Section 9. Other Officers. Such other officers as the Board of Directors may choose shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors. The Board of Directors may delegate to any other officer of the Corporation the power to choose such other officers and to prescribe their respective duties and powers.

 

ARTICLE V

 

STOCK

 

Section 1. Form of Certificates. Shares of capital stock of the Corporation may be certificated or uncertificated, as provided under the General Corporation Law of the State of Delaware. Shares of capital stock issued in certificated form shall be signed in the name of the Corporation (i) by the President or a Vice-President and (ii) by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the Corporation, certifying the number of shares owned by the shareholder in the Corporation.

 

Section 2. Signatures. Where a certificate is countersigned by (i) a transfer agent other than the Corporation or its employee, or (ii) a registrar other than the Corporation or its employee, any other signature on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue.

 

Section 3. Lost Certificates. The Board of Directors may direct a new certificate to be issued in place of any certificate theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed; provided, however, that if such shares have ceased to be certificated, a new certificate shall be issued only upon written request to the transfer agent or registrar of the Corporation. When authorizing such issue of a new certificate, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate, or his legal representative, to advertise the same in such manner as the Board of Directors shall require and/or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed.

 

Section 4. Transfers. Stock of the Corporation shall be transferable in the manner prescribed by law and in these By-laws. Transfers of stock shall be made on the books of the Corporation, if such shares are certificated, only by the person named in the certificate or by his attorney lawfully constituted in writing and upon the surrender of the certificate therefore, which shall be cancelled before a new certificate shall be issued, or upon proper instructions from the holder of uncertificated shares.

 

Section 5. Record Date. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty days nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting, provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. 

 

 
 

 

 

Section 6. Beneficial Owners. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law.

 

ARTICLE VI

 

NOTICES

 

Section 1. Notices. Whenever written notice is required by law, the Certificate of Incorporation or these By-laws, to be given to any director, member of a committee or stockholder, such notice may be given by mail, addressed to such director, member of a committee or stockholder, at his address as it appears on the records of the Corporation, with postage thereon prepaid and such notice shall be determined to be given at the time when the same shall be deposited in the United States mail. Written notice may also be given personally or by facsimile, telex, telegram or cable.

 

Section 2. Waivers of Notice. Whenever any notice is required by law, the Certificate of Incorporation or these by-laws, to be given to any director, member of a committee or stockholder, a waiver thereof in writing, signed, by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto.

ARTICLE VII

 

GENERAL PROVISIONS

 

Section 1. Dividends. Dividends upon the capital stock of the Corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, and may be paid in cash, in property, or in shares of the capital stock. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors from time to time, in its absolute discretion, deems proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for any proper purpose, and the Board of Directors may modify or abolish any such reserve.

 

Section 2. Disbursements. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate.

 

Section 3. Fiscal Year. The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors.

 

Section 4. Corporate Seal. The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words “Corporate Seal, Delaware”. The seal may be used by causing it or a facsimile thereof to be impressed, affixed, reproduced, or otherwise.

 

ARTICLE VIII

 

INDEMNIFICATION

 

Section 1. Power to Indemnify in Actions, Suits or Proceedings other Than those by or in the right of the Corporation. Subject to Section 3 of this Article VIII, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a director or officer of the Corporation, or is or was a director or officer of the Corporation serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action , suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful.

 

 
 

 

 

Section 2. Power to Indemnify in Actions, Suits or Proceedings by or in the Right of the Corporation. Subject to Section 3 of this Article VIII, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director or officer of the Corporation, or is or was a director or officer of the Corporation serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against expenses (including attorneys’ fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation; except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other Court shall deem proper.

 

Section 3. Authorization of Indemnification. Any indemnification under this Article VIII (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in Section 1 or Section 2 of this Article VIII, as the case may be. Such determination shall be made (i) by the Board of Directors by a majority vote of a quorum consisting of directors who were rot parties to such action, suit or proceeding, or (ii) if such a quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (iii) by the stockholders. To the extent, however, that a director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding described above, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by him in connection therewith, without the necessity of authorization in the specific case.

 

Section 4. Good Faith Defined. For purposes of any determination under Section 1 and 2 of this Article VIII, a person shall be deemed to have acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests the Corporation, or, with respect to any criminal action or proceeding, to have had no reasonable cause to believe his conduct was unlawful, if his action is based on the records or books of account of the Corporation or another enterprise, or on information supplied to him by the officers of the Corporation or another enterprise in the course of their duties, or on the advice of legal counsel for the Corporation or another enterprise or on information or records given or reports made to the Corporation or another enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Corporation or another enterprise. The term “another enterprise” as used in this Section 4 shall mean any other corporation or any partnerships joint venture, trust, employee benefit plan or other enterprise of which such person is or was serving at the request of the Corporation as a director, officer, employee or agent. The provisions of this Section 4 shall not be deemed to be exclusive or to limit in any way the circumstances in which a person may be deemed to have met the applicable standard of conduct set forth in Sections 1 or 2 of this Article VIII, as the case may be.

 

 
 

 

 

Section 5. Indemnification by a Court. Notwithstanding any contrary determination in the specific case under Section 3 of this Article VIII, and notwithstanding the absence of any determination thereunder, any director, officer, employee or agent may apply to any court of competent jurisdiction in the State of Delaware for indemnification to the extent otherwise permissible under Sections 1 and 2 of this Article VIII. The basis of such indemnification by a court shall be a determination by such court that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standards of conduct set forth in Sections 1 or 2 of this Article VIII, as the case may be. Neither a contrary determination in the specific case under Section 3 of this Article VIII nor the absence of any determination thereunder shall be a defense to such application or create a presumption that the director, officer, employee or agent seeking indemnification has not met any applicable standard of conduct. Notice of any application for indemnification pursuant to this Section 5 shall be given to the Corporation promptly upon the filing of such application. If successful, in whole or in part, the director, officer, employee or agent seeking indemnification shall also be entitled to be paid the expense of prosecuting such application.

 

Section 6. Expenses Payable in Advance. Expenses incurred by a director or officer in defending or investigating a threatened or pending action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director, officer, employee or agent to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized in this Article VIII.

 

Section 7. Nonexclusively of Indemnification and Advancement of Expenses. The indemnification and advancement of expenses provided by or granted pursuant to this Article VIII shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any By-law, agreement, contract, vote of stockholders or disinterested directors or pursuant to the direction (howsoever embodied) of any court of competent jurisdiction or otherwise, both as to action in his official capacity and to action in another capacity while holding such office, it being the policy of the Corporation that indemnification of the persons specified in Sections 1 and 2 of this Article VIII shall be made to the fullest extent permitted by law. The provisions of this Article VIII shall not be deemed to preclude the indemnification of any person who is not specified in Sections 1 or 2 of this Article VIII but whom the Corporation has the power or obligation to indemnify under the provisions of the General Corporation law of the State of Delaware, or otherwise.

 

Section 8. Insurance. The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was a director or officer of the Corporation serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power or the obligation to indemnify him against such liability under the provisions of this Article VIII.

 

Section 9. Certain Definitions. For purposes of this Article VIII, references to “the Corporation” shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was a director or officer of such constituent corporation serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, shall stand in the same position under the provisions of this Article VIII with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. For purposes of this Article VIII, references to “fines” shall include any excise taxes assessed on a person with respect to an employee benefit plan and references to “serving at the request of the Corporation” shall include any service as a director, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participant and beneficiaries of an employee benefit plan shall be deemed to have acted in a “not opposed to the best interests of the Corporation” as referred to in this Article VIII.

 

Section 10. Survival of Indemnification and Advancement of Expenses. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article VIII shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person.

 

 
 

 

 

Section 11. Limitation on Indemnification. Notwithstanding anything contained in this Article VIII to the contrary, except for proceedings to enforce rights to indemnification (which shall be governed by Section 5 hereof), the Corporation shall not be obligated to indemnify any director, officer, employee or agent in connection with proceedings (or part thereof) initiated by such person unless such proceeding (or part thereof) was authorized or consented to by the Board of Directors of the Corporation.

 

Section 12. Indemnification of Employees and Agents. The Corporation may, to the extent authorized from time to time by the Board of Directors, provide rights to indemnification and to the advancement of expenses to employees and agents of the Corporation similar to those conferred in this Article VIII to directors and officers of the Corporation.

 

ARTICLE IX

 

AMENDMENTS

 

Section 1. These By-laws may be altered, amended or repealed, in whole or in part, or new By-laws may be adopted by the stockholders or by the Board of Directors, provided, however, that notice of such alteration, amendment, repeal or adoption of new By-laws be contained in the notice of such meeting of stockholders or Board of Directors as the case may be All such amendments approved by either the holders of a majority of the outstanding capital stock entitled to vote thereon or by a majority of the entire Board of Directors then in office.

 

Section 2. Entire Board of Directors. As used in this Article IX and in these By-laws generally, the term “Entire Board of Directors” means the total number of directors which the Corporation would have if there were no vacancies.

 

 

 

 

 

Exhibit 31.1

 

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

 

I, Gary Stern, certify that:

 

1.

I have reviewed this quarterly report on Form 10-Q of Asta Funding, Inc.;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:

 

 

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

 

 

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

 

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

 

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

 

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: August 9, 2016 

   
 

/s/ Gary Stern

 

Gary Stern

Chairman, President and Chief Executive Officer

 

(Principal Executive Officer)

 

Exhibit 31.2

 

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

 

I, Bruce R. Foster, certify that:

 

1.

I have reviewed this quarterly report on Form 10-Q of Asta Funding, Inc.;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:

 

 

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

 

 

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

 

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

 

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

 

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: August 9, 2016 

   
 

/s/ Bruce R. Foster

 

Bruce R. Foster

 

Chief Financial Officer and Chief Accounting Officer

 

Exhibit 32.1

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of Asta Funding, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2016, filed with the Securities and Exchange Commission (the “Report”), I, Gary Stern, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

 

 

(1)

The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

 

 

(2)

The information contained in the Report fairly presents, in all material respects, the consolidated financial condition of the Company as of the dates presented and the consolidated result of operations of the Company for the periods presented.

 

Date: August 9, 2016  

   
 

/s/ Gary Stern

 

Gary Stern

 

Chairman, President and Chief Executive Officer (Principal Executive Officer)

 

Exhibit 32.2

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of Asta Funding, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2016, filed with the Securities and Exchange Commission (the “Report”), I, Bruce R. Foster, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

 

 

(1)

The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

 

 

(2)

The information contained in the Report fairly presents, in all material respects, the consolidated financial condition of the Company as of the dates presented and the consolidated result of operations of the Company for the periods presented.

 

Dated: August 9, 2016

 

   
 

/s/ Bruce R. Foster

 

Bruce R. Foster

 

Chief Financial Officer and Chief Accounting Officer