Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

For the quarterly period ended June 30, 2020

OR

For the transition period from                    to                    

Commission file number: 001-35637

ASTA FUNDING, INC.

(Exact name of registrant as specified in its charter)

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    

Yes   ☒     No   ☐

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

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

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

As of August 13, 2020, the registrant had 6,567,765 common shares outstanding.

ASTA FUNDING, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

Note 1—Business and Basis of Presentation   

Business  

The Company, Asta Funding, Inc., a Delaware Corporation (“we” or “us”), together with its wholly owned significant operating subsidiaries Palisades Collection, LLC, Palisades Acquisition XVI, LLC (“Palisades XVI”), Palisades Acquisition XIX, LLC (“Palisades XIX”), Palisades Acquisition XXIII, LLC (“Palisades XXIII”), VATIV Recovery Solutions LLC (“VATIV”), ASFI Pegasus Holdings, LLC (“APH”), Fund Pegasus, LLC (“Fund Pegasus”), GAR Disability Advocates, LLC (“GAR Disability Advocates”), Five Star Veterans Disability, LLC (“Five Star”), EMIRIC, LLC (“EMIRIC”), Simia Capital, LLC (“Simia”), Sylvave, LLC (“Sylvave”) (formerly known as Pegasus Funding, LLC (“Pegasus”)), Arthur Funding LLC (“Arthur Funding”) (formerly known as Practical Funding, LLC (“Practical Funding”)), and other subsidiaries, which are not all wholly owned, is engaged in several business segments in the financial services industry including funding of personal injury claims, through the Company's wholly owned subsidiaries Sylvave, Simia and Arthur Funding, social security disability advocacy through the Company's wholly owned subsidiaries GAR Disability Advocates and Five Star and the business of purchasing, managing for its own account and servicing distressed consumer receivables, including charged off receivables, and semi-performing receivables.

We operate principally in the United States in three reportable business segments: consumer receivables, social security disability advocacy and personal injury claims. 

Consumer receivables 

This segment is engaged in the business of purchasing, managing for its own account and servicing distressed charged off consumer receivables, including charged off receivables, and semi-performing receivables. 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 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 

This segment is comprised of purchased interests in personal injury claims from claimants who are a party to a personal injury claim. The Company advances to each claimant funds on a non-recourse basis at an agreed upon fee, in anticipation of a future settlement. The Company capitalizes employee compensation and benefits expenses as direct costs related to the origination of personal injury advances. Claims purchased consist of the right to receive, from such claimant, part of the proceeds or recoveries which such claimant receives by reason of a settlement, judgment or award with respect to such claimant’s claim. The Company historically funded personal injury claims in Simia and Sylvave. The Company formed a new wholly owned subsidiary, Practical Funding on March 16, 2018 to continue in the personal injury claims funding business. On April 8, 2019, Practical Funding changed its name to Arthur Funding, LLC. Arthur Funding began funding advances on personal injury claims in May 2019 (see Note 6).

Simia commenced operations in January 2017, and conducts its business solely in the United States. Simia obtained its business from external brokers and internal sales professionals soliciting attorneys and law firms who represent claimants who have personal injury claims. Business was also obtained from its website and through attorneys. The personal injury claims segment includes the consolidated results of operations of Sylvave, Simia and Arthur Funding. Simia and Sylvave are not funding any new advances, but continue to collect on outstanding personal claim advances in the ordinary course.

Social security disability advocacy  

This segment consists of advocacy groups representing individuals throughout the United States in their claims for social security disability and supplemental social security income benefits from the Social Security Administration and Department of Veterans Affairs. It relies upon Search Engine Optimization (“SEO”) to bring awareness to its intended market. 

Basis of Presentation  

The condensed consolidated balance sheet as of June 30, 2020, the condensed consolidated statements of operations for the three and nine months ended June 30, 2020 and 2019, the condensed consolidated statements of comprehensive income (loss) for the three and nine months ended June 30, 2020 and 2019, the condensed consolidated statements of stockholders’ equity as of and for the three and nine months ended June 30, 2020 and 2019, and the condensed consolidated statements of cash flows for the nine months ended June 30, 2020 and 2019, are unaudited. The September 30, 2019 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, 2019. In the opinion of management, all adjustments necessary to present fairly our financial position at June 30, 2020, the results of operations for the three and nine months ended June 30, 2020 and 2019, the condensed consolidated statement of comprehensive income (loss) for the three and nine months ended June 30, 2020 and 2019, the condensed consolidated statement of stockholders' equity for the three and nine months ended June 30, 2020 and 2019 and condensed consolidated cash flows for the nine months ended June 30, 2020 and 2019 have been made. The results of operations for the three and nine months ended June 30, 2020 and 2019 are not necessarily indicative of the operating results for any other interim period or the full fiscal year.

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1—Business and Basis of Presentation (Continued)

The accompanying unaudited condensed 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 our 2019 Form 10-K filed with the Securities and Exchange Commission.

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

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

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

Going Private Transaction

On April 8, 2020 the Company announced that it has entered into a definitive merger agreement (the “Merger Agreement”) under which the Stern Group, comprised of Gary Stern, Chairman, President and Chief Executive Officer of the Company, Ricky Stern and certain related parties, will acquire all of the issued and outstanding shares of common stock of the Company through the merger of the Company with a wholly-owned subsidiary of Asta Finance Acquisition Inc. (“Parent”), with the Company surviving as a wholly-owned subsidiary of Parent (the “Merger”). Each share of outstanding common stock under the original Merger Agreement would have been purchased for $11.47 in cash.

The Merger was unanimously approved by the board of directors of Asta (the “Board”), acting on the unanimous recommendation of a special committee of independent and disinterested directors (the “Special Committee”) that was granted full authority to conduct a comprehensive strategic review and evaluate, and if warranted, negotiate an acquisition proposal. Subsequent to the approval of the Merger by the Board, on May 22, 2020, RBF Capital, LLC notified the Company’s Board of Directors, of its proposal to acquire all of the outstanding shares of the Company not currently held by RBF Capital, LLC for a price of $13.00 per  

share in cash (the “RBF Capital Proposal”), representing a 13% premium to the Stern Investor Group’s proposed purchase price of $11.47 per share. The Special Committee evaluated the RBF Capital Proposal.

On June 25, 2020, the Company announced that it had entered into an amendment (the “Amendment”) to the Merger Agreement.

Pursuant to the amended Merger Agreement each share of outstanding common stock will be purchased for $13.10 in cash. The new purchase price represents an increase of $1.63 per share over the original purchase price and a premium of approximately 18% to the Company’s closing stock price on June 24, 2020, the last trading day prior to the execution of the Amendment.

The Merger Agreement and Amendment were approved by the board of directors of Asta (the “Board”) (without the participation of Gary Stern), acting on the unanimous recommendation of a special committee of independent and disinterested directors (the “Special Committee”) that was granted full authority to conduct a comprehensive strategic review and evaluate, and if warranted, negotiate an acquisition proposal. The Merger is subject to the satisfaction of customary closing conditions as well as the approval by the Company’s stockholders other than the Stern Group.

Simultaneously with the signing of the amended Merger Agreement, the Company also entered into a Settlement and Voting agreement with RBF Capital, LLC, a stockholder of the Company. Pursuant to the terms of the Settlement and Voting Agreement, RBF Capital, LLC has, among other things, agreed to vote the shares of Common Stock of the Company beneficially owned by RBF Capital, LLC, or that may become beneficially owned by it during the term of the Settlement and Voting Agreement, in favor of adopting the amended Merger Agreement, dated June 25, 2020, and any other matters necessary for consummation of the Merger (as defined in the Settlement and Voting Agreement) and the other transactions contemplated by the amended Merger Agreement.

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1—Business and Basis of Presentation (Continued) 

The Merger will be financed by a committed loan facility provided by Bank Leumi USA.

The Merger is expected to close in the Company’s fourth fiscal quarter of 2020 and is subject to the satisfaction of customary closing conditions as well as the approval by the Company’s stockholders other than the Stern Group. The Board recommends that Company’s stockholders vote to adopt and approve the Merger Agreement. Upon closing, the Company will become a privately held company and as such, the Company’s shares of common stock will no longer be listed or traded on the Nasdaq Global Select Market.

During the three and nine months ended June 30, 2020, the Company incurred fees and expenses in connection with the Merger of $668,000 and $1,453,000, respectively, included in general and administrative expenses on the accompanying consolidated statement of operations.

Risks and Uncertainties

Current economic uncertainty brought about as a result of the coronavirus 2019 (“COVID-19”) global pandemic may adversely impact the results of operations and liquidity of the Company overall and its business units to varying degrees over the near and longer term, particularly if the economic effects of the pandemic worsen or persist for an extended period of time.

A contributing factor to this expected near-term impact is that the COVID-19 pandemic has significantly impacted the ability of many consumers to pay their charged-off consumer receivable balances. In addition, the world-wide effect of this pandemic has been to drastically reduce employment both in the U.S. and abroad, and because employment is the greatest predictor of a consumer debtor to fulfill his or her obligations, diminished cash flows are probable in this segment. Our Personal Injury claims business relies on the adjudication of personal injury claims for which we purchase an interest in 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. Most courthouses have temporarily closed and lawsuits are not being adjudicated. It is unclear as to when there will be a full reopening of the court system, and, as such, many cases will be held in abeyance as part of an already long-standing backlog.

Through June 30, 2020, our consumer receivables segment has experienced a downturn in cash collections attributable to consumer delays in making payments on their outstanding debts. Management attributes these delays to circumstances caused by COVID-19. Through June 30, 2020, our Personal Injury segment has not experienced noticeable delays in the adjudication of claims despite the fact that most courthouses have been temporarily closed. However, we have experienced customer payment delays due to COVID-19 impacts in our Peru operations.

While it is premature to quantify the impact of the evolving effects of COVID-19 and the effectiveness of measures taken by global governments to mitigate the pandemic and its economic impact, we expect COVID-19 will negatively impact the Company’s results of operations and its cash flows across both the consumer receivable and personal injury claim segments. The nature, extent and duration of the impact to the Company’s businesses will depend on implications to the general economic and financial markets, changes in economic variables, such as the availability of consumer credit, the ability of consumers to pay amounts owed to us; the effect on the rate of unemployment; the number and size of personal bankruptcy filings; the levels of consumer confidence and consumer debt; investor sentiment.; and any closures to our foreign offices. Additionally, government actions in response to the pandemic may hinder our collection activities or result in increased expenses.

Management is actively monitoring the impact of the global situation on our financial condition, liquidity, operations, and workforce. Given the daily evolution of the COVID-19 pandemic and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 pandemic on its results of operations, financial condition, or liquidity for fiscal year 2020.

Concentration of Credit Risk – Cash and cash equivalents

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 two banks at June 30, 2020 that each exceeded the balance insured by the FDIC by approximately $0.6 million. Additionally, three foreign banks with an aggregate $1.7 million in cash balances are not FDIC insured. The Company does not believe it is exposed to any significant credit risk due to concentration of cash. 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) 

Note 1—Business and Basis of Presentation (Continued)

Investments in Equity Securities  

All equity investments in nonconsolidated entities are measured at fair value with changes recognized in earnings, except for those accounted for using the equity method of accounting. Changes in the fair value of equity securities are included in other income, net on the condensed consolidated statement of operations.

Available-for-Sale Debt Securities    

Debt investments that the Company intends to hold for an indefinite period of time, but not necessarily to maturity, are classified as available-for-sale debt securities and are carried at fair value. Unrealized gains and losses on available-for-sale debt securities are determined using the specific-identification method. Unrealized gains/losses are recorded in other comprehensive income (loss).

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

 Personal Injury Claim Advances and Impairments

The Company accounts for its investments in personal injury claims at an agreed upon fee in anticipation of a future settlement. Purchased personal injury claim advances consists of the right to receive from a 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 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 fee, and, if applicable, adjusted for any changes due to a settled amount and fees charged to the claimant.

Management assesses the quality of the personal injury claims portfolio through an analysis of the underlying personal injury fundings on a case by case basis. Cases are reviewed through periodic updates with attorneys handling the cases, as well as with third party research tools which monitor public filings, such as motions or judgments rendered on specific cases. The Company specifically reserves for those fundings where the underlying cases are identified as uncollectible, due to anticipated non-favorable verdicts and/or settlements at levels where recovery of the advance outstanding is unlikely. For cases that have not exhibited any specific negative collection indicators, the Company establishes reserves based on the historical collections of the fee income. Fee income on advances is reserved for on all cases where a specific reserve is established on the initially funded amount. In addition, management also monitors its historical collection of fee income and establishes reserves on fee income consistent with the historically experienced collection rates. Management regularly analyzes and updates the historical collection of its initially funded cases as well as its fee income.

  Income Recognition - Consumer Receivables

The Company accounts for certain of its investments in consumer receivables using the guidance of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 310, 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, 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).

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) 

Note 1—Business and Basis of Presentation (Continued)

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

 Impairments - Consumer Receivables

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. The Company believes it has significant experience in acquiring certain distressed consumer receivable portfolios at a significant discount to the amount actually owed by underlying customers. The Company invests in these portfolios only after both qualitative and quantitative analyses of the underlying receivables are performed and a calculated purchase price is paid so that it believes its estimated cash flow offers an adequate return on acquisition costs after servicing expenses. Additionally, when considering larger portfolio purchases of accounts, or portfolios from issuers with whom the Company has limited experience, it has the added benefit of soliciting its third party collection agencies and attorneys for their input on liquidation rates and, at times, incorporates such input into the estimates it uses for its expected cash flows, and the Company’s ability to recover their cost basis.

   Income Recognition - Social Security Disability Advocacy

In accordance with FASB ASC 606, Revenue from Contracts with Customers, the Company recognizes disability fee income for GAR Disability Advocates and Five Star when disability claimant’s cases close, when cash is received or when the Company receives a notice of award from the Social Security Administration (“SSA”) or the Department of Veterans Affairs that stipulates the amount of fee approved by the SSA to be paid to the Company. The Company establishes a reserve for the differentials in amounts awarded by the SSA compared to the actual amounts received by the Company. Fees paid to the Company are withheld by the SSA against the claimant's disability claim award, and are remitted directly to the Company from the SSA.

 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 and asset searches. The Company utilizes third party collection agencies and attorney networks.

   Income taxes

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

 Fair Value Hierarchy

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.

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) 

Note 1—Business and Basis of Presentation (Continued)

The Company records its available-for-sale debt securities and investments in equity securities at estimated fair value on a recurring basis. The accompanying condensed consolidated financial statements include estimated fair value information regarding its available-for-sale debt securities and investments in equity securities as of March 31, 2020, 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 measurementdate.

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

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

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.

Recent Accounting Pronouncements

Adopted During the Nine Months EndedJune 30, 2020 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”) which requires lessees to recognize right-of-use assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. For a lease with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize a right-of-use asset and lease liability. Additionally, when measuring assets and liabilities arising from a lease, optional payments should be included only if the lessee is reasonably certain to exercise an option to extend the lease, exercise a purchase option or not exercise an option to terminate the lease. In January 2018, the FASB issued ASU 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842 (“ASU 2018-01”). ASU 2018-01 was issued to address concerns about the cost and complexity of complying with the transition provisions of ASU 2016-02. Additionally, in July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements, which provides an alternative transition method that permits an entity to use the effective date of ASU 2016-02 as the date of initial application through the recognition of a cumulative effect adjustment to the opening balance of retained earnings upon adoption. The standard became effective in for fiscal years beginning after December 15, 2018 and interim periods within those years, and early adoption is permitted (see Note 8 – Right of Use Assets).

The Company adopted the lease accounting standard using the modified retrospective transition option on adoption on October 1, 2019, which had an immaterial impact to the Company’s condensed consolidated balance sheet. Upon adoption, the Company recorded additional lease liabilities of approximately $636,000 attributable to the Company’s operating leases based on the present value of the remaining minimum lease payments with an increase to right-of-use assets of approximately $636,000. The Company used 3.5% as its incremental borrowing rate to calculate the net present value of its leases at October 1, 2019, based on the Company's estimated borrowing rate for a collateralized loan. The Company had no debt outstanding as of October 1, 2019.

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income (loss) to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act enacted on December 22, 2017, and requires certain disclosures about stranded tax effects. ASU 2018-02 was effective for the Company's fiscal year beginning October 1, 2019, with early adoption permitted, and was applied in the period of adoption in which the effect of the change in the U.S. federal corporate income tax rate in the Act was recognized. The adoption of this accounting update did not have a material impact on the Company’s condensed consolidated financial statements. 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1—Business and Basis of Presentation (Continued)

Recent Accounting Pronouncements Not Yet Adopted 

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, 2022. Upon adoption, the Company will accelerate the recording of its credit losses and is continuing to assess the impact on its consolidated financial statements.

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

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements on fair value measurements. The ASU removes the requirement to disclose: the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 3 fair value measurements. The ASU requires disclosure of changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for the Company beginning in fiscal 2022. The Company is evaluating the impact of the adoption of ASU 2019-12 on its financial statements, but does not expect such adoption to have a material impact.

Note 2—Investments in Debt and Equity Securities

Investments in Equity Securities  

Investments in equity securities at June 30, 2020 and September 30, 2019, consist of mutual funds valued at $26.6 million and $8.1 million, respectively.

Net gains and losses recognized on investments in equity securities for the three and nine months ended June 30, 2020 and 2019 are as follows:

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)  

Note 2—Investments in Debt and Equity Securities(Continued)

Available for Sale Debt Securities

Available for sale debt securities at June 30, 2020 and September 30, 2019, consist of the following:

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

Note 3—Consumer Receivables Acquired for Liquidation  

Accounts acquired for liquidation are stated at cost and consist primarily of defaulted consumer loans of individuals primarily, throughout the United States and South America. 

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

During the three and nine months ended June 30, 2020 and 2019 the Company did not purchase any new portfolios. 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 3—Consumer Receivables Acquired for Liquidation (Continued)

As of June 30, 2020, the Company held consumer receivables acquired for liquidation from Peru and Colombia of $0.7 million and $0.1 million, respectively. The total amount of internationally held consumer receivables acquired for liquidation was $0.8 million, or 79.5% of the $1.0 million in total consumer receivables held at June 30, 2020. Of the total consumer receivables four individual portfolios comprise 26.5%, 20.5%, 14.4% and 8.0% of the overall asset balance at June 30, 2020. 

As of September 30, 2019, the Company held consumer receivables acquired for liquidation from Peru and Colombia of $1.1 million and $0.3 million, respectively. The total amount of foreign consumer receivables acquired for liquidation was $1.4 million, or 83.8% of the total consumer receivables held of $1.7 million at September 30, 2019. Of the total consumer receivables held domestically and internationally 4 individual portfolios comprise 23.9%, 16.2%, 14.1% and 11.0% of the overall asset balance at September 30, 2019. 

As of June 30, 2020, and September 30, 2019, 0.8% and 1.5% of the Company's total assets were related to its international operations, respectively. For the three and nine months ended June 30, 2020 and 2019, 6.2% and 3.9%, respectively, and 6.0% and 4.6%, respectively, of the Company's total revenue were related to its international operation.

At June 30, 2020, approximately 30% of the Company’s portfolio face value was serviced by five collection organizations. At September 30, 2019, approximately 28% of the Company’s portfolio face value was serviced by five collection organizations. The Company has servicing agreements in place with these five collection organizations, as well as all of the Company’s other third-party collection agencies and attorneys that cover standard contingency fees and servicing of the accounts. While the 5 collection organizations represent only 30% and 28% as of June 30, 2020 and September 30, 2019, respectively, of the Company’s portfolio face value, it does represent approximately 87% and 86% of the Company’s portfolio face value at all third-party collection agencies and attorneys as of June 30, 2020 and September 30, 2019, 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 months ended June 30, 2019 and 2018, respectively. 

 Note 4—Equity Method Investments

Serlefin Peru is a joint venture in which the Company has a 49% ownership interest. The other 51% is owned by three individuals who share common ownership with Serlefin BPO&O Serlefin S.A. (“Serlefin”). Each owner maintains voting rights equivalent to their share ownership, and the 51% shareholders collectively manage the operations of the business. Based on the Company's ownership and voting rights, the Company lacks requisite control of Serlefin Peru, and therefore accounts for its investment in Serlefin Peru under the equity method of accounting. Under the joint venture agreement, the Company is entitled to a management fee from Serlefin Peru in connection with certain payments made to Serlefin Peru. In light of the novel coronavirus (“COVID-19”) pandemic, the Company agreed to delay the reimbursement of management fees due in April through December 2020.

Additionally, the Company and Serlefin jointly purchase international consumer debt portfolios under a purchase agreement. The Company and Serlefin purchase the portfolios on a pro-rata basis of 80% and 20%, respectively. The purchased portfolios are transferred to an administrative and payment trust, where the Company and Serlefin are trustees. Serlefin provides collection services to the trust, and receives a performance fee determined by the parties for each loan portfolio acquired. Serlefin received approximately $0.2 million and $0.2 million, and $0.9 million and $0.7 million in performance fees for the three and nine months ended June 30, 2020 and 2019, respectively. During June 2020, Serlefin Peru recapitalized $89,000 of loans due to the Company into equity in accordance with statutory requirements in Peru.  Accordingly, the Company has reclassed $89,000 from other assets into equity method investment in its consolidated balance sheet at June 30, 2020. Further reclassifications of loans, as well as additional capital investments may be required to fund the ongoing operations of Serlefin Peru in the future.

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)  

Note 4—Equity Method Investments(Continued)

The operating results for Serlefin Peru were negatively impacted by COVID-19 during the three and nine months ended June 30, 2020. The carrying value of the investment in Serlefin Peru was $307,000 and $280,000 as of June 30, 2020 and September 30, 2019, respectively. The cumulative net loss from our investment in Serlefin Peru from the date of the initial investment through June 30, 2020 was approximately $311,000, and was not significant to the Company's condensed consolidated statement of operations. The Company has determined that there is no impairment of this investment at June 30, 2020.

Note 5—Personal Injury Claims Funding 

Simia and Sylvave 

As of June 30, 2020, Simia had a personal injury claims portfolio of $0.6 million, and recognized revenue for the three and nine months then ended of $97,000 and $168,000, respectively.  As of September 30, 2019, Simia had a personal injury claims portfolio of $1.3 million, and recognized revenue of $31,000 and $60,000 for the three and nine months ended June 30, 2019, respectively. 

As of June 30, 2020, Sylvave had a personal injury claims portfolio of $2.4 million, and recognized revenue for the three and nine months then ended of $128,000 and $568,000, respectively.   As of September 30, 2019, Sylvave had a personal injury claims portfolio of $3.7 million. For the three and nine months ended June 30, 2019, Sylvave recognized revenue of $406,000 and $1,546,000, respectively.   

Simia and Sylvave remain in operation to continue to collect on their outstanding personal injury claim portfolios, but will not be funding any new advances to claimants.

Arthur Funding

Arthur Funding began funding advances on personal injury claims in May 2019. As of June 30, 2020, Arthur Funding had a personal injury claims portfolio of $0.6 million, and recognized revenue for the three and nine months then ended of $26,000 and $56,000, respectively. As of September 30, 2019, Arthur Funding had a personal injury claims portfolio of $0.2 million, and recognized revenue for the three and nine months ended June 30, 2019 of $2,000.

The following tables summarize the changes in the balance sheet account of personal injury claim portfolios held by Simia, Sylvave and Arthur Funding, net of reserves, for the following periods: 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)  

Note 5—Personal Injury Claims Funding (Continued)

 The Company recognized personal injury claims income of $0.3 million and $0.4 million for the three months ended June 30, 2020 and 2019, respectively, and $0.8 million and $1.6 million for the nine months ended June 30, 2020 and 2019, respectively. The personal injury claims income for the three and nine months ended June 30, 2020 excludes broker fees of $9,000 for both periods. The Company has recorded a reserve on principle fundings in personal injury claims of $1.0 million as of June 30, 2020 and $1.2 million as of September 30, 2019. During the three and nine months ended June 30, 2020, the Company realized personal injury bad debt recoveries of $201,000 and $260,000, respectively, as compared with $248,000 and $90,000 in the comparable periods of fiscal 2019, respectively.

Note 6—Non-Recourse Debt

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

As of June 30, 2020, and September 30, 2019, the Company recorded a liability to BMO of approximately $75,000 and $22,000, respectively, which has been recorded in accounts payable and accrued expenses on the Company’s consolidated balance sheet. The funds were subsequently remitted to BMO on July 10, 2020 and October 10, 2019, respectively. The liability to BMO is recorded when actual collections are received.     

Note 7 —Right of Use Assets and Liabilities

Effective October 1, 2019, the Company adopted ASU 2016-02, and all subsequent ASUs that modified Topic 842. For the Company, Topic 842 affected the accounting treatment for operating lease agreements in which the Company is the lessee by recognizing lease assets and liabilities on the balance sheet. The Company leases the premises for two New Jersey office facilities under operating lease agreements expiring in various years through 2023. The Company is responsible to pay all insurance, utilities, maintenance and repairs on the office spaces. All of the Company’s leases are classified as operating leases.

On October 1, 2019, the Company recorded lease liabilities of approximately $636,000 attributable to the Company’s operating leases based on the present value of the remaining minimum lease payments along with right-of-use assets of approximately $636,000. The Company used 3.5% as its incremental borrowing rate to calculate the net present value of its leases on October 1, 2019. As of June 30, 2020, the Company’s operating lease right-of-use assets and operating lease liabilities were approximately $362,000 and $370,000, respectively.

The Company leases office space in Englewood Cliffs, New Jersey and subleases office space in Fort Lee, New Jersey under agreements classified as operating leases.

The lease agreement in Englewood Cliffs, New Jersey expires on August 31, 2020 and does not include any renewal option. The lease agreement provides for an initial monthly base amount plus annual escalations through the term of the lease.

The sublease agreement in Fort Lee, New Jersey expires on March 31, 2023 and does not include any renewal option. The lease agreement provides for an initial monthly base amount plus certain additional amounts pursuant to the leasing arrangement between the landlord and sublessor.

In adopting the new accounting guidance, the Company used the following practical expedients for transitional relief as provided for in ASU 2018-01:

●An entity need not reassess whether any expired or existing contracts are or contain leases.

●An entity need not reassess the lease classification for any expired or existing leases.

●An entity need not reassess initial direct costs for any existing leases.

●An entity may elect to apply hindsight to leases that existed during the period from the beginning of the earliest period presented in the financial statements until the effective date.

The Company also elected not to include short-term leases (i.e., leases with initial terms of twelve months or less) or insignificant equipment leases on the condensed consolidated balance sheet as provided for in the accounting guidance.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)    

Note 7 —Right of Use Assets and Liabilities (Continued)

The following provides additional information about the Company’s operating leases:

As of June 30, 2020, the future minimum payments for the fiscal years are as follows:

The Company leases its facilities in (i) Englewood Cliffs, New Jersey, and (ii) Fort Lee, New Jersey. Rent expense for the three and nine months ended June 30, 2020 and 2019 was $0.1 million and $0.1 million and $0.3 million and $0.2 million, respectively.

On July 8, 2020, the Company entered into an agreement with its landlord to amend its lease for its corporate offices by terminating its tenancy for approximately 1,888 square feet of space as per the lease agreement dated October 7, 2015. Accordingly, rent due for this space is waived by the landlord and the Company waived any and all tenancy rights for this space. The Company’s remaining monthly rent for its corporate office is $14,000 or 82% of the current monthly rent. This change shall be effective as of August 1, 2020 and all other terms and conditions of the lease remain unchanged and in full effect.

 Note 8 — Note Payable

On April 10, 2020, the Company applied for a $1.1 million Paycheck Protection Program (“PPP”) loan under the CARES Act. On May 11, 2020, the Company signed a PPP loan note with an interest rate of 1% and a May 11, 2022 maturity date, though PPP loans may be forgiven if certain conditions are met. The PPP loan was funded on May 20, 2020. During the quarter ended June 30, 2020, the Company used the proceeds of the PPP loan for payroll, lease payments and utility payments. The Company has not applied for PPP loan forgiveness. 

 Note 9 — Settlements

In August 2014, the Company filed a lawsuit in Delaware state court against a third-party servicer arising from the third-party servicer’s failure to pay the Company certain amounts that are due the Company under a servicing agreement.  The third-party servicer filed a counterclaim in the Delaware action alleging that the Company owes certain amounts to the third-party servicer for court costs pursuant to an alleged arrangement between the companies.  On or about July 12, 2018, the parties agreed to settle the action pursuant to a settlement agreement and release, which provides for, among other things, the payment by the third-party servicer of $4.4 million to the Company pursuant to an agreed upon schedule with a lump sum payment to be made at the third anniversary of the agreement.  

These fee-based settlements are required to total $2.4 million and $4.4 million by the second and third anniversaries, respectively. To the extent that these fee-based settlement fees are less than these amounts, the servicer is required to make lump sum true-up payments.

The Company determined the fair value of this settlement using (i) historical collection history to estimate the fee based settlement fees that are expected to be received each month from the servicer; (ii) the contractual true-up dates, discussed above, in order to estimate the anticipated true-up payments that will be received from the servicer on the second and third anniversaries; and (iii) an imputed interest rate of 8.5%.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)   

Note 9 — Settlements (Continued)

As of June 30, 2020, and September 30, 2019, the Company has a settlement receivable due from this third-party servicer of $0.5 million and $1.6 million, respectively. During the nine months ended June 30, 2020, the Company received $1.1 million in payments from this third-party servicer. For the three and nine months ended June 30, 2020 and 2019, the Company recorded interest income of $29,000 and $53,000 and $101,000 and $180,000, respectively, which is included in other income on the Company's consolidated statements of operations.  

On January 22, 2018, DLCA, LLC ("DLCA"), a Delaware limited liability company and a wholly owned subsidiary of the Company, filed a complaint against Balance Point Divorce Funding, LLC. ("Balance Point") and Stacey Napp ("Napp") in the United States District Court of New Jersey, asserting various claims including breach of contract, conversion, unjust enrichment and fraud associated with a loan made to Balance Point and Napp in May 2012.

On May 22, 2019, Napp and DLCA entered into a Settlement Agreement that settled the action as well as all other claims for monies and/or other obligations owed as and between the parties.

Napp agreed to pay the sum of $1.4 million (the "Settlement Amount"), the payment terms of which are between May 21, 2019 and January 12, 2022.

The Company has previously reviewed the financial condition of both Balance Point and Napp, and has concluded that neither entity currently has assets sufficient to honor the obligations set forth in the Settlement Agreement. Therefore, due to the uncertainty of collecting the Settlement Amount from either Balance Point or Napp, the Company will realize the gain on this settlement, as the Company receives the cash proceeds. Napp missed the $25,000 payment due in December 2019 and made a $30,000 payment in February 2020. Napp missed the $25,000 payment due on May 31, 2020 and indicated to make up that payment by July 31, 2020, along with the regularly scheduled $25,000 payment that was due on July 31, 2020 under the Settlement Agreement. Napp missed the double payment of $50,000 due on July 31, 2020 and promised to make the double payment of $50,000 by September 30, 2020. The Company has recognized a gain on settlement of $0 and $30,000 for the three and nine months ended June 30, 2020 in its condensed consolidated statements of operations. The Company had recognized a gain on settlement of $25,000 for the three and nine months ended June 30, 2019 in its consolidated statements of operations.

On June 30, 2017, GAR Disability Advocates, filed a complaint against a former employee, Pamela Hofer ("Hofer"), and others in the United States Court for the District of New Jersey (the "Action"), asserting claims of conversion and tortious interference with existing business relationships. On May 22, 2018, the Action was transferred to the Eastern District of Kentucky.

On May 7, 2019, GAR agreed to dismiss and settle the Action for a payment from Hofer in the amount of $47,500, payable to GAR no later than May 8, 2019.

On May 8, 2019, GAR received the payment from Hofer, and delivered to Hofer an executed Stipulation of Dismissal of the Action. The Company recognized a gain on settlement of $47,500 for the three and nine months ended June 30, 2019 in its consolidated statements of operations.

On May 15, 2019, the Company received $0.2 million from the bankruptcy trustee in New Jersey, associated with the bankruptcy filing of Axiant, LLC, and a previous third-party servicer. The Company recorded a gain on settlement of $0.2 million for the three and nine months ended June 30, 2019 in its consolidated statements of operations. 

 Note 10 — Interest, Dividend and Other Income

The following tables summarize other income for the three and nine months ended June 30, 2020 and 2019:

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 11—Commitments and Contingencies

Legal Matters

On November 7, 2019, a shareholder of the Company filed a verified shareholder derivative complaint in the Court of Chancery of the State of Delaware against certain current and former officers and directors of the Company, and named the Company as a nominal defendant, alleging that certain actions taken by management constituted a violation of fiduciary duty to the Company. The Company believes the lawsuit is without merit and intends to vigorously defend the matter. On or about January 8, 2020, a motion to dismiss the complaint was filed on behalf of all individual defendants and the Company as nominal defendant. In light of the execution of the merger agreement, the parties to the lawsuit entered into a joint stipulation and submitted a proposed order to stay proceedings in the lawsuit until the earlier of: (i) an announcement by the Company of the completion or cancellation of the merger, or (ii) June 30, 2020. On April 14, 2020, the court granted the parties’ stipulation and proposed order. On July 8, 2020, the court granted the parties' stipulation and proposed order to extend the stay until the earlier of: (i) an announcement by the Company of the completion or cancellation of the merger, or (ii) September 30, 2020. 

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. The Company is not involved in any other material litigation in which we are a defendant.

  Commitments 

On June 9, 2020, a newly formed subsidiary of the Company entered into an agreement with a third party pursuant to which it will provide funding in connection with certain consumer lease transactions. Under the agreement, when a consumer is approved for financing at a participating merchant, the Company purchases the merchandise and then leases it to the consumer pursuant to a consumer lease agreement. The Company agreed to fund a maximum of $300,000 in total transactions, over a three-month period beginning with the date of the third party agreement. The Company did not make any funding payments during the month of June 2020.

Note 12—Income Taxes  

At the end of each interim reporting period, the Company estimates its effective income tax rate expected to be applicable for the full year. The estimate is used in providing for income taxes on a year-to-date basis and may change in subsequent interim periods. The Company’s effective tax rate from operations for the three and nine months ended June 30, 2020 was 30.4% and 34.6%, respectively, compared to 31.0% and 28.6%, respectively, for the same periods in the prior year.

The Company’s effective rate for the three months ended June 30, 2020 differed from the U.S. federal statutory rate of 21%, primarily due to income from foreign operations, and state income taxes. The Company’s effective tax rate from operations for the nine months ended June 30, 2020 differed from the U.S. federal statutory rate of 21%, primarily due to income from foreign operations resulting in income tax expense of $144,000, state income taxes and other differences discrete to the quarter.

The Company files income tax returns in the U.S federal jurisdiction, various state jurisdictions, and various foreign countries. The Company does not have any uncertain tax positions.

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 12—Income Taxes (Continued)

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was signed into law. The CARES Act contains several new or changed income tax provisions, including but not limited to the following: increased limitation threshold for determining deductible interest expense, class life changes to qualified improvements (in general, from 39 years to 15 years), and the ability to carry back net operating losses incurred from tax years 2018 through 2020 up to the five preceding tax years.

The income tax provisions of the CARES Act had limited applicability to the Company as of June 30, 2020, and therefore, the enactment of the CARES Act did not have a material impact on the Company’s condensed consolidated financial statements as of, and for the three and nine months ended, June 30, 2020. We will continue to evaluate the impact of tax legislation and will update our disclosures as additional information and interpretive guidance becomes available.   

Note 13—Net Income (Loss) per Share  

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

The following table presents the computation of basic and diluted per share data for the three and nine months ended June 30, 2020 and 2019:

 At June 30, 2020 there were no stock options outstanding that were anti-dilutive. At June 30, 2019 there were 725,567 stock options outstanding that could have an effect on the future computation of dilution per common share, had their effect not been anti-dilutive. 

Note 14—Stock Option Plans

2012 Stock Option and Performance Award Plan

On February 7, 2012, the Company adopted the 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 540,800 shares, awarded 245,625 shares of restricted stock, and has cancelled 118,668 options, leaving 1,332,243 shares available as of June 30, 2020. At June 30, 2020, 49 of the Company’s employees were able to participate in the 2012 Plan. 

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 14—Stock Option Plans (Continued)

Equity Compensation Plan

On December 1, 2005, the Company adopted the 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 Company adopted the 2002 Stock Option Plan (the “2002 Plan”), which 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 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 requisite vesting or service period. Compensation expense for restricted stock is based upon the market price of the shares underlying the awards on the grant date.

The following table summarizes stock option transactions under the 2012 Plan, the Equity Compensation Plan and the 2002 Plan (collectively the “Plans”):

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 14—Stock Option Plans (Continued)

The following table summarizes information about the Plans outstanding options as of June 30, 2020:

The Company did not recognize any compensation expense related to the stock option grants during the three and nine months ended June 30, 2020. The Company recognized $0 and $7,000 of compensation expense related to the stock optionsvested during the three and nine months ended June 30, 2019, respectively. As of June 30, 2020, there was no unrecognized compensation cost related to stock option awards.

The intrinsic value of the outstanding and exercisable options as of June 30, 2020 was approximately $3,162,000. The weighted average remaining contractual life of exercisable options is 2.2 years. There were no options exercised during the three and nine months ended June 30, 2020 and 2019. The fair value of the stock options that vested during the three and nine months ended March 31, 2020 was approximately $0 for both periods. The fair value of the stock options that vested during the three and nine months ended June 30, 2019 was approximately $0 and $126,000, respectively. There were no options granted during the three and nine months ended June 30, 2020 and 2019.

The Company did not grant any restricted stock awards during the three and nine months ended June 30, 2020 and 2019. As of June 30, 2020, and September 30, 2019, there was no unrecognized compensation cost related to restricted stock awards.

Note 15—Stockholders’ Equity

The Company has 5,000,000 authorized preferred shares with a par value of $0.01 per share.  The Board of Directors are authorized to divide the authorized shares of Preferred Stock into one or more series, each of which shall be so designated as to distinguish the shares thereof from the shares of all other series and classes.

There were no shares of preferred stock issued and outstanding as of June 30, 2020 and 2019.

Dividends are declared at the discretion of the Board and depend upon the Company’s financial condition, operating results, capital requirements and other factors that the Board deems relevant. In addition, agreements with the Company’s lenders may, fromtime to time, restrict the ability to pay dividends. As of June 30, 2020, there were no such restrictions. No dividends were declared during the three and nine months ended June 30, 2020.   

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) 

Note 16—Fair Value of Financial Measurements and Disclosures  

Fair Value of Financial Instruments 

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

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 equivalents - The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. The carrying amount of cash equivalents approximates fair value.

Investments in equity securities - The investments in equity consist of mutual funds that are valued based on quoted prices in active markets. 

Available-for-sale debt securities - The available-for-sale debt securities consist of U.S. treasury bills that are valued based on quoted prices in active markets. The U.S. treasury bills have been classified as available for sale by the Company, as they are deemed to be short term investments, and can be liquidated as needed by the Company.   

The Company’s investments in equity securities and available-for-sale debt securities are classified as Level 1 and Level 2 financial instruments, respectively, based on the classifications described above. The Company did not have any transfers into (out of) Level 1 investments during the fiscal year ended September 30, 2019. The Company had no Level 3 available-for-sale investments during the three and nine months ended June 30, 2020.

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 monthly collections for consumer receivables over the estimated collection period, which is currently July of 2020 through March of 2029. These cash flows are then fair valued using a discount rate of 20%. See Note 4 for the rollforward of Level 3 activity.  

Note 17—Related Party

The Company utilizes the services of a consultant in conjunction with its international operations. The consultant is the spouse of one of the owners of Serlefin Peru. For the three and nine months ended June 30, 2020 and 2019, the Company paid this consultant $12,500 and $37,500, and $16,000 and $64,000, respectively. The Company does not have a formal agreement in place for these services, and the Company had no amounts due to this consultant as of June 30, 2020 and September 30, 2019.

On August 15, 2019, the Company and Lou Piccolo, a non-independent member of the Company’s Board of Directors, entered into a new one-year, $30,000 contract, pursuant to which Mr. Piccolo will provide consulting services. The compensation is to be paid quarterly. The Company recorded an expense of $7,500 and $23,650 for the three and nine months ended June 30, 2020. On July 18, 2020, the Companyand Mr. Piccolo entered into a six-month, $15,000 contract, pursuant to which Mr. Piccolo will continue toprovide consulting services to the Company. The compensation is to be paid quarterly in the amount of $7,500 on August 15, 2020 and November 30, 2020. There were no amounts due to Mr. Piccolo at June 30, 2020 and September 30, 2019.

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 18—Segment Reporting

The Company operates through strategic business units that are aggregated into three reportable segments: Consumer receivables, personal injury claims and social security disability advocacy. The three reportable segments consist of the following:

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

ASTA FUNDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 Note 18—Segment Reporting (Continued)

The following table shows results by reporting segment for the three and nine months ended June 30, 2020 and 2019:

 The Company does not have any intersegment revenue transactions.

Note 19–Subsequent Events

On August 13, 2020, the Company entered into a sale and assignment agreement with a third party (Assignor) and purchased the Assignor’s rights, title and interest in a certain litigation funding agreement in the amount of $675,000.