Item
2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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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.
Financial Information About Operating Segments
The Company operates through strategic business units that are aggregated into four reportable segments consisting of the following:
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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.
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•
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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.
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•
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Structured settlements
– CBC purchases periodic structured settlements and annuity policies from individuals in exchange for a lump sum payment.
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•
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GAR Disability Advocates
is a social security disability advocacy group, which obtains and represents individuals in their claims for social security disability and supplemental security income benefits from the Social Security Administration.
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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:
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Three Month Periods Ended
June 30,
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|
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Nine Month Periods Ended
June 30,
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|
|
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2016
|
|
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2015
|
|
|
2016
|
|
|
2015
|
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Finance income (consumer receivables)
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24.5
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%
|
|
|
51.4
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%
|
|
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35.6
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%
|
|
|
51.9
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%
|
Personal injury claims
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|
|
52.3
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%
|
|
|
17.2
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%
|
|
|
35.8
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%
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|
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20.1
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%
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Structured settlements
|
|
|
17.0
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%
|
|
|
25.9
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%
|
|
|
22.0
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%
|
|
|
25.0
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%
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GAR Disability Advocates
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|
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6.2
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%
|
|
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5.5
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%
|
|
|
6.6
|
%
|
|
|
3.0
|
%
|
Total revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
The Company has no reportable segment information from international operations.
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)
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Consumer
Receivables
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|
|
Personal
Injury
Claims
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|
|
Structured
Settlements
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|
|
GAR
Disability
Advocates
|
|
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Corporate
|
|
|
Total
Company
|
|
Three Months Ended June 30,
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
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.
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.
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.
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
Month
s
Ended
June 30
, 2016
|
|
|
Nine
Month
s
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.
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.
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 Month
s
Ended
June 30
, 2016
|
|
|
Three Month
s
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
|
)
|
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.
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%.
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.
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.