Note and Basis of Presentation

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three

March 16, 2018

April 8, 2019,

May 2019 (

6

January 2017,

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The condensed consolidated balance sheet as of the condensed consolidated statements of operations for the and months ended and the condensed consolidated statements of comprehensive income (loss) for the and months ended and the condensed consolidated statements of stockholders’ equity as of and for the and months ended and and the condensed consolidated statements of cash flows for the months ended and are unaudited. The financial information included in this report was derived from our audited financial statements included in our Annual Report on Form -K for the fiscal year ended In the opinion of management, all adjustments necessary to present fairly our financial position at the results of operations for the and months ended and the condensed consolidated statement of comprehensive income (loss) for the and months ended and the condensed consolidated statement of stockholders' equity for the and months ended and and condensed consolidated cash flows for the months ended and have been made. The results of operations for the and months ended and are necessarily indicative of the operating results for any other interim period or the full fiscal year.  

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Rule - of Regulation S- promulgated by the Securities and Exchange Commission and therefore do 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 Form -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.

 

On 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 will be purchased for 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. 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. Upon closing, the Company will become a privately held company and as such, the Company’s shares of common stock will longer be listed or traded on the Nasdaq Global Select Market.

 

Subsequent to the approval of the Merger by the Board, on RBF Capital, LLC notified the Company’s Board of Directors, of its proposal to acquire all of the outstanding shares of the Company currently held by RBF Capital, LLC for a price of per share in cash (the “RBF Capital Proposal”), representing a premium to the Stern Investor Group’s proposed purchase price of per share. RBF Capital, LLC intends to finance the proposed acquisition with internal cash. RBF Capital, LLC is prepared to immediately negotiate a confidentiality agreement, commence due diligence and begin negotiation of definitive documentation for a transaction. RBF Capital, LLC is open to a co-investment with the Stern Investor Group as part of their buyout proposal, if the members of the Stern family wish to retain their equity in the Company. The RBF Capital Proposal does purport to be complete and RBF Capital, LLC reserves the right to modify the RBF Capital Proposal in any way, to extend or discontinue discussions regarding the same, or to withdraw the RBF Capital Proposal at any time. RBF Capital, LLC directly or indirectly, take such additional steps from time to time as it deem appropriate to further the RBF Capital Proposal as be modified from time to time, including, without limitation, (a) engaging in discussions regarding the same with the Company, other shareholders advisors, and other relevant parties, and (b) entering into other agreements, arrangements and understanding as be appropriate in connection with its RBF Capital Proposal, as be modified from time to time. The Special Committee is evaluating the RBF Capital Proposal.

 

During the and months ended the Company incurred fees and expenses in connection with the Merger of and respectively, included in general and administrative expenses on the accompanying consolidated statement of operations.

 

 

Current economic uncertainty brought about as a result of the coronavirus (“COVID-) global pandemic 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- 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 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.

 

While it is premature to quantify the impact of the evolving effects of COVID- and the effectiveness of measures taken by global governments to mitigate the pandemic and its economic impact, we expect COVID- 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 housing market; the rate of unemployment; the number and size of personal bankruptcy filings;the effect on energy costs;  the levels of consumer confidence and consumer debt; investor sentiment; and any closures to our offices. Additionally, government actions in response to the pandemic hinder our collection activities or result in increased expenses. 

 

 

The Company considers all highly liquid investments with a maturity date of 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 a cash balance with bank at that exceeded the balance insured by the FDIC by approximately million. Additionally, foreign banks with an aggregate million balances are FDIC insured. The Company does believe it is exposed to any significant credit risk due to concentration of cash.

 

 

 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.

  

 

Debt investments that the Company intends to hold for an indefinite period of time, but 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 have the ability to hold a security for a period of time sufficient to allow for any anticipated recovery in fair value.  

 

 

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 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 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 on 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.

 

The Company accounts for certain of its investments in consumer receivables using the guidance of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC ). Under the guidance of ASC 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 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 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, income is recognized until the cost of the portfolio has been fully recovered. A pool can become fully amortized ( carrying balance on the balance sheet) while still generating cash collections. At such time, all cash collections are recognized as revenue when received.

 

 

 

The Company accounts for its impairments in accordance with ASC 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 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 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 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 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.

 

 

 

 In accordance with FASB ASC 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 are the contractual commissions earned by party collection agencies and attorneys, and direct costs associated with the collection effort, generally court costs and asset searches. The Company utilizes party collection agencies and attorney networks. 

 

   

 

Deferred federal and state taxes arise from (i) recognition of finance income collected for tax purposes, but 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.

 

FASB ASC Financial Instruments, (“ASC ), requires disclosure of fair value information about financial instruments, whether or recognized on the balance sheet, for which it is practicable to estimate that value. Because there are a limited number of market participants for certain of the Company’s assets and liabilities, fair value estimates are based upon judgments regarding credit risk, investor expectation of economic conditions, normal cost of administration and other risk characteristics, including interest rate and prepayment risk. These estimates are subjective in nature and involve uncertainties and matters of judgment, which significantly affect the estimates.

 

The 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 as required by FASB ASC Fair Value Measurements and Disclosures (“ASC ). ASC 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 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 - Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to assess at the measurement date.

 

Level - Observable inputs other than Level prices, such as quoted prices for similar assets or liabilities in active markets; quoted prices in markets that are 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 - Unobservable inputs that are supported by little or 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 requires disclosure of fair value information about financial instruments, whether or 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.

 

  

 

In the FASB issued ASU - Leases (Topic ) (“ASU -) which requires lessees to recognize right-of-use assets and lease liabilities on the balance sheet for all leases with terms longer than months. For a lease with a term of months or less, a lessee is permitted to make an accounting policy election by class of underlying asset 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 exercise an option to terminate the lease. In the FASB issued ASU - Leases (Topic ): Land Easement Practical Expedient for Transition to Topic (“ASU -). ASU - was issued to address concerns about the cost and complexity of complying with the transition provisions of ASU - Additionally, in the FASB issued ASU - “Leases (Topic ): Targeted Improvements, which provides an alternative transition method that permits an entity to use the effective date of ASU - 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 and interim periods within those years, and early adoption is permitted (see Note – Right of Use Assets). 

 

The Company adopted the lease accounting standard using the modified retrospective transition option on adoption on which had an immaterial impact to the Company’s condensed consolidated balance sheet. Upon adoption, the Company recorded additional lease liabilities of approximately 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 The Company used as its incremental borrowing rate to calculate the net present value of its leases at based on the Company's estimated borrowing rate for a collateralized loan. The Company had debt outstanding as of

In the FASB issued ASU - 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 and requires certain disclosures about stranded tax effects. ASU - was effective for the Company's fiscal year beginning 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 have a material impact on the Company’s condensed consolidated financial statements.

  

In the FASB issued ASU - Financial Instruments-Credit Losses (Topic ): 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 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 the FASB issued ASU - Intangibles - Goodwill and Other (Topic ): Simplifying the Test for Goodwill Impairment. The objective of this update is to simplify the subsequent measurement of goodwill, by eliminating step from the goodwill impairment test. The amendments in this update are effective for annual periods beginning after and interim periods within those fiscal years. The Company does believe this update will have a material impact on its consolidated financial statements.

In the FASB issued ASU - Fair Value Measurement (Topic ): 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 and Level of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 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 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 fair value measurements. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.  

 In the FASB issued ASU - Income Taxes (Topic ): Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. ASU - removes certain exceptions to the general principles in Topic and also clarifies and amends existing guidance to improve consistent application. ASU - is effective for the Company beginning in fiscal The Company is evaluating the impact of the adoption of ASU - on its financial statements, but does expect such adoption to have a material impact.