ASTA FUNDING, INC. Caution Regarding Forward Looking Statements
The "COVID-19" pandemic, and measures taken to mitigate the pandemic, could cause actual results to differ materially from those set forth in the forward-looking statements, particularly if the pandemic persists for an extended period of time both domestically and internationally. While it is difficult to predict the extent to which the evolving effects of COVID-19 and measures taken to mitigate the pandemic, they may impact us, they could have an adverse effect on our results of operations and cash flows, particularly as they affect 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 housing market, energy costs, the number and size of personal bankruptcy filings, the rate of unemployment, the levels of consumer confidence and consumer debt, and investor sentiment. Additionally, government actions in response to the pandemic may hinder our collection activities or result in increased expenses. This Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21 E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included or incorporated by reference in this report, 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, the impact of the COVID-19 pandemic on general political and economic conditions, including as a result of efforts by governmental authorities to mitigate the COVID-19 pandemic, such as travel bans, shelter in place orders and third-party business closures and resource allocations, our ability to execute our business continuity as well as our operational and budget plans in light of the COVID-19 pandemic, our ability to consummate the proposed Merger, satisfaction of closing conditions to the consummation of the proposed Merger, the impact of the announcement or the closing of the Merger on the Company's relationships with its employees, existing customers or potential future customers, the ability to realize anticipated benefits of the proposed Merger, the restatement of previously issued financial statements, the identified material weaknesses in our internal control over financial reporting and our ability remediate those material weaknesses, our ability to purchase defaulted consumer receivables at appropriate prices, changes in government regulations that affect our ability to collect sufficient amounts on our defaulted consumer receivables, our ability to employ and retain qualified employees, changes in the credit or capital markets, changes in interest rates, deterioration in economic conditions, negative press regarding the debt collection industry which may have a negative impact on a debtor's willingness to pay the debt we acquire, and statements of assumption underlying any of the foregoing, as well as other factors set forth under "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2019 . 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. OverviewAsta Funding, Inc. , aDelaware Corporation (the "Company," "we" or "us"), together with our wholly owned significant operating subsidiariesPalisades 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 asPegasus Funding, LLC ("Pegasus")),Arthur Funding LLC ("Arthur Funding") (formerly known asPractical Funding, LLC ("Practical Funding")), and other subsidiaries, which are not all wholly owned, are engaged in several business segments in the financial services industry including funding of personal injury claims, through our wholly owned subsidiaries Sylvave, Simia and Arthur Funding, social security disability advocacy through our wholly owned subsidiariesGAR Disability Advocates and Five Star and the business of purchasing, managing for our own account and servicing distressed consumer receivables, including charged off receivables, and semi-performing receivables. For the periodOctober 1, 2017 toJanuary 12, 2018 , Pegasus was 80% owned, but not controlled, and accounted for under the equity method. OnJanuary 12, 2018 ("Date of Acquisition"), we acquired the remaining 20% minority interest and a controlling financial interest, in Pegasus and changed its name to Sylvave and now own 100% of Sylvave. Commencing on the Date of Acquisition, we consolidated the financial results of this entity. 28
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We operate principally in
For a detailed description of our segments, please read Note 19 - Segment Reporting, in our notes to condensed consolidated financial statements.
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
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 onJune 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 ofGary 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 withRBF 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 byRBF 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, datedJune 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.
The Merger will be financed by a committed loan facility provided by
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
Risks and Uncertainties
The novel coronavirus 2019 ("COVID-19") outbreak emerged in late 2019 and was
declared a global pandemic by the World Health Organization on March 11, 2020 .
Current economic uncertainty brought about as a result of 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.
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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 theU.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. Accordingly, while we cannot quantify the expected effects, we believe revenues and cash collections generated by our Consumer Receivables business are likely to be below our budgeted expectations for at least the remainder of 2020. For the three months endedJune 30, 2020 , we did experience 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 and expects additional delays in customer payments in future periods. We have also experienced customer payment delays due to COVID-19 impacts in ourPeru operations. 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. Our Personal Injury segment has not experienced noticeable delays in the adjudication of claims despite the fact that most courthouses have been temporarily closed. While we cannot quantify the effects of this downward trend, we believe COVID-19 may negatively impact the results of future operations and cash flows related to this segment. 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. 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.
Financial Information About Operating Segments
The consumer receivables segment and the social security benefit advocacy segment each accounted for 10% or more of consolidated net revenue for the three and nine months endedJune 30, 2020 and 2019. The personal injury claims segment accounted for its investment in Sylvave under the equity method of accounting throughJanuary 12, 2018 , for subsequent periods we included the financial results of Sylvave in our consolidated statement of operations, while Simia is a consolidated entity. The following table summarizes total revenues by percentage from our three lines of business for the three and nine months endedJune 30, 2020 and 2019: For the Three Months For the Nine Months Ended Ended June 30, June 30, 2020 2019 2020 2019 Finance income (consumer receivables) 65.6 % 69.5 % 70.5 % 66.6 % Personal injury claims income 7.1 8.3 6.7 10.1 Disability fee income 27.3 22.2 22.8 23.3 Total revenues 100.0 % 100.0 % 100.0 % 100.0 % 30
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Information about the results of each of our reportable segments for the three and nine months endedJune 30, 2020 and, 2019, reconciled to the consolidated results, are set forth below. Separate segment MD&A is not provided, as segment revenue corresponds to the revenue presented in our condensed consolidated statement of operations, and material expense items are not allocable to any specific segment. Social Security Personal Consumer Disability Injury Corporate (Dollars in millions) Receivables Advocacy Claims (2) Total Three Months Ended June 30, 2020: Revenues $ 2.2$ 0.9 $ 0.3 $ -$ 3.4 Other income - - - 0.5 0.5
Segment profit (loss) 2.0 0.1 0.4 (1.9 ) 0.6 2019: Revenues 3.7 1.2 0.4 - 5.3 Other income 0.2 - - 0.9 1.1 Segment profit (loss) 3.3 0.4 0.6 (1.0 ) 3.3 Nine Months Ended June 30, 2020: Revenues 8.2 2.6 0.8 - 11.6 Other income 0.1 - - 0.9 1.0 Segment profit (loss) 7.1 0.3 0.8 (6.0 ) 2.2 Segment Assets (1) 6.0 1.0 4.1 82.3 93.4 2019: Revenues 10.7 3.7 1.6 - 16.0 Other income 0.7 - - 1.3 2.0 Segment profit (loss) 9.9 1.2 1.5 (5.1 ) 7.5 Segment Assets (1) 9.1 0.6 6.2 74.5 90.4
We do not have any intersegment revenue transactions.
(1) Includes other amounts in other line items on the consolidated balance
sheet.
(2) Corporate is not part of our three reportable segments, as certain
expenses and assets are not earmarked to any specific operating segment
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 theoriginators and may have been previously serviced by collection agencies;
and
• semi-performing receivables - accounts where the debtor is making partialor 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
• other sources.
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Table of Contents Personal Injury ClaimsThis Company's personal injury claims business segment is comprised of purchased interests in personal injury claims from claimantswho are a party in personal injury litigation or claims. The Company 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 consists of the right to receive, from such claimant, part of the proceeds or recoveries which such claimant receives by reason of a settlement, judgment or award with respect to such claimant's claim. The Company historically funded personal injury claims in Simia and Sylvave. The Company formed a new wholly owned subsidiary, Arthur Funding, onMarch 16, 2018 to continue in the personal injury claims funding business. Arthur Funding began funding advances on personal injury claims inMay 2019 . Arthur Funding, Simia and Sylvave conduct its businesses solely inthe United States and obtains business from external brokers and internal sales professionals soliciting attorneys and law firmswho represent claimantswho have personal injury claims. Business is also obtained from its website and through attorneys. Simia and Sylvave are not funding any new advances, but continue to collect on outstanding personal injury claim advances in the ordinary course. Disability Advocacy Business
Critical Accounting Policies
Income Recognition - Consumer Receivables
We account for certain of our investments in consumer receivables using the guidance ofFinancial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC"), Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality ("ASC 310"). Under the guidance of ASC 310, static pools of accounts are established. These pools are aggregated based on certain common risk criteria. Each static pool is recorded at cost and is accounted for as a single unit for the recognition of income, principal payments and loss provision. Due to the substantial reduction of portfolios reported under the interest method, and the inability to reasonably estimate cash collections required to account for those portfolios under the interest method, we concluded the cost recovery method is the appropriate accounting method under the circumstances. Under the guidance of ASC 310-30, we 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). We use 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.
Impairments - Consumer Receivables
We account for our 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 us having the ability to develop reasonable expectations of both the timing and amount of cash flows to be collected. In the event we 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. We will recognize income only after we have recovered our 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. We believe we have significant experience in acquiring certain distressed consumer receivable portfolios at a significant discount to the amount actually owed by underlying customers. We invest 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 we have 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 our ability to recover our cost basis. For the three and nine months endedJune 30, 2020 , we recorded impairment of our international portfolios by$0 and$23,000 , respectively.For the three and nine months endedJune 30, 2019 , we recorded impairment of our international portfolios by$100 ,000for both periods. 32
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Personal Injury Claim Advances and Impairments
We account for our investments in personal injury claims at an agreed upon interest rate, in anticipation of a future settlement. Our interest purchased in 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 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. We assess 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. We specifically reserve 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, we establish reserves based on the historical collection rates of our fundings. Fee income on advances is reserved for on all cases where a specific reserve is established on the initially funded amount. In addition, we also monitor our historical collection rates on fee income and establish reserves on fee income consistent with the historically experienced collection rates. We regularly analyze and update the historical collection rates of our initially funded cases as well as our fee income.
Income Recognition - Social Security Disability Advocacy
In accordance with FASB ASC 606, Revenue from Contracts with Customers, we recognize disability fee income forGAR Disability Advocates and Five Star when disability claimant's cases close, when cash is received, or when we receive a notice of award from theSocial Security Administration ("SSA") that stipulates the amount of fee approved by the SSA to be paid to us. We establish a reserve for the differentials in amounts awarded by theSSA and Veterans Administration compared to the actual amounts received by us. Fees paid to us are withheld by theSSA and Veterans Administration against the claimant's disability claim award, and are remitted directly to us from theSSA and Veterans Administration .
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
Finance income. For the nine months endedJune 30, 2020 , finance income decreased$2.5 million , or 23.3%, to$8.2 million from$10.7 million for the nine months endedJune 30, 2019 . During the nine months endedJune 30, 2020 and 2019 the Company did not purchase any consumer portfolios. Net collections for the nine months endedJune 30, 2020 decreased 27.1% to$8.8 million from$12.0 million for the same prior year period. During the first nine months of fiscal year 2020, gross collections decreased 27.7% or$6.5 million to$16.8 million from$23.3 million for the nine months endedJune 30, 2019 . Commissions and fees associated with gross collections from our third-party collection agencies and attorneys decreased$3.2 million , or 28.4%, to$8.0 million for the nine months endedJune 30, 2020 from$11.2 million for the nine months endedJune 30, 2019 . Commissions and fees amounted to 47.8% of gross collections for the nine months endedJune 30, 2020 , compared to 48.3% in the same period of the prior year, due to a higher percentage of commissionable collections in the prior year period. Management's outlook for our Consumer Receivables business segment is that we expect that Finance income may continue to decline due to the continued aging of our existing credit card portfolios. Although we may purchase new portfolios in future periods, we may not be able to purchase consumer receivable portfolios domestically at favorable prices or on sufficient terms. The expected decline in our future Finance income may have a negative impact on our Consumer Receivables business segment and our consolidated pre-tax profits in the remainder of fiscal 2020 and future periods. Personal Injury Claims income.Personal injury claims income decreased 51.3% or$0.8 million to$0.8 million for the nine months endedJune 30, 2020 from$1.6 million for the nine months endedJune 30, 2019 as a result of lower new advances in Arthur Funding partially offset by continued collections on historical personal injury claims. Disability fee income. For the nine months endedJune 30, 2020 , disability fee income decreased$1.1 million , or 29.3%, to$2.6 million as compared to$3.7 million for the nine months endedJune 30, 2019 , due to decreases in average fees per case earned for the disability claimants' cases closed with theSocial Security andVeterans Administration during the current period. Management's outlook for our Social Security Disability Advocacy business segment is that revenue and segment profitability may be lower for the full year of fiscal 2020 as compared with the full year of fiscal 2019. This full year outlook for fiscal 2020 is attributable to the decline in our first and second quarter revenues and segment profits in the first three quarters of fiscal 2020 as compared with the first three quarters of fiscal 2019 and the fourth quarter of fiscal 2019. 33
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Earnings (loss) from equity method investee.Loss from equity method investment decreased by$32,000 to a loss of$59,000 for the nine months endedJune 30, 2020 from a loss of$91,000 during the nine months endedJune 30, 2019 . Gain on Settlement. For the nine months endedJune 30, 2020 , the Company recognized$30,000 in gain on settlement. For the nine months endedJune 30, 2019 , the Company recognized$0.6 million in gain on settlement associated with prior overcharges billed to the Company by a third-party servicer in excess of contractually permitted amounts, a bankruptcy settlement from a previous third party service provider, a gain on settlement associated withBalance Point Divorce Funding andStacey Napp and a gain on settlement associated with a complaint against a former employee. Interest and dividend income. Interest and dividend income decreased$0.4 million , or 28.4% to$0.9 million for the nine months endedJune 30, 2020 from$1.3 million for the nine months endedJune 30, 2019 , due primarily to lower interest rates onU.S. Treasury securities.
Other income (loss), net. The following table summarizes other income (loss) for
the nine months ended
For the Nine Months Ended
June 30,
2020 2019
Realized gain $ - $ 25,000
Unrealized gain on equity securities 67,000 53,000
Other 25,000 43,000
$ 92,000 $ 121,000
General and administrative expenses. For the nine months ended June 30, 2020 ,
general and administrative expenses increased $0.1 million to $10.4 million from
$10.3 million for the nine months ended June 30, 2019 , primarily due to an
increase in outside services cost of $1.3 millionoffset by a decrease in
professional fees of $0.5 million ,payroll expenses of $0.4 million , bad debt
expense of $0.2 million and collection expenses of $0.1 million . During the nine
months ended June 30, 2020 , the Company incurred fees and expenses in connection
with the Merger of $1.4 million .
Interest expense. Interest expense for the nine months ended June 30, 2020 , was
$1,000 attributable to the Company's recently added loan payable as compared to
no interest expense for the nine months ended June 30, 2019 .
Segment profit - Consumer Receivables. For the nine months ended June 30, 2020 ,
segment profit decreased $2.8 million to $7.1 million from $9.9 million for the
nine months ended June 30, 2019 , primarily due to the decrease in revenue of
$2.5 million , and decrease in other income of $0.6 million offset by a decrease
in collection expense of $0.1 million and payroll expenses of $0.2 million .
Segment profit - Personal Injury Claims. For the nine months ended June 30,
2020 , segment profit was $0.8 million as compared to segment profit of $1.5
million for the nine months ended June 30, 2019 . The decrease is attributable to
decrease in revenue of $0.8 million partially offset by various lower operating
expenses of $0.1 million .
Segment profit - Social Security Benefit Advocacy. For the nine months ended
June 30, 2020 , segment profit was $0.3 million as compared to $1.2 million for
the same period in the prior year. The decrease in profit of $0.9 million in the
current period is primarily the result of decreased revenues of $1.1 million
partially offset by a reduction in overhead expenses of $0.2 million .
Income tax (benefit) expense. Income tax expense, consisting of federal and
state components, for nine months ended
Net income (loss). As a result of the above, the Company had net income for the nine months endedJune 30, 2020 of$1.5 million compared to$5.4 million net income for the nine months endedJune 30, 2019 . 34
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Three Months Ended
Finance income. For the three months endedJune 30, 2020 , finance income decreased$1.5 million , or 39.3%, to$2.2 million from$3.7 million for the three months endedJune 30, 2019 . The decrease in finance income is due to a reduction in the collections on portfolios during the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 and the overall age of the portfolios. During the three months endedJune 30, 2020 and 2019, the Company did not purchase any consumer portfolios. Net collections for the three months endedJune 30, 2020 decreased 41.1% to$2.4 million from$4.1 million for the three months endedJune 30, 2019 . For the three months endedJune 30, 2020 gross collections decreased 40.6%, or$3.1 million , to$4.6 million from$7.7 million for the three months endedJune 30, 2019 . For the three months endedJune 30, 2020 commissions and fees associated with gross collections from our third-party collection agencies and attorneys decreased 39.9% or$1.5 million to$2.1 million from$3.6 million for the three months endedJune 30, 2019 . Commissions and fees amounted to 47.0% of gross collections for the three months endedJune 30, 2020 , compared to 46.5% for the three months endedJune 30, 2019 resulting from higher percentage of commissionable collections in the current year period. Personal Injury Claims income. Personal injury claims income decreased 44.9% or$0.2 million to$0.2 million for the three months endedJune 30, 2020 from$0.4 million for the three months endedJune 30, 2019 as a result of lower new advances in Arthur Funding partially offset by continued collections on historical personal injury claims. Social security benefit advocacy fee income. For the three months endedJune 30, 2020 , disability fee income decreased$0.3 million , or 20.7%, to$0.9 million as compared to$1.2 million for the three months endedJune 30, 2019 , due to decreases in average fees per case earned for the disability claimants' cases closed with theSocial Security andVeterans Administration during the current period. Earnings (loss) from equity method investee. Loss from equity method investment was$2,000 for the three months endedJune 30, 2020 as compared to a loss of a loss of$5,000 for the three months endedJune 30, 2019 . Gain on Settlement. For the three months endedJune 30, 2020 , the Company did not recognize any gain on settlement. For the three months endedJune 30, 2019 , the Company recognized$0.3 million in gain on settlement associated with a bankruptcy settlement from a previous third-party servicer, a gain on settlement with Balance Point Divorce Funding andStacey Napp and a gain on settlement with a former employee.
Other income, net. The following table summarizes other income for the three
months ended
For the Three Months Ended
June 30,
2020 2019
Unrealized gain on equity securities $ 228,000 $ 33,000
Other 25,000 1,000
$ 253,000 $ 34,000
General and administrative expenses. For the three months ended June 30, 2020 ,
general and administrative expenses increased $0.2 million , or 5.9%, to
$3.2 million from $3.0 million for the three months ended June 30, 2019 ,
primarily due to an increase in outside services cost of $0.4 million offset by
a decrease in bad debt expense of $0.2 million . During the three months ended
June 30, 2020 , the Company incurred fees and expenses in connection with the
Merger of $0.6 million .
Segment profit - Consumer Receivables. Segment profit decreased $1.3 million to
$2.0 million for the three months ended June 30, 2020 from $3.3 million for the
three months ended June 30, 2019 . This decrease in profitability is a result of
decreased revenue of $1.5 million partially offset by a decrease in impairment
cost of $0.1 million , and decreases in various operating expenses of $0.1
million .
Segment profit - Personal Injury Claims. Segment profit decreased $0.2 million
to $0.4 million for the three months ended June 30, 2020 , from $0.6 million for
the three months ended June 30, 2019 . This decrease in profitability is
primarily due to decreased revenue of $0.2 million .
Segment profit - Social Security Disability Advocates. The Segment profit was
$0.1 million for the three months ended June 30, 2020 as compared $0.4 million
for the three months ended June 30, 2019 . The decrease in profitability of $0.3
million is primarily the result of decreased revenue of $0.3 million .
Income tax expense- Income tax expense, consisting of federal and state
components, for three months ended June 30, 2020 , was $0.2 million , as compared
to $1.0 million for the three months ended June 30, 2019 , primarily due to lower
income in the current year period.
Net income (loss)- As a result of the above, we generated net income for the
three months ended June 30, 2020 of $0.5 million , compared to $2.3 million for
the three months ended June 30, 2019 .
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Liquidity and Capital Resources
We manage our liquidity and capital resources to fund our operating and investing activities. We rely on cash flows from operations as the main source for liquidity.
Our primary source of cash from operations is collections on the receivable portfolios we have acquired and the funds generated from the liquidation of our personal injury claim portfolios.
Our primary uses of cash include costs involved in the collection of consumer receivables, the liquidation of our personal injury portfolio, and the costs to run our disability advocacy business. AtJune 30, 2020 , the Company had$4.2 million in cash and cash equivalents, as well as$70.6 million in investments in debt and equity securities on hand and$1.1 in debt. In addition, the Company had$90.4 million in stockholders' equity atJune 30, 2020 . 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 term, particularly if the economic effects of the pandemic worsen or persist for an extended period of time. As a result of the evolving effects of the COVID-19 on our businesses, we are continuing to evaluate our liquidity position and cash flows to ensure we are judiciously utilizing our cash. In recognition of expected reductions in future operating cash flows, onApril 10, 2020 , the Company applied for a$1.1 million Paycheck Protection Program ("PPP") loan under the CARES Act. OnMay 11, 2020 , the Company signed a PPP loan note with an interest rate of 1% and aMay 11, 2022 maturity date, though PPP loans may be forgiven if certain conditions are met. The PPP loan was funded onMay 20, 2020 .
Receivables Financing Agreement
As of
Cash Flow AtJune 30, 2020 , our cash decreased$0.1 million to$4.2 million from$4.3 million atSeptember 30, 2019 . Our cash balance remained consistent; due to the fact we invested all excess cash inU.S. Treasury bills, which are accounted for as available for sale debt securities on our condensed consolidated balance sheet. Net cash provided by operating activities was$1.7 million during the nine months endedJune 30, 2020 , as compared to$5.4 million provided by operating activities for the nine months endedJune 30, 2019 , primarily resulting from the net income of$1.4 million in the current period compared to a net income of$5.4 million in the prior year period. Net cash used in investing activities was$3.0 million during the nine months endedJune 30, 2020 , as compared to$8.3 million used in investing activities during the nine months endedJune 30, 2019 . The change in cash provided by (used in) investing activities was primarily due to the net purchase of available for sale debt securities and investments in equity securities of($6.4) million in the current period compared to($20.1) million in the prior period, lower collection from receivables acquired for liquidation of($0.8) million ,lower receipts from personal injury claims of($2.8) million in the current year and proceeds from notes receivable of$4.3 million in the prior year period. Cash provided by financing activities during the nine months endedJune 30, 2020 was$1.1 million from the PPP loan. Cash used in financing activities during the nine months endedJune 30, 2019 was$0.6 million . The cash used in financing activities during the prior year was due to the purchase of treasury stock of$0.6 million . Our cash requirements have been and will continue to be significant to operate our various lines of business. Significant requirements include costs involved in the collections of consumer receivables, investment in consumer receivable portfolios and investment in personal injury claims. In addition, dividends could be declared and paid if and when approved by the Board. Acquisitions recently have been financed through cash flows from operating activities. We believe we will not be dependent on a credit facility in the short-term, as our cash balances will be sufficient to invest in personal injury claims, purchase portfolios and finance the disability advocacy business.
We do not expect to incur any material capital expenditures during the next twelve months.
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We believe our available cash resources and expected cash flows from operations will be sufficient to fund operations for at least 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 may seek opportunities with banking organizations and others on a possible financing loan facility.
Off Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
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
Adopted During The Nine Months Ended
InFebruary 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. InJanuary 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, inJuly 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 afterDecember 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 onOctober 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 atOctober 1, 2019 , based on the Company's estimated borrowing rate for a collateralized loan. The Company had no debt outstanding as ofOctober 1, 2019 . InFebruary 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 onDecember 22, 2017 , and requires certain disclosures about stranded tax effects. ASU 2018-02 was effective for the Company's fiscal year beginningOctober 1, 2019 , with early adoption permitted, and was applied in the period of adoption in which the effect of the change in theU.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.
Recent Accounting Pronouncements Not Yet Adopted
InJune 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 afterDecember 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. 37
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InJanuary 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 afterDecember 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. InAugust 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 afterDecember 15, 2019 . The Company is currently evaluating the impact this guidance will have on its consolidated financial statements. InDecember 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.
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