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Asta Funding, Inc. (NASDAQ:ASFI)

Q3 2014 Earnings Conference Call

August 20, 2014 04:00 PM ET

Executives

Gary Stern - Chairman, President, CEO

Robert Michel - CFO

William Skyrm - Co-Founder and CEO, CBC Settlement Funding, LLC

Analysts

Nathaniel Hall August - Mangrove Partners

John Deysher - Bertolet Capital Trust

Operator

Good afternoon. My name is Sammi, and I will be your conference operator today. At this time, I’d like to welcome everyone to the Asta Funding Inc. Conference Call for the Three and Nine Months Period ended June 30, 2014, of the Fiscal Year ended September 30, 2014. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions)

On the call today is Mr. Gary Stern, Chairman and Chief Executive Officer; Mr. Bob Michel, Chief Financial Officer; and Mr. William Skyrm, CEO of CBC Settlement Funding, LLC.

Before our host, Gary Stern, discusses the Company's current results, let me take a few moments to read the following statements.

Except for statements of historical facts, all of the statements made during the conference call are forward-looking statements. Although Asta Funding believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, there can be no assurance that these expectations will be realized. Forward-looking statements are not guarantees and are subject to numerous known and unknown risks and uncertainties that could cause actual results to diverge materially and adversely from the results expressed or implied by such forward-looking statements.

Factors that can contribute to such differences include the Company's ability to purchase defaulted consumer receivables at appropriate prices; changes in government regulations that affect the Company's ability to collect sufficient amounts on defaulted consumer receivables; the Company's ability to employ and retain qualified employees; the Company's ability to fund future portfolio purchases; changes in the credit or capital markets; changes in interest rates; deterioration in economic condition; negative press regarding the debt collection industry, which may have a negative impact on the debtor's willingness to pay their debts; statements of assumption underlying any of the foregoing; and those factors identified in Asta Funding's Annual Report on SEC Form 10-K for the fiscal year ended September 30, 2013 filed with the Securities and Exchange Commission and, from time to time, in its other filings with the Securities and Exchange Commission. Asta Funding's filings with the Securities and Exchange Commission are available, free of charge, through the Company's Web site at www.astafunding.com.

Now, let me turn the call over to Gary Stern. Please begin, sir.

Gary Stern

Thank you. Good afternoon everyone, and thank you for joining today's conference call. We're pleased to announce a profitable first nine months and third quarter of fiscal year 2014, in which we reported net income of $9.3 million in the first nine months of fiscal year 2014 as compared to net income of $733,000 for the nine month period ending June 30, 2013. Including the results of the three and nine month periods ending June 30, 2014 is the forgiveness of non-recourse debt in the amount of $26.1 million.

We’ve had our challenges with the Great Seneca portfolio and we’re pleased that we completed this transaction with the Bank of Montreal and we like to thank them for working with us to finalize this. We are very excited about the growth of CBC Settlement Funding, LLC a structured settlement unit we invested in at the end of December 2013.

On a pro-forma basis, CBC has more than doubled its total receivables balance, purchase volume in the six month period ended June 30, 2014 and increased its transaction volume by 19% as compared to the same period of the prior year.

We continue to see growth in the personal injury unit as revenue on personal claims increased by 16% in the nine month period ended June 30, 2014 compared to the same prior year period. Although the revenue is not yet material, we’re pleased that the growth of GAR National Disability Advocates, LLC our non-attorney advocacy group which obtains and represents individuals in their claims for social security disability and supplemental security income benefits from the Social Security Administration.

Our cash and securities position at June 30, 2014 was $96.2 million. Overall, we’re pleased with the results of the third quarter and nine month periods ended June 30, 2014. Steps taken in the quarter put us in a very strong position moving forward.

Now I’d like to turn the call over to Bob Michel, our Chief Financial Officer, who will provide some additional comments on the financial results.

Robert Michel

Thank you, Gary. Good afternoon, everyone. For the third quarter of fiscal year 2014, we reported net income of $5,464,000 or $0.41 per diluted share, as compared to reported net loss of $2,737,000 or $0.21 loss per diluted share for the third quarter of fiscal year 2013.

The nine months ended June 30, 2014 we reported net income of $9,295,000 or $0.70 per diluted share as compared to $733,000 or $0.06 per diluted share for the nine month period ended June 30, 2013. Included in the third quarter a nine months results is the previously announced Forgiveness of Debt which amounted to $26,101,000.

On June 30, 2014 we made a payment of approximately $2.9 million which included a voluntary payment by the Company of $1.9 million to finish paying the remaining amount due based on the settlement agreement signed in August of 2013.

With these payments, the settlement agreement entitles us to retain 100% of the next approximately $16.9 million of net collections on the Great Seneca portfolio. Until such time, we will share in the net collections with Bank of Montreal with Asta Funding retaining 70% of the net collections thereafter. As Gary mentioned, we appreciate the efforts of Bank of Montreal working with us to finalize this transaction.

Company reported revenues for the three months ended June 30, 2014 excluding the forgiveness of non-recourse debt of $10,173,000, a decrease of $2,495,000 from the $12,668,000 reported in the third quarter of fiscal year 2013.

Revenues for the nine month period ended June 30, 2014 excluding the forgiveness of non-recourse debt of $30,591,000, a decrease of $2,714,000 from the $33,305,000 reported for the nine month period ended June 30, 2013.

Included in total income of $36,274,000 and $56,692,000 for the three and nine months period ended June 30, 2014 is the Forgiveness of Debt of the $26,101,000. Also included in total revenue is income from structured settlements as reported by CBC in the amount of $1,406,000 in the three month period ended June 30, 2014 with no comparative data from the prior year as the acquisition of CBC was completed on December 31, 2013.

CBC reported income from structured settlements of $2,941,000 during the six month period ended June 30, 2014, the period in which CBC was included in the results of Asta Funding year-to-date.

In addition, revenues from the personal injury claims for the three months ended -- three month period ended June 30, 2014 were $1,779,000 as compared to $2,287,000, small decrease from the prior year as we included a level of reserves during the third quarter of fiscal year 2014.

Revenues from personal injury claims was $5,724,000 in the nine month period ended June 30, 2014 compared to $4,921,000 for the nine month period ended June 30, 2013, a 16.3% increase over the prior year.

Net cash collections of receivables acquired for liquidation including cash collections represented by account sales during the third quarter of fiscal year 2014 were $10,041,000 as compared to $15,425,000 in the third quarter of fiscal year 2013. Net cash collections receivables acquired including account sales was $3,743,000 for the nine month period ended June 30, 2013 as compared to $42,038,000 for the same period in the prior year.

Including the net collections in the three month period -- three and nine month period ended June 30, 2013 was approximately $2 million of accounts sales. Account sales were not material in the nine months of fiscal year 2014.

Net collections on the Great Seneca portfolio were $2,781,000 in the third quarter of fiscal year 2014, as compared to $3,348,000 in the third quarter of 2013. Net collections on Great Seneca for the nine months ended June 30, 2014 were $7,749,000 as compared to $8,989,000 for the nine month period ended June 30, 2013. Carrying value on the Great Seneca portfolio at June 30, 2014 was $21,601,000 as compared to $46,294,000 at June 30, 2013.

Zero basis income was $6,532,000 in the third quarter of fiscal year 2014 as compared to $9,749,000 reported in the third quarter of fiscal year 2013. Zero basis income for the nine months ended June 30, 2014 was $20,195,000 as compared to $25,824,000 we reported for the nine months ended June 30, 2013.

Our investment in structured settlements through our unit, CBC Settlement Funding was $35,892,000 at June 30, 2014, an increase from $30,436,000 at December 31, 2013, the date of the acquisition of CBC.

Our investment in personal injury claims through the joint venture Pegasus Funding, LLC was approximately $31,733,000 at June 30, 2014 as compared to $30,489,000 at December 31, 2013.

General and administrative expenses for the third quarter of fiscal year 2014 were $7,012,000 as compared to $6,545,000 for the third quarter ended June 30, 2013. The increase reflected the inclusion of CBC and GAR National Disability Advocates, LLC as there is no comparable data in the three month period of the prior year.

General and administrative expenses were $20,517,000 for the nine month period ended June 30, 2014 as compared to $17,926,000 for the nine month period ended June 30, 2013. G&A expenses were higher during the current nine month period as compared to fiscal year 2013 primarily due to the inclusion of CBC and GAR National Disability in the current nine month period.

Interest expense was $413,000 during the third quarter of fiscal year 2014 as compared to $518,000 for the third quarter of fiscal year 2013. Interest expense was $820,000 for the nine month period ended June 30, 2014 as compared to a $1,621,000 for the same period a year-ago.

Interest expense for the current period is primarily from CBC as the settlement agreement with the Bank of Montreal significantly reduced the interest expense for the parent company.

Impairments of $19,901,000 we reported in the third quarter of fiscal year 2014 as compared to $10,148,000 reported in the third quarter of fiscal year 2013. The impairment reported in 2013 was attributable to the Great Seneca portfolio. A $14.2 million impairment was reported on the Great Seneca portfolio during the third quarter of fiscal year 2014. Most of the remaining amount of the impairment charge was the write-off of medical receivable asset class. The Company’s book value per share as of June 30, 2014 was $13.91.

This concludes my remarks on the financial results. I’ll turn the call back to Gary.

Gary Stern

Thank you, Bob. Now, we’d like to take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Philip Lee of Mangrove Partners. Your line is now opened.

Nathaniel August - Mangrove Partners

Hi, guys. It’s Nathaniel August on for Phil. I wanted to ask if you could first just give us some additional color on the write-off that you took with regards to the medical receivable asset class. I thought that was going to be a growth area for the company, so I’m a little bit surprised to see you taking the write-off?

Robert Michel

Well those are receivables that we purchased in between the years 2010 and early 2012. And the collections of them just tailed off in the list year or so and there are some just issues with the attorney network that we’re dealing with and we just took the prudent route of writing off and we haven’t purchased those receivables since very early of fiscal year 2012.

Nathaniel August - Mangrove Partners

So that’s not an investment strategy you’re going to be pursuing any longer? Overall was that a profitable investment strategy for you taking into consideration the write-off that you had to take?

Robert Michel

No, it was not profitable and like I said we invested in it only about a year and half and have not invested in it since early of fiscal year 2012.

Nathaniel August - Mangrove Partners

Was this in anyway related to Pegasus?

Robert Michel

No.

Nathaniel August - Mangrove Partners

Okay. And then my follow-up question is could you tell us where thing stand with the IRS with regards to the ongoing audit?

Robert Michel

We are still working diligently with the IRS and hope to have a conclusion shortly.

Nathaniel August - Mangrove Partners

Have you received anything such as a notice of preliminary adjustment and could you just tell me where you’re in the audit process? Are you in the examination at the district level or are you in appeals or where are you exactly?

Robert Michel

We are in the examination at the district level and as just previously said, we’re working with them to come to a conclusion.

Nathaniel August - Mangrove Partners

Have you received a notice of preliminary adjustment?

Robert Michel

We are still working with them on the issues that they have, the questions that they have.

Nathaniel August - Mangrove Partners

You mentioned issues they have. Could you expand a little bit on what those are?

Robert Michel

Just questions relating to the write-offs that we took back in 2009 that was a very large impairment year. We took a $180 million of impairment, so it’s - which yielded a $52 million tax refund. So that is the year and a couple of other years in question.

Nathaniel August - Mangrove Partners

Okay. Thank you.

Operator

Thank you. Our next question comes from Russell Rosh, a Private Investor. Your line is now opened.

Russell Rosh - Private Investor

Good afternoon gentlemen. Glad to see you pursuing the diversification to the other businesses, but given like you mentioned the close to $14 share book value, what plans do you have to unlock the shareholder value for us long suffering shareholders such as perhaps stock dividend or massive stock buyback or other related strategies?

Gary Stern

The Board meets on a regular basis; as of now we do not have any authorization to do a stock buyback and we’re trying to find new businesses that we hope we can achieve attractive yields to increase shareholder value.

Russell Rosh - Private Investor

And as a follow-up, why there are no analysts any longer covering Asta Funding?

Gary Stern

I don’t know.

Russell Rosh - Private Investor

Okay. Thank you.

Gary Stern

Welcome.

Operator

Thank you. Our next question comes from John Deysher of Pinnacle. Your line is now opened.

John Deysher - Bertolet Capital Trust

Hi. Thanks for taking the call. On the structured settlements, the line items I think the unrealized gain is $620,000 and the interest income was $786,000. I understand the interest income revenue, but I’m not clear what generates the unrealized gain on structured settlements. Could you maybe tell us what the genesis of that is?

William Skyrm

Hi, this is Bill Skyrm, CEO of CBC Settlement Funding. The income settlement is the interest portion of the collections that are received for the period. The unrealized gain on receivables is the amount between where we have our portfolio financed and the current market value.

John Deysher - Bertolet Capital Trust

And what specifically generates the gain?

William Skyrm

It’s the amount that the assets are not financed; we don’t fully finance our assets through our warehouse. We only finance a certain loan to value. So there is additional equity in our portfolio based on the market value of these receivables today.

John Deysher - Bertolet Capital Trust

Okay. As a follow-up could that -- could it ever be an unrealized loss and if so what would precipitate that?

William Skyrm

It could if the assets were not financed through a long-term financial transaction such as the securitization or a private placement. Right now, the receivables are conservatively financed through our warehouse and we believe that there is significant equity in our portfolio based on the current market values. But interest rates are subject to change. So, we don’t make any statements as to what the interest rates in the future will be.

John Deysher - Bertolet Capital Trust

So, higher rates could perhaps indicate a loss there?

William Skyrm

That’s correct.

John Deysher - Bertolet Capital Trust

Okay. Thank you very much.

Operator

Thank you. Our next question comes from (Zed Djynsky) [ph] of Jordan Capital. Your line is now open.

Unidentified Analyst

Good afternoon gentlemen. I have a quick question as I’m also a private shareholder and I wanted to continue on the questioning line sort of over the second caller. Obviously you guys have mentioned several times that you’re -- the Board is investigating or it’s meeting on a regular basis and it’s talking about share buyback and potential dividends etcetera and other alternatives and obviously I’ve been communicating with you guys for quite a while and we’ve been a shareholder for a while, and you guys have been saying that you guys are going to expand [the new] [ph] business lines and diversify. But given the track record over the last few years of there were several ventures you guys went into where the returns have not been what you guys expected et cetera. I mean, at what point will the math starts working a little bit against that diversification strategy. I mean considering your -- the Divorce Funding not working out the way it wanted the recent sort of the claims you’re making against your partners in the injury space et cetera?

Robert Michel

I’m sorry. Could you just repeat the last couple of sentences because it wasn’t clear, it didn’t come clear through the -- I couldn’t understand -- hear the conversation properly.

Unidentified Analyst

What I’m saying is that, you guys have tried to diversify and you guys certainly have done a great job kind of resolving the Bank of Montreal and Great Seneca issues -- out of the ventures you guys entered to over the last several years, the Divorce Funding, that settlement, the personal injury kind of venture and that recent lawsuit that was sort of disclosed out there. At what point does the diversification strategy is becoming -- is going to become a little bit of a distraction, and you might do something else with the cash rather than just try to get into businesses that don’t necessarily provide the proper return?

Robert Michel

It’s a very good point. I don’t know at this point, but we haven’t reached it. We’re excited about certain things that we’ve done in the past. We’re not at a point yet where it’s a distraction, it’s far from it.

Unidentified Analyst

But I meant more or maybe not distraction from the Board or the management team, but more from the financial mathematics standpoint considering the…?

Robert Michel

Yes, I mean so far things have been okay, and some of these businesses take time to build up, but one just has to take a look at it as time goes on. But at this point, we’re not terribly unhappy with the investments we’ve made. Now the medical receivable investment that we wrote off this quarter unfortunately did not work out but that’s a discontinued item and we tried and it didn’t work out. But we’re very hopeful that these other investments we have ventured into will work out. We’ll gladly discuss it with you over time, but right now we’re not there.

Unidentified Analyst

Okay. Then from the new venture standpoint, what kind of profitability’s are you guys targeting in their visibility, and in the personal injury settlement et cetera. I mean what is the return that you guys expect for those investments?

Robert Michel

Well, we haven’t -- we’ve never disclosed our company goals or returns, but they have -- they both have, especially the personal injury claims have done very well. And CBC as we mentioned has doubled its business on a pro forma basis, they weren’t included in our results last year. And we have a very strong outlook for that growth going forward.

Gary Stern

This is Gary speaking. So, as far as the social security venture, that takes time to show profitability, but this is a fairly long window between the service business as you know and it could take 15, 18, 24 months from inception to see the material amount of cash flow. So, it’s something that cost us money with the hope down the road we’ll bear the fruits of our work.

Unidentified Analyst

Okay. But as I said as a shareholder some of the people that called in, I think it’s important for the Board hopefully to listen into their -- the conference call, but I think it’s important for you guys to know the voice of the shareholders and we think you guys -- it would be great if there were some meaningful attempt made to provide some value to all shareholders, not just the…?

Gary Stern

Yes, I agree.

Unidentified Analyst

Okay. I appreciate you taking my call.

Gary Stern

My pleasure.

Operator

Thank you. Our next question comes from John Deysher of Pinnacle. Your line is now opened.

John Deysher - Bertolet Capital Trust

Hi, just a follow-up. On the 8K that was filed, I guess August 5th, regarding the lawsuit against Unifund CCR Partners. I know its ongoing litigation, but I was just curious on the amount there of $19 million, it seems like a big number and I was just curious if you could provide some color on why that number is so large?

Robert Michel

Well, we’ve been working -- trying to work with Unifund for quite a while to resolve the issue and it finally came to a head where we realized that perhaps we weren’t making progress in terms of settling it, so that’s what prompted the action we took.

John Deysher - Bertolet Capital Trust

Where is that $19 million on the balance sheet. Now is that part of a receivable or where is that exactly in the balance sheet?

Robert Michel

As you know that we count for our collections on a net basis. So, it’s not any -- we have no accrued this amount anywhere on the balance sheet. It’s just a -- it’s held up of a disagreement that we had with Unifund for a bit of time.

John Deysher - Bertolet Capital Trust

Okay. So, if you do not collect it, there is no write off?

Robert Michel

Correct.

John Deysher - Bertolet Capital Trust

Okay, understood. Thank you.

Operator

Thank you. And at this time, I’d like to turn the call back to Mr. Gary Stern for closing comments.

Gary Stern

Okay. Thank you for participating in our third quarter fiscal year 2014 conference call. As always should you have any additional questions please feel free to contact us. Have a pleasant day.

Operator

Thank you. Ladies and gentlemen, thank you for participating in today's teleconference. Everyone have a pleasant day.

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