FLEXSHOPPER, INC.
10-Ks and 10-Qs
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act Of 1934
For The Quarterly Period Ended March 31, 2013
Commission File Number: 0-52589
ANCHOR FUNDING SERVICES, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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20-5456087
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(State of jurisdiction of Incorporation)
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(I.R.S. Employer Identification No.)
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10801 Johnston Road. Suite 210
Charlotte, NC
(Address of Principal Executive Offices)
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28226
(Zip Code)
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(866) 789-3863
(Registrant's telephone number)
Not Applicable
(Former name, address and fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Date File required to be submitted pursuant to Rule 405 of Regulation S-T during the 12 preceding months (or such shorter period that the registrant was required to submit and post such file). Yes [ X ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer [ ]
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Accelerated filer [ ]
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Non-accelerated filer [ ]
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(Do not check if a smaller reporting company)
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Smaller reporting company [X]
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of March 31, 2013, the Company had a total of 18,634,369 shares of Common Stock outstanding, excluding 376,387 outstanding shares of Series 1 Preferred Stock convertible into 1,919,574 shares of Common Stock.
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
This report contains certain "forward-looking statements," within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995, and are including this statement for purposes of these safe harbor provisions. "Forward-looking statements," which are based on certain assumptions and describe our future plans, strategies and expectations, may be identified by the use of such words as "believe," "expect," "anticipate," "should," "planned," "estimated" and "potential." Examples of forward-looking statements, include, but are not limited to, estimates with respect to our financial condition, results of operations and business that are subject to various factors that could cause actual results to differ materially from these estimates and most other statements that are not historical in nature. These factors include, but are not limited to, general and local economic conditions, changes in interest rates, deposit flows, demand for commercial, mortgage, consumer and other loans, real estate values, competition, changes in accounting principles, policies or guidelines, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing, products and services. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning the Company and its business, including additional factors that could materially affect our financial results, is included in our other filings with the Securities and Exchange Commission.
ANCHOR FUNDING SERVICES, INC.
Form 10-Q Quarterly Report
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Page
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PART I. FINANCIAL INFORMATION
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PART II. OTHER INFORMATION
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| Certifications | ||
ANCHOR FUNDING SERVICES, INC.
| ASSETS |
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(Unaudited)
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March 31,
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December 31,
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2013
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2012
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CURRENT ASSETS:
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Cash
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$ | 697,269 | $ | 610,439 | ||||
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Retained interest in purchased accounts receivable, net
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7,517,934 | 7,019,463 | ||||||
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Due from client
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372,149 | - | ||||||
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Earned but uncollected fee income
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174,112 | 168,805 | ||||||
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Prepaid expenses and other
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96,056 | 100,998 | ||||||
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Total current assets
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8,857,520 | 7,899,705 | ||||||
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PROPERTY AND EQUIPMENT, net
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23,517 | 14,257 | ||||||
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SECURITY DEPOSITS
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6,023 | 6,023 | ||||||
| $ | 8,887,060 | $ | 7,919,985 | |||||
| LIABILITIES AND STOCKHOLDERS' EQUITY |
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CURRENT LIABILITIES:
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Due to financial institution
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$ | 5,966,448 | $ | 4,977,763 | ||||
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Accounts payable
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46,259 | 86,772 | ||||||
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Accrued payroll and related taxes
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55,458 | 69,338 | ||||||
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Accrued expenses
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33,882 | 59,252 | ||||||
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Collected but unearned fee income
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29,737 | 28,642 | ||||||
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Total current liabilities
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6,131,784 | 5,221,767 | ||||||
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COMMITMENTS AND CONTINGENCIES
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STOCKHOLDERS’ EQUITY
PREFERRED STOCK, net of issuance costs of
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$1,209,383
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671,409 | 671,409 | ||||||
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COMMON STOCK
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1,863 | 1,863 | ||||||
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ADDITIONAL PAID IN CAPITAL
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7,500,835 | 7,496,693 | ||||||
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ACCUMULATED DEFICIT
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(5,418,831 | ) | (5,471,747 | ) | ||||
| 2,755,276 | 2,698,218 | |||||||
| $ | 8,887,060 | $ | 7,919,985 | |||||
The accompanying notes to the consolidated financial statements are an integral part of these statements.
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For the three months ended March 31,
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(Unaudited)
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(Unaudited)
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2013
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2012
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FINANCE REVENUES
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$ | 602,607 | $ | 542,496 | ||||
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INTEREST EXPENSE - financial institution
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(102,381 | ) | (90,323 | ) | ||||
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NET FINANCE REVENUES
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500,226 | 452,173 | ||||||
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(PROVISION) BENEFIT FOR CREDIT LOSSES
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- | - | ||||||
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FINANCE REVENUES, NET OF INTEREST EXPENSE
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AND CREDIT LOSSES
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500,226 | 452,173 | ||||||
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OPERATING EXPENSES
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447,310 | 415,404 | ||||||
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INCOME BEFORE INCOME TAXES
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52,916 | 36,769 | ||||||
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INCOME TAXES
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- | - | ||||||
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NET INCOME
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$ | 52,916 | $ | 36,769 | ||||
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NET INCOME PER SHARE:
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Basic
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$ | - | $ | - | ||||
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Dilutive
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$ | - | $ | - | ||||
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WEIGHTED AVERAGE SHARES:
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Basic
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18,634,369 | 18,634,369 | ||||||
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Dilutive
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20,691,517 | 20,516,132 | ||||||
The accompanying notes to the consolidated financial statements are an integral part of these statements.
ANCHOR FUNDING SERVICES, INC.
For the three months ended March 31, 2013
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Preferred
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Common
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Additional
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Accumulated
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Stock
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Stock
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Paid in Capital
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Deficit
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Total
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Balance, December 31, 2012
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$ | 671,409 | $ | 1,863 | $ | 7,496,693 | $ | (5,471,747 | ) | $ | 2,698,218 | |||||||||
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Provision for compensation expense related to issued stock options
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- | - | 2,226 | - | 2,226 | |||||||||||||||
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Provision for compensation expense related to issued warrants
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- | - | 1,916 | - | 1,916 | |||||||||||||||
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Net income
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- | - | - | 52,916 | 52,916 | |||||||||||||||
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Balance, March 31, 2013 (unaudited)
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$ | 671,409 | $ | 1,863 | $ | 7,500,835 | $ | (5,418,831 | ) | $ | 2,755,276 | |||||||||
The accompanying notes to the consolidated financial statements are an integral part of these statements
ANCHOR FUNDING SERVICES, INC.
For the three months ended March 31,
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(Unaudited)
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(Unaudited)
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CASH FLOWS FROM OPERATING ACTIVITIES:
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2013
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2012
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Net income
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$ | 52,916 | $ | 36,769 | ||||
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Adjustments to reconcile net income to net cash
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(used in) provided by operating activities:
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Depreciation and amortization
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4,163 | 5,041 | ||||||
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Compensation expense related to issuance of stock options
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2,226 | 1,302 | ||||||
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Compensation expense related to issuance of warrants
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1,916 | 3,834 | ||||||
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(Increase) in retained interest in purchased
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accounts receivable
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(498,471 | ) | (857,153 | ) | ||||
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(Increase) in due from client
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(372,149 | ) | - | |||||
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(Increase) decrease in earned but uncollected
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(5,307 | ) | 21,186 | |||||
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Decrease (increase) in prepaid expenses and other
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4,942 | (1,522 | ) | |||||
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(Decrease) increase in accounts payable
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(40,513 | ) | 27,635 | |||||
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(Decrease) in accrued payroll and related taxes
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(13,880 | ) | (2,792 | ) | ||||
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Increase (decrease) in collected but not earned
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1,095 | (4,768 | ) | |||||
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(Decrease) increase in accrued expenses
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(25,370 | ) | 3,525 | |||||
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Net cash used in operating activities
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(888,432 | ) | (766,943 | ) | ||||
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CASH FLOWS FROM INVESTING ACTIVITIES:
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Purchases of property and equipment
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(13,423 | ) | (2,349 | ) | ||||
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Net cash used in investing activities
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(13,423 | ) | (2,349 | ) | ||||
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CASH FLOWS FROM FINANCING ACTIVITIES:
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Proceeds from financial institution, net
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988,685 | 986,391 | ||||||
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Net cash provided by financing activities
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988,685 | 986,391 | ||||||
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INCREASE IN CASH
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86,830 | 217,099 | ||||||
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CASH, beginning of period
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610,439 | 306,571 | ||||||
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CASH, end of period
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$ | 697,269 | $ | 523,670 | ||||
The accompanying notes to the consolidated financial statements are an integral part of these statements.
ANCHOR FUNDING SERVICES, INC.
Three Months Ended March 31, 2013 and 2012
(Unaudited)
The Consolidated Balance Sheet as of March 31, 2013, the Consolidated Statements of Operations and Consolidated Statements of Changes In Stockholders’ Equity for the three months ended March 31, 2013 and the Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012 have been prepared by us without audit. In the opinion of Management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly in all material respects our financial position as of March 31, 2013, results of operations for the three months ended March 31, 2013 and 2012 and cash flows for the three months ended March 31, 2013 and 2012, and are not necessarily indicative of the results to be expected for the full year.
This report should be read in conjunction with our Form 10-K for our fiscal year ended December 31, 2012.
1.
BACKGROUND AND DESCRIPTION OF BUSINESS:
The consolidated financial statements include the accounts of Anchor Funding Services, Inc. (formerly BTHC XI, Inc.) and its wholly owned subsidiary, Anchor Funding Services, LLC (“Anchor”).
Anchor Funding Services, Inc. is a Delaware corporation. Anchor Funding Services, Inc. has no operations; substantially all operations of the Company are the responsibility of Anchor Funding Services, LLC.
Anchor Funding Services, LLC is a North Carolina limited liability company. Anchor Funding Services, LLC was formed for the purpose of providing factoring and back office services to businesses located throughout the United States of America.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation -
The accompanying consolidated financial statements include the accounts of Anchor Funding Services, Inc. and, its wholly owned subsidiary, Anchor Funding Services, LLC.
Estimates –
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition –
The Company charges fees to its customers in one of two ways as follows:
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1)
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Fixed Transaction Fee.
Fixed transaction fees are a fixed percentage of the purchased invoice and purchase order advance. This percentage does not change from the date the purchased invoice is funded until the date the purchased invoice is collected.
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2)
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Variable Transaction Fee.
Variable transaction fees are variable based on the length of time the purchased invoice and purchase order advance is outstanding. As specified in its contract with the client, the Company charges variable increasing percentages of the purchased invoice or purchase order advance as time elapses from the purchase date to the collection date.
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For both Fixed and Variable Transaction fees, the Company recognizes revenue by using one of two methods depending on the type of customer. For new customers the Company recognizes revenue using the cost recovery method. For established customers the Company recognizes revenue using the accrual method.
Under the cost recovery method, all revenue is recognized upon collection of the entire amount of purchased accounts receivable.
The Company considers new customers to be accounts whose initial funding has been within the last three months or less. Management believes it needs three months of history to reasonably estimate a customer’s collection period and accrued revenues. If three months of history has a limited number of transactions, the cost recovery method will continue to be used until a reasonable revenue estimate can be made based on additional history. Once the Company obtains sufficient historical experience, it will begin using the accrual method to recognize revenue.
For established customers the Company uses the accrual method of accounting. The Company applies this method by multiplying the historical yield, for each customer, times the amount advanced on each purchased invoice outstanding for that customer, times the portion of a year that the advance is outstanding. The customers’ historical yield is based on the Company’s last six months of experience with the customer along with the Company’s experience in the customer’s industry, if applicable.
The amounts recorded as revenue under the accrual method described above are estimates. As purchased invoices and purchase order advances are collected, the Company records the appropriate adjustments to record the actual revenue earned on each purchased invoice and purchase order advance. Adjustments from the estimated revenue to the actual revenue have not been material.
Retained Interest in Purchased Accounts Receivable –
Retained interest in purchased accounts receivable represents the gross amount of invoices purchased and advances on purchase orders from clients less amounts maintained in a reserve account. For factoring transactions, the Company purchases a customer’s accounts receivable and advances them a percentage of the invoice total. The difference between the purchase price and amount advanced is maintained in a reserve account. The reserve account is used to offset any potential losses the Company may have related to the purchased accounts receivable. For purchase order transactions the company advances and pays for 100% of the product’s cost.
The Company’s factoring and security agreements with their customers include various recourse provisions requiring the customers to repurchase accounts receivable if certain conditions, as defined in the factoring and security agreement, are met.
Senior management reviews the status of uncollected purchased accounts receivable and purchase order advances monthly to determine if any are uncollectible. The Company has a security interest in the accounts receivable and inventory purchased and, on a case-by-case basis, may have additional collateral. The Company files security interests in the property securing their advances. Access to this collateral is dependent upon the laws and regulations in each state where the security interest is filed. Additionally, the Company has varying types of personal guarantees from their customers relating to the purchased accounts receivable and purchase order advances.
Management considered approximately
$80,449
of their March 31, 2013 and December 31, 2012 retained interest in purchased accounts receivable to be uncollectible.
Management believes the fair value of the retained interest in purchased accounts receivable approximates its recorded value because of the relatively short-term nature of the purchased receivable and the fact that the majority of these invoices have been subsequently collected. As of March 31, 2013, accounts receivable purchased over 90 days old and still accruing fees totaled approximately $307,300.
Advertising Costs –
The Company charges advertising costs to expense as incurred. Total advertising costs were approximately $66,000 and $68,000 for the quarters ended March 31, 2013 and 2012, respectively.
Earnings per Share (“EPS”) –
Basic net income per share is computed by dividing the net income for the period by the weighted average number of common shares outstanding during the period. Dilutive earnings per share include the potential impact of dilutive securities, such as convertible preferred stock, stock options and stock warrants. The dilutive effect of stock options and warrants is computed using the treasury stock method, which assumes the repurchase of common shares at the average market price.
Under the treasury stock method, options and warrants will have a dilutive effect when the average price of common stock during the period exceeds the exercise price of options or warrants.
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The following tables present a reconciliation of the components used to derive basic and diluted EPS for the periods indicated:
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(Denominator)
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(Denominator)
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Weighted-
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Per
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Weighted-
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Per
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(Numerator)
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Average
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Share
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(Numerator)
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Average
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Share
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Net Income
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Shares
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Amount
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Net Income
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Shares
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Amount
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Three Months Ended March 31,
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Basic EPS
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$ | 52,916 | 18,634,369 | $ | - | $ | 36,769 | 18,634,369 | $ | - | ||||||||||||||
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Effect of Dilutive Securities – Options and
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Convertible Preferred Stock
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- | 2,057,148 | - | - | 1,881,763 | - | ||||||||||||||||||
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Diluted EPS
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$ | 52,916 | 20,691,517 | $ | - | $ | 36,769 | 20,516,132 | $ | - | ||||||||||||||
Stock Based Compensation -
The fair value of transactions in which the Company exchanges its equity instruments for employee services (share-based payment transactions) is recognized as an expense in the financial statements as services are performed.
Compensation expense is determined by reference to the fair value of an award on the date of grant and is amortized on a straight-line basis over the vesting period. We have elected to use the Black-Scholes-Merton (BSM) pricing model to determine the fair value of all stock option awards.
See Note 8 for the impact on the operating results for the three months ended March 31, 2013 and 2012.
Fair Value of Financial Instruments –
The carrying value of cash equivalents, retained interest in purchased accounts receivable, due to financial institution, accounts payable and accrued liabilities approximates their fair value.
Cash and Cash Equivalents –
Cash and cash equivalents consist primarily of highly liquid cash investment funds with original maturities of three months or less when acquired.
Income Taxes –
Effective January 31, 2007, the Company became a “C” corporation for income tax purposes. In a “C” corporation income taxes are provided for the tax effects of transactions reported in the consolidated financial statements plus deferred income taxes related to the differences between financial statement and taxable income.
The primary differences between financial statement and taxable income for the Company are as follows:
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Expenses related to the issuance of equity instruments
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Use of the reserve method of accounting for bad debts
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Net operating loss carryforwards.
The deferred tax asset represents the future tax return consequences of utilizing these items. Deferred tax assets are reduced by a valuation reserve, when management is uncertain if the net deferred tax assets will ever be realized.
The Company applied the provisions of ASC 740-10-50, “Accounting For Uncertainty In Income Taxes”, which provides clarification related to the process associated with accounting for uncertain tax positions recognized in our financial statements. The Company applied this guidance to all its tax positions, including tax positions taken and those expected to be taken, under the transition provision of the interpretation. For the three months ended March 31, 2013 and 2012, the Company concluded that it had no material uncertain tax positions.
The Company classifies interest accrued on unrecognized tax benefits with interest expense. Penalties accrued on unrecognized tax benefits are classified with operating expenses.
Recent Accounting Pronouncements –
The FASB amended the Comprehensive Income topic of the ASC in February 2013. The amendment addresses reporting of amounts reclassified out of accumulated other comprehensive income. Specifically, the amendment does not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendment does require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, in certain circumstances an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. The amendment will be effective for the Company on a prospective basis for reporting periods beginning after December 15, 2012. Early adoption is permitted. The Company adopted this guidance effective January 1, 2013, as required, and this adoption did not have a significant impact to our consolidated financial statements.
In October 2012, the FASB issued Accounting Standards Update ("ASU") 2012-04, "Technical Corrections and Improvements," portions of which were effective upon issuance and the remaining portion was effective for fiscal periods beginning after December 15, 2012. The amendments in this ASU cover a wide range of topics in the FASB ASC and are categorized in two sections, "Technical Corrections and Improvements", and "Conforming Amendments Related to Fair Value Measurements." The first section created source literature amendments, clarified guidance and corrected references, and relocated guidance throughout the ASC. The second section conformed terminology and clarified guidance in various topics of the ASC to fully reflect the fair value measurement and disclosure requirements of ASC Topic 820. No new fair value measurements were introduced and the application of the requirements of A5C Topic 820 is not anticipated to change. The Company adopted this guidance as required and the adoption did not have a significant impact to our consolidated financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact in the Company’s financial position, results of operations or cash flows.
3.
RETAINED INTEREST IN PURCHASED ACCOUNTS RECEIVABLE:
Retained interest in purchased accounts receivable consists of the following:
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March 31, 2013
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December 31, 2012
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Purchased invoices
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$ | 9,076,705 | $ | 8,921,203 | ||||
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Purchase order advances
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90,000 | 21,156 | ||||||
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Reserve account
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(1,568,322 | ) | (1,842,447 | ) | ||||
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Allowance for uncollectible invoices
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(80,449 | ) | (80,449 | ) | ||||
| $ | 7,517,934 | $ | 7,019,463 | |||||
Retained interest in purchased accounts receivable consists, excluding the allowance for uncollectible invoices, of United States companies in the following industries:
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March 31, 2013
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December 31, 2012
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Staffing
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$ | 280,684 | $ | 185,557 | ||||
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Transportation
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1,685,042 | 1,773,290 | ||||||
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Service
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4,385,993 | 4,528,668 | ||||||
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Manufacturing
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832,183 | 612,397 | ||||||
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Apparel
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414,481 | - | ||||||
| $ | 7,598,383 | $ | 7,099,912 | |||||
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Adjustments to the allowance for uncollectible invoices were as follows:
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For the quarters ended March 31,
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2013
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2012
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Balance - beginning of quarter
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$ | 80,449 | $ | 17,500 | ||||
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Provision for credit losses
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- | - | ||||||
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Write-offs
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- | - | ||||||
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Balance - end of quarter
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$ | 80,449 | $ | 17,500 | ||||
Total purchased invoices and purchase order advances were as follows:
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For the quarters ended March 31,
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2013
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2012
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Purchased invoices
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$ | 23,538,188 | $ | 20,245,117 | ||||
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Purchase order advances
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90,000 | 96,730 | ||||||
| $ | 23,628,188 | $ | 20,341,847 | |||||
4. DUE FROM CLIENT
In March 2013, the Company advanced a client $372,149 in excess of its accounts receivable. This amount was included in a subsequent invoice for completed services that were purchased by the Company.
5.
PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
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Estimated
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Useful Lives
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March 31, 2013
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December 31, 2012
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Furniture and fixtures
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2-5 years
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$ | 46,818 | $ | 46,818 | ||||
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Computers and software
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3-7 years
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200,928 | 187,505 | ||||||
| 247,746 | 234,323 | ||||||||
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Less: accumulated depreciation
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(224,229 | ) | (220,066 | ) | |||||
| $ | 23,517 | $ | 14,257 | ||||||
Depreciation expense was $4,163 and $5,041 for the quarters ended March 31, 2013 and 2012, respectively.
6. DUE TO FINANCIAL INSTITUTION:
On November 8, 2011, Anchor entered into a Rediscount Credit Facility with a Commercial Bank that was effective November 30, 2011 and replaced its prior credit facility. The maximum amount that can be borrowed under the facility is $10 million and the Bank will advance up to 80% of Anchor's advances to its clients. Anchor pays interest on advances monthly at the 90 Day Libor Rate plus 6.25% and various other monthly fees as defined in the agreement. The agreement requires that Anchor maintain at all times a ratio of debt to tangible net worth of not more than four to one (4:1). As of March 31, 2013, the Company was in compliance. The agreement contains customary representations and warranties, events of default and limitations, among other provisions. The agreement is collateralized by a first lien on all Anchors' assets. The agreement’s anniversary date is November 30, 2013 and automatically renews each year for an additional year provided that the Company has not provided 60 days’ notice to the Bank in advance of the anniversary date. This facility contains certain standard covenants, representations and warranties for loans of this type. In the event that we fail to comply with the covenant(s) and the lender does not waive such non-compliance, we could be in default of our credit facility, which could subject us to penalty rates of interest and accelerate the maturity of the outstanding balances in addition to other legal remedies, including foreclosure on collateral. The Company’s President and CEO have provided validity guarantees to the Bank. Anchor owed this financial institution $5,966,448 as of March 31, 2013 and $4,977,763 as of December 31, 2012.
7.
CAPITAL STRUCTURE:
The Company’s capital structure consists of preferred and common stock as described below:
Preferred Stock –
The Company is authorized to issue 10,000,000 shares of $.001 par value preferred stock. The Company’s Board of Directors determines the rights and preferences of its preferred stock.
On January 31, 2007, the Company filed a Certificate of Designation with the Secretary of State of Delaware. Effective with this filing, 2,000,000 preferred shares became Series 1 Convertible Preferred Stock. Series 1 Convertible Preferred Stock will rank senior to Common Stock.
Series 1 Convertible Preferred Stock is convertible into 5.1 shares of the Company’s Common Stock. The holder of the Series 1 Convertible Preferred Stock has the option to convert the shares to Common Stock at any time. Upon conversion all accumulated and unpaid dividends will be paid as additional shares of Common Stock.
The dividend rate on Series 1 Convertible Preferred Stock is 8%. Dividends are paid annually on December 31st in the form of additional Series 1 Convertible Preferred Stock unless the Board of Directors approves a cash dividend. Dividends on Series 1 Convertible Preferred Stock shall cease to accrue on the earlier of December 31, 2009, or on the date they are converted to Common Shares. Thereafter, the holders of Series 1 Convertible Preferred Stock have the same dividend rights as holders of Common Stock, as if the Series 1 Convertible Preferred Stock had been converted to Common Stock.
Common Stock –
The Company is authorized to issue 65,000,000 shares of $.0001 par value Common Stock. Each share of Common Stock entitles the holder to one vote at all stockholder meetings. Dividends on Common Stock will be determined annually by the Company’s Board of Directors.
The changes in Series 1 Convertible Preferred Stock and Common Stock shares for the quarter ended March 31, 2013 is summarized as follows:
|
Series 1 Convertible
|
Common
|
|||||||
|
Preferred Stock
|
Stock
|
|||||||
|
Balance, December 31, 2012
|
376,387 | 18,634,369 | ||||||
|
Preferred Stock Conversions
|
- | - | ||||||
|
Common Stock Issuances
|
- | - | ||||||
|
Balance March 31, 2013
|
376,387 | 18,634,369 | ||||||
8. RELATED PARTY TRANSACTION:
Promissory notes payable
On June 5, 2012, upon approval of the Board, Anchor entered into two Promissory Notes totaling $400,000, one with Morry Rubin and the other with a major shareholder of the company. Each Promissory Note was for $200,000, had a 90 day term, and earned interest (payable monthly) at 15% per annum. The Promissory Notes were to assist Anchor in providing factoring and purchase order funding facilities to some of its clients. The Promissory Notes were subordinate to and supplemented Anchor's $10 Million Rediscount Credit Facility with a Commercial Bank. Both promissory notes were paid on September 5, 2012. Anchor paid $0 of interest on these notes for quarters ended March 31, 2013 and 2012.
|
Options granted to officers and directors.
|
On March 20, 2012, M. Rubin and B. Bernstein were each granted 10 year options to purchase 250,000 shares of common stock each for a total of 500,000 shares, with the options vesting over a period of 10 years. Due to the anti-dilution provisions of our Series 1 Convertible Preferred Stock, this grant caused an adjustment of our preferred stock into common stock. Each share of Series 1 Preferred Stock is now convertible into 5.1 shares of the Company’s Common Stock. The holders of the Series 1 Convertible Preferred Stock have the option to convert the shares to Common Stock at any time. See Note 9.
In June 2012, Paul Healy was granted 10-year non-statutory stock options to purchase 180,000 shares of Anchor’s common stock exercisable at $.25 per share. The options vest one-third immediately and one-third on each of the successive anniversary dates from Mr. Healy joining the board until fully vested.
9. EMPLOYMENT AND STOCK OPTION AGREEMENTS:
On January 31, 2007, the Board adopted our 2007 Omnibus Equity Compensation Plan (the “Plan”), with 2,100,000 common shares authorized for issuance under the Plan. In October 2009 the Company's stockholders approved an increase in the number of shares covered by the Plan to 4,200,000 shares.
The general purpose of the plan is to provide an incentive to the Company’s employees, directors and consultants by enabling them to share in the future growth of the business.
At closing of the exchange transaction described above, M. Rubin and Brad Bernstein (“B. Bernstein”), the President of the Company, entered into employment contracts and stock option agreements. Additionally, at closing two non-employee directors entered into stock option agreements.
The following summarizes M. Rubin’s employment agreement and stock options:
|
·
|
The employment agreement with M. Rubin currently retains his services as Co-chairman and Chief Executive Officer through January 31, 2014.
|
|
·
|
An annual salary of $1 until, the first day of the first month following such time as the Company, shall have, within any period beginning on January 1 and ending not more than 12 months thereafter, earned pre-tax net income exceeding $1,000,000, M. Rubin’s base salary shall be adjusted to an amount, to be mutually agreed upon between M. Rubin and the Company, reflecting the fair value of the services provided, and to be provided, by M. Rubin taking into account (i) his position, responsibilities and performance, (ii) the Company’s industry, size and performance, and (iii) other relevant factors. M. Rubin is eligible to receive annual bonuses as determined by the Company’s compensation committee. M. Rubin shall be entitled to a monthly automobile allowance of $1,500.
|
|
·
|
10-year options to purchase 650,000 shares exercisable at $1.25 per share, pursuant to the Plan. All of the aforementioned options are fully vested.
|
The following summarizes B. Bernstein’s employment agreement and stock options:
|
·
|
The employment agreement with B. Bernstein currently retains his services as President through January 31, 2014.
|
|
·
|
An annual salary of $240,000. The Board may periodically review B. Bernstein’s base salary and may determine to increase (but not decrease) the base salary in accordance with such policies as the Company may hereafter adopt from time to time. The Board approved an annual bonus program for Mr. Bernstein commencing with the 2012 fiscal year and ending with the 2014 fiscal year. The annual bonus is equal to 5% of annual net income provided net income is equal to or greater than $200,000. The bonus is calculated on the Company’s audited GAAP financial statements. B. Bernstein shall be entitled to a monthly automobile allowance of $1,000.
|
|
·
|
10-year options to purchase 950,000 shares exercisable at $1.25 per share, pursuant to the Plan. All of the aforementioned options are fully vested.
|
The following table summarizes information about stock options as of March 31, 2013:
|
Exercise
|
Number
|
Remaining
|
Number
|
||||||||
|
Price
|
Outstanding
|
Contractual Life
|
Exercisable
|
||||||||
| $ | 1.25 | 1,605,000 |
4 years
|
1,605,000 | |||||||
| $ | 1.00 | 45,000 |
6 years
|
33,750 | |||||||
| $ | 0.62 | 500,000 |
6 years
|
500,000 | |||||||
| $ | 0.17 | 500,000 |
9 years
|
50,000 | |||||||
| $ | 0.25 | 180,000 |
10 years
|
60,000 | |||||||
| 2,830,000 | 2,248,750 | ||||||||||
The Company measured the fair value of each option award on the date of grant using the Black Scholes option pricing model with the following assumptions:
|
Exercise price
|
$.17 to $1.25
|
|||
|
Term
|
10 years
|
|||
|
Volatility
|
.41 to 2.50
|
|||
|
Dividends
|
0%
|
|||
|
Discount rate
|
0.08% to 4.75%
|
The fair value amounts recorded for these options in the statement of operations was $2,226 and $1,302 for the quarters ended March 31, 2013 and 2012, respectively.
10. WARRANTS:
In March, 2007, the placement agent was issued warrants to purchase 1,342,500 shares of the Company’s common stock. These warrants were due to expire on January 31, 2012, but were extended by the Company through January 31, 2013 at the same exercise price of $1.10 per share and were again extended by the Company through January 31, 2014 on the condition that each warrant holder accept a new exercise price of $1.35 per share. The following information was input into BSM to compute a per warrant price of $.023:
|
Exercise price
|
$
|
1.35
|
|||
|
Term
|
7 years
|
||||
|
Volatility
|
40%
|
||||
|
Dividends
|
0
|
%
|
|||
|
Discount rate
|
.05
|
%
|
|||
For the quarters ended March 31, 2013 and 2012 the Company recorded compensation expense of $1,916 and $3,884 respectively, related to the issuance of these warrants.
On December 7, 2009, the Company received gross proceeds of $500,002 from the sale of 500,002 shares of common stock and ten year warrants to purchase 2,000,004 shares of common stock exercisable at $1.00 per share. The Black Scholes option pricing model was used to compute the fair value of the warrants.
The following table summarizes information about stock warrants as of March 31, 2013:
|
Weighted Average
|
|||||||||||
|
Exercise
|
Number
|
Remaining
|
Number
|
||||||||
|
Price
|
Outstanding
|
Contractual Life
|
Exercisable
|
||||||||
| $ | 1.10 | 1,342,500 |
10 Months
|
1,342,500 | |||||||
| $ | 1.00 | 2,000,004 |
7 years
|
2,000,004 | |||||||
11.
CONCENTRATIONS:
Revenues –
The Company recorded revenues from United States companies in the following industries as follows:
|
For the quarters ended March 31,
|
||||||||
|
Industry
|
2013 | 2012 | ||||||
|
Staffing
|
$ | 16,697 | $ | 27,670 | ||||
|
Transportation
|
161,874 | 156,279 | ||||||
|
Service
|
353,862 | 351,016 | ||||||
|
Other
|
70,174 | 7,081 | ||||||
| $ | 602,607 | $ | 542,496 | |||||
Major Customers –
For the three months ended March 31, 2013, the Company’s largest customer by revenues was an IT Consulting Company which accounted for approximately 10.0% of its revenues. In May 2013, this customer sold its business and paid all of its obligations to Anchor including a $75,000 early termination fee. For the three months ended March 31, 2012, the Company’s largest customer by revenues was a food service Company which accounted for approximately 10.2% of its revenues.
Client Accounts -
As of March 31, 2013, we have three clients that account for an aggregate of approximately 34.6% of our accounts receivable portfolio and approximately 25.6% of our revenues for the three months ended March 31, 2013. The transactions and balances with these clients as of and for the three months ended March 31, 2013 are summarized below:
|
Percentage of Accounts Receivable
|
Percentage of Revenues for
|
|||||||
|
Portfolio As of
|
the Three Months Ended
|
|||||||
|
Entity
|
March 31, 2013
|
March 31, 2013
|
||||||
|
Food Service Company in Missouri (1)
|
15.3 | % | 8.4 | % | ||||
|
Paperboard Company in Michigan
|
10.2 | % | 7.2 | % | ||||
|
IT Consultant in Maryland
|
9.1 | % | 10.0 | % | ||||
| 34.6 | % | 25.6 | % | |||||
|
(1)
|
Percentage calculation includes $372,149 which is classified as “due from client” for this entity.
|
If these clients’ balances did not collect, the Company’s total potential loss would be $3,309,762; however, the majority of these balances were subsequently collected and the Company deems them all collectible.
Cash –
The Company places its cash and cash equivalents on deposit with financial institutions in the United States. The Federal Deposit Insurance Corporation (FDIC) provides coverage up to $250,000 per depositor at FDIC-insured depository institutions. During the three months ended March 31, 2013, the Company from time to time may have had amounts on deposit in excess of the insured limits.
12.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW:
Cash paid for interest to a financial institution was $102,288 and $90,323 for the quarters ended March 31, 2013 and 2012, respectively.
Non-cash financing and investing activities consisted of the following:
For the three months ending March 31, 2013
None
For the three months ending March 31, 2012
None
13.
INCOME TAXES:
As of December 31, 2012, the Company had approximately $3.6 million of net operating loss carryforwards (“NOL”) for income tax purposes. The NOL’s expire in various years from 2022 through 2025. The Company’s use of operating loss carryforwards is subject to limitations imposed by the Internal Revenue Code. Management believes that the deferred tax assets as of March 31, 2013 do not satisfy the realization criteria and has recorded a valuation allowance for the entire net tax asset. By recording a valuation allowance for the entire amount of future tax benefits, the Company has not recognized a deferred tax benefit for income taxes in its statements of operations.
14. COMMITMENTS AND CONTINGENCIES:
Lease Commitments
The Company has lease agreements for office space in Charlotte, NC, Boca Raton, FL and Medley, Florida. All lease agreements are with unrelated parties.
The Company has two Charlotte leases for adjoining space that expire May 31, 2013 and the company plans to renew for another year. The monthly rent for the combined space is approximately $2,340.
Beginning November 1, 2009, the company entered into a 24 month lease for office space in Boca Raton, FL, and on November 1, 2011 renewed for another two years. The monthly rental is approximately $1,413.
Beginning November 12, 2012, the company entered into a six month lease for office space in Medley, FL, with an option to renew for twelve month terms. The monthly rental is $800.
The rental expense for the three months ended March 31, 2013 and 2012 was approximately $14,341 and $11,200, respectively.
Contingencies
We are not a party to any pending material legal proceedings except as described below. To our knowledge, no governmental authority is contemplating commencing a legal proceeding in which we would be named as a party.
On October 22, 2010, the Company filed a complaint in the Superior Court of Stamford/Norwalk, Connecticut against the Administrators of the Estate of David Harvey (“Harvey”) to recoup a credit loss incurred by the Company’s former subsidiary, Brookridge Funding Services, LLC. Harvey was the owner of a Company that caused the credit loss and the Company is pursuing its rights under the personal guarantee that Harvey provided. The Complaint is demanding principal of approximately $485,000 plus interest and damages.
|
ITEM 2.
|
MANAGEMENT
'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
This discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and the related notes appearing at the end of our Form 10-K for the fiscal year ended December 31, 2012. Some of the information contained in this discussion and analysis or set forth elsewhere in this form 10-Q, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. The “Risk Factors” section of our Form 10-K for the fiscal year ended December 31, 2012 should be read for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Executive Overview
Our business objective is to create a well-recognized, national financial services firm for small businesses providing accounts receivable funding (factoring), purchase order finance, outsourcing of accounts receivable management including collections and the risk of customer default and other specialty finance products including, but not limited to, trade finance and government contract funding. For certain service businesses, Anchor also provides back office support, including payroll and invoice processing services. We provide our services to clients nationwide and may expand our services internationally in the future. We plan to achieve our growth objectives as described below through internal growth through a network of business development personnel and mass media marketing initiatives. Our plans also include a combination of strategic and add-on acquisitions of other factoring and related specialty finance firms and other types of firms that serve small businesses in the United States and Canada that could provide cross-selling opportunities. Our principal operations are located in Charlotte, North Carolina and we maintain an executive office in Boca Raton, Florida, which includes its sales and marketing functions. We have a sales office in Medley, Florida which sells freight bill funding services to transportation companies under our TruckerFunds.com trade name.
Summary of Critical Accounting Policies
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to credit provisions, intangible assets, contingencies, litigation and income taxes. Management bases its estimates and judgments on historical experience as well as various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies, among others, reflect the more significant judgments and estimates used in the preparation of our financial statements.
Principles of Consolidation -
The accompanying consolidated financial statements include the accounts of Anchor Funding Services, Inc. and, its wholly owned subsidiary, Anchor Funding Services, LLC.
Estimates –
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition –
The Company charges fees to its customers in one of two ways as follows:
|
1)
|
Fixed Transaction Fee.
Fixed transaction fees are a fixed percentage of the purchased invoice and purchase order advance. This percentage does not change from the date the purchased invoice is funded until the date the purchased invoice is collected.
|
|
2)
|
Variable Transaction Fee.
Variable transaction fees are variable based on the length of time the purchased invoice and purchase order advance is outstanding. As specified in its contract with the client, the Company charges variable increasing percentages of the purchased invoice or purchase order advance as time elapses from the purchase date to the collection date.
|
For both Fixed and Variable Transaction fees, the Company recognizes revenue by using one of two methods depending on the type of customer. For new customers the Company recognizes revenue using the cost recovery method. For established customers the Company recognizes revenue using the accrual method.
Under the cost recovery method, all revenue is recognized upon collection of the entire amount of purchased accounts receivable.
The Company considers new customers to be accounts whose initial funding has been within the last three months or less. Management believes it needs three months of history to reasonably estimate a customer’s collection period and accrued revenues. If three months of history has a limited number of transactions, the cost recovery method will continue to be used until a reasonable revenue estimate can be made based on additional history. Once the Company obtains sufficient historical experience, it will begin using the accrual method to recognize revenue.
For established customers the Company uses the accrual method of accounting. The Company applies this method by multiplying the historical yield, for each customer, times the amount advanced on each purchased invoice outstanding for that customer, times the portion of a year that the advance is outstanding. The customers’ historical yield is based on the Company’s last six months of experience with the customer along with the Company’s experience in the customer’s industry, if applicable.
The amounts recorded as revenue under the accrual method described above are estimates. As purchased invoices and purchase order advances are collected, the Company records the appropriate adjustments to record the actual revenue earned on each purchased invoice and purchase order advance. Adjustments from the estimated revenue to the actual revenue have not been material.
Retained Interest in Purchased Accounts Receivable –
Retained interest in purchased accounts receivable represents the gross amount of invoices purchased and advances on purchase orders from clients less amounts maintained in a reserve account. For factoring transactions, the Company purchases a customer’s accounts receivable and advances them a percentage of the invoice total. The difference between the purchase price and amount advanced is maintained in a reserve account. The reserve account is used to offset any potential losses the Company may have related to the purchased accounts receivable. For purchase order transactions the company advances and pays for 100% of the product’s cost.
The Company’s factoring and security agreements with their customers include various recourse provisions requiring the customers to repurchase accounts receivable if certain conditions, as defined in the factoring and security agreement, are met.
Senior management reviews the status of uncollected purchased accounts receivable and purchase order advances monthly to determine if any are uncollectible. The Company has a security interest in the accounts receivable and inventory purchased and, on a case-by-case basis, may have additional collateral. The Company files security interests in the property securing their advances. Access to this collateral is dependent upon the laws and regulations in each state where the security interest is filed. Additionally, the Company has varying types of personal guarantees from their customers relating to the purchased accounts receivable and purchase order advances.
Management considered approximately $80,500 of their March 31, 2013 and December 31, 2012 retained interest in purchased accounts receivable to be uncollectible.
Management believes the fair value of the retained interest in purchased accounts receivable approximates its recorded value because of the relatively short-term nature of the purchased receivable and the fact that the majority of these invoices have been subsequently collected. As of March 31, 2013, accounts receivable purchased over 90 days old and still accruing fees totaled approximately $307,300.
Advertising Costs –
The Company charges advertising costs to expense as incurred. Total advertising costs were approximately $66,000 and $68,000 for the quarters ended March 31, 2013 and 2012, respectively.
Earnings per Share (“EPS”) –
Basic net income per share is computed by dividing the net income for the period by the weighted average number of common shares outstanding during the period. Dilutive earnings per share include the potential impact of dilutive securities, such as convertible preferred stock, stock options and stock warrants. The dilutive effect of stock options and warrants is computed using the treasury stock method, which assumes the repurchase of common shares at the average market price.
Under the treasury stock method, options and warrants will have a dilutive effect when the average price of common stock during the period exceeds the exercise price of options or warrants.
|
The following tables present a reconciliation of the components used to derive basic and diluted EPS for the periods indicated:
|
||||||||||||||||||||||||
| 2013 | 2012 | |||||||||||||||||||||||
|
(Denominator)
|
(Denominator)
|
|||||||||||||||||||||||
|
Weighted-
|
Per
|
Weighted-
|
Per
|
|||||||||||||||||||||
|
(Numerator)
|
Average
|
Share
|
(Numerator)
|
Average
|
Share
|
|||||||||||||||||||
|
Net Income
|
Shares
|
Amount
|
Net Income
|
Shares
|
Amount
|
|||||||||||||||||||
|
Three Months Ended March 31,
|
||||||||||||||||||||||||
|
Basic EPS
|
$ | 52,916 | 18,634,369 | $ | - | $ | 36,769 | 18,634,369 | $ | - | ||||||||||||||
|
Effect of Dilutive Securities – Options and
|
||||||||||||||||||||||||
|
Convertible Preferred Stock
|
- | 2,057,148 | - | - | 1,881,763 | - | ||||||||||||||||||
|
Diluted EPS
|
$ | 52,916 | 20,691,517 | $ | - | $ | 36,769 | 20,516,132 | $ | - | ||||||||||||||
Stock Based Compensation -
The fair value of transactions in which the Company exchanges its equity instruments for employee services (share-based payment transactions) is recognized as an expense in the financial statements as services are performed.
Compensation expense is determined by reference to the fair value of an award on the date of grant and is amortized on a straight-line basis over the vesting period. We have elected to use the Black-Scholes-Merton (BSM) pricing model to determine the fair value of all stock option awards.
See Note 9 for the impact on the operating results for the three months ended March 31, 2013 and 2012.
Fair Value of Financial Instruments –
The carrying value of cash equivalents, retained interest in purchased accounts receivable, due to financial institution, accounts payable and accrued liabilities approximates their fair value.
Cash and Cash Equivalents –
Cash and cash equivalents consist primarily of highly liquid cash investment funds with original maturities of three months or less when acquired.
Income Taxes –
Effective January 31, 2007, the Company became a “C” corporation for income tax purposes. In a “C” corporation income taxes are provided for the tax effects of transactions reported in the consolidated financial statements plus deferred income taxes related to the differences between financial statement and taxable income.
The primary differences between financial statement and taxable income for the Company are as follows:
·
Expenses related to the issuance of equity instruments
·
Use of the reserve method of accounting for bad debts
·
Net operating loss carryforwards.
The deferred tax asset represents the future tax return consequences of utilizing these items. Deferred tax assets are reduced by a valuation reserve, when management is uncertain if the net deferred tax assets will ever be realized.
The Company applied the provisions of ASC 740-10-50, “Accounting For Uncertainty In Income Taxes”, which provides clarification related to the process associated with accounting for uncertain tax positions recognized in our financial statements. The Company applied this guidance to all its tax positions, including tax positions taken and those expected to be taken, under the transition provision of the interpretation. For the three months ended March 31, 2013 and 2012, the Company concluded that it had no material uncertain tax positions.
The Company classifies interest accrued on unrecognized tax benefits with interest expense. Penalties accrued on unrecognized tax benefits are classified with operating expenses.
Results of Operations
Three Months Ended March 31, 2013 vs. Three Months Ended March 31, 2012
The following table compares the operating results for the three months ended March 31, 2013 and March 31, 2012:
|
Three Months Ended March 31,
|
||||||||||||||||
|
2013
|
2012
|
$ Change
|
% Change
|
|||||||||||||
|
Finance revenues
|
$ | 602,607 | $ | 542,496 | $ | 60,111 | 11.1 | |||||||||
|
Interest income (expense), net and commissions
|
(102,381 | ) | (90,323 | ) | 12,058 | 13.3 | ||||||||||
|
Net finance revenues
|
500,226 | 452,173 | 48,053 | 10.6 | ||||||||||||
|
(Provision) benefit for credit losses
|
- | - | - | - | ||||||||||||
|
Finance revenues, net of interest expense and credit losses
|
500,226 | 452,173 | 48,053 | 10.6 | ||||||||||||
|
Operating expenses
|
447,310 | 415,404 | 31,906 | 7.7 | ||||||||||||
|
Net income before income taxes
|
52,916 | 36,769 | 16,147 | 43.9 | ||||||||||||
|
Income tax (provision) benefit:
|
- | - | - | - | ||||||||||||
|
Net income
|
$ | 52,916 | $ | 36,769 | $ | 16,147 | 43.9 | |||||||||
Finance revenues increased to $602,607 for the three months ended March 31, 2013 compared to $542,496 for the three months ended March 31, 2012, an 11.1% increase. Finance revenues increased due to an increase in business from existing clients and new clients.
The Company had net interest expense of $102,381 for the three months ended March 31, 2013 compared to net interest expense of $90,323 for the three months ended March 31, 2012. This change is primarily the result of the Company borrowing more to purchase invoices.
Operating expenses for the three months ended March 31, 2013 were $447,310 compared to $415,404 for the three months ended March 31, 2012, a $31,906 increase. This 7.7% increase is primarily the result of additional payroll costs associated with the Company’s opening of a sales office in Medley, Florida.
Increased finance revenues more than offset the increases in interest and operating expenses and resulted in net income for the three months ended March 31, 2013 of $52,916 compared to net income of $36,769 for the three months ended March 31, 2012.
Liquidity
Cash Flow Summary
Cash Flows from Operating Activities
Net cash used in operating activities was $888,432 for the three months ended March 31, 2013 and was primarily due to cash used by operating assets, primarily to purchase accounts receivable. Cash used by operating assets and liabilities was primarily due to an increase of $498,471 in retained interest in accounts receivable and an increase in due from client of $372,149. Increases and decreases in prepaid expenses, accounts payable, accrued payroll and accrued expenses were primarily the result of timing of payments and receipts.
Net cash used in operating activities was $766,943 for the three months ended March 31, 2012 and was primarily due to cash used by operating assets, primarily to purchase accounts receivable. Cash used by operating assets and liabilities was primarily due to an increase of $857,153 in retained interest in accounts receivable. Increases and decreases in prepaid expenses, accounts payable, accrued payroll and accrued expenses were primarily the result of timing of payments and receipts.
Cash Flows from Investing Activities
For the three months ended March 31, 2013, net cash used in investing activities was $13,423 for the purchase of property and equipment.
For the three months ended March 31, 2012, net cash used in investing activities was $2,349 for the purchase of property and equipment.
Cash Flows from Financing Activities
Net cash provided by financing activities was $988,685 for the three months ended March 31, 2013. This was the result of proceeds from the Company’s rediscount credit facility.
Net cash provided by financing activities was $986,391 for the three months ended March 31, 2012. This was the result of proceeds from the Company’s rediscount credit facility.
Capital Resources
We have the availability of a $10 million Rediscount Credit Facility with a Commercial Bank. The maximum amount that can be borrowed under the facility is $10 million and the Bank advances up to 80% of Anchor’s advances to its clients. The agreement’s anniversary date is November 30, 2013 and automatically renews each year for an additional year provided that the Company has not provided 60 days notice to the financial institution in advance of the anniversary date. This facility is secured by our assets, and contains certain standard covenants, representations and warranties for loans of this type. In the event that we fail to comply with the covenant(s) and the lender does not waive such non-compliance, we could be in default of our credit facility, which could subject us to penalty rates of interest and accelerate the maturity of the outstanding balances. The Credit Agreement contains standard representations, warranties and events of default for facilities of this type. Occurrences of an event of default under our credit facility allow the lender to accelerate the payment of the loans and/or terminate the commitments to lend, in addition to other legal remedies, including foreclosure on collateral. In the event we are not able to maintain adequate credit facilities for our factoring, purchase order financing and acquisition needs on commercially reasonable terms, our ability to operate our business and complete one or more acquisitions would be significantly impacted and our financial condition and results of operations could suffer. We can provide no assurances that replacement facilities will be obtained by us on terms satisfactory to us, if at all.
Based on our current cash position and our Credit Facilities, we believe we can meet our cash needs for the next 12 to 15 months and support our anticipated organic growth. In the event we acquire another company, we may need additional equity or subordinated debt financing and/or a new credit facility to complete the transaction and our daily cash needs and liquidity could change based on the needs of the combined companies. At that time, in the event we are not able to obtain adequate new facilities and/or financing to complete the acquisition (if needed) and to operate the combined companies financing needs on commercially reasonable terms, our ability to operate and expand our business would be significantly impacted and our financial condition and results of operations could suffer.
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ITEM 3.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. Our primary exposure to market risk is interest rate risk associated with our short term money market investments. The Company does not have any financial instruments held for trading or other speculative purposes and does not invest in derivative financial instruments, interest rate swaps or other investments that alter interest rate exposure. The Company does not have any credit facilities with variable interest rates.
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ITEM 4.
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CONTROLS
AND PROCEDURES
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The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of "disclosure controls and procedures" in Rule 13a-15(e). In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and the Company's Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on the foregoing, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective at the reasonable assurance level at the end of our most recent quarter. There have been no changes in the Company's disclosure controls and procedures or in other factors that could affect the disclosure controls subsequent to the date the Company completed its evaluation. Therefore, no corrective actions were taken.
There were no changes in the Company’s internal controls over financial reporting during the most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
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LEGAL PROCEEDINGS:
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We are not a party to any pending material legal proceedings except as described below. To our knowledge, no governmental authority is contemplating commencing a legal proceeding in which we would be named as a party.
On October 22, 2010, the Company filed a complaint in the Superior Court of Stamford/Norwalk, Connecticut against the Administrators of the Estate of David Harvey (“Harvey”) to recoup a credit loss incurred by the Company’s former subsidiary, Brookridge Funding Services, LLC. Harvey was the owner of a Company that caused the credit loss and the Company is pursuing its rights under the personal guarantee that Harvey provided. The Complaint is demanding principal of approximately $485,000 plus interest and damages. During the quarter ended March 31, 2013, there were no current developments involving the current legal proceeding.
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RISK FACTORS:
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As a Smaller Reporting Company as defined Rule 12b-2 of the Exchange Act and in item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item 1A. See the Company’s risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.
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UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS:
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(a)
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For the three months ended March 31, 2013, there were no sales of unregistered securities.
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(b)
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Rule 463 of the Securities Act is not applicable to the Company.
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(c)
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In the three months ended March 31, 2013, there were no repurchases by the Company of its Common Stock.
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DEFAULTS UPON SENIOR SECURITIES:
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Not applicable.
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MINE SAFETY DISCLOSURES.
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Not applicable.
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OTHER INFORMATION:
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Not applicable.
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EXHIBITS:
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The following exhibits are all previously filed in connection with our Form 10-SB, as amended, unless otherwise noted.
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2.1
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Exchange Agreement
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3.1
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Certificate of Incorporation-BTHC,INC.
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3.2
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Certificate of Merger of BTHC XI, LLC into BTHC XI, Inc.
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3.3
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Certificate of Amendment
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3.4
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Designation of Rights and Preferences-Series 1 Convertible Preferred Stock
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3.5
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Amended and Restated By-laws
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4.1
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Form of Placement Agent Warrant issued to Fordham Financial Management
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10.1
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Directors’ Compensation Agreement-George Rubin
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10.2
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Employment Contract-Morry F. Rubin
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10.3
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Employment Contract-Brad Bernstein
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10.4
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Agreement-Line of Credit
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10.5
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Fordham Financial Management-Consulting Agreement
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10.6
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Facilities Lease – Florida
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10.7
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Facilities Lease – North Carolina
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10.8
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Loan and Security Agreement (1)
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10.9
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Revolving Note (1)
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10.10
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Debt Subordination Agreement (1)
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10.11
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Guaranty Agreement (Morry Rubin) (1)
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10.12
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Guaranty Agreement (Brad Bernstein)(1)
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10.13
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Continuing Guaranty Agreement (1)
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10.14
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Pledge Agreement (1)
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10.16
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Asset Purchase Agreement between the Company and Brookridge Funding LLC (2)
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10.17
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Senior Credit Facility between the Company and MGM Funding LLC (2)
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10.18
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Senior Credit Facility Guarantee - Michael P. Hilton and John A. McNiff III (4)
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10.19
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Employment Agreement - Michael P. Hilton (4)
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10.20
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Employment Agreement - John A. McNiff (4)
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10.21
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Accounts Receivable Credit Facility with Greystone Commercial Services LP (3)
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10.22
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Memorandum of Understanding - Re: Rescission Agreement*
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10.23
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Rescission Agreement and Exhibits Thereto (5)
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10.24
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Termination Agreement by and between Brookridge Funding Services LLC and MGM Funding LLC.(5)
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10.25
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First Amendment to Factoring Agreement (6)
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10.26
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Promissory Note dated April 26, 2011 between Anchor Funding Services, Inc. and MGM Funding, LLC (7)
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10.27
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Rediscount Facility Agreement with TAB Bank (8)
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10.28
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Form of Validity Warranty to TAB Bank (8)
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| 10.29 | Amendment to Employment Agreement of Morry F. Rubin (10) |
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21.21
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Subsidiaries of Registrant listing state of incorporation (4)
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99.1
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2007 Omnibus Equity Compensation Plan
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99.2
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Form of Non-Qualified Option under 2007 Omnibus Equity Compensation Plan
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99.3
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Amendment to 2007 Omnibus Equity Compensation Plan increasing the Plan to 4,200,000 shares (9)
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99.4
|
Press Release –First Quarter Results of Operations *
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101.INS
|
XBRL Instance Document,XBRL Taxonomy Extension Schema *
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|
101.SCH
|
Document, XBRL Taxonomy Extension *
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101.CAL
|
Calculation Linkbase, XBRL Taxonomy Extension Definition *
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|
101.DEF
|
Linkbase,XBRL Taxonomy Extension Labels *
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|
101.LAB
|
Linkbase, XBRL Taxonomy Extension *
|
|
101.PRE
|
Presentation Linkbase *
|
|
___________________
|
|
|
* Filed herewith.
|
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(1)
|
Incorporated by reference to the Registrant’s Form 8-K filed November 24, 2008 (date of earliest event
November 21, 2008).
|
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(2)
|
Incorporated by reference to the Registrant's Form 8-K filed December 8, 2009 (date of earliest event
- December 4, 2009).
|
|
(3)
|
Incorporated by reference to the Registrant's Form 8-K filed December 2, 2009 (date of earliest event
-November 30, 2009).
|
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(4)
|
Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 2009.
|
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(5)
|
Incorporated by reference to the Registrant's Form 8-K filed October 12, 2010 (date of earliest event -
October 6, 2010).
|
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(6)
|
Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 2010.
|
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(7)
|
Incorporated by reference to the Registrant's Form 8-K filed April 28, 2011 (date of earliest event -
April 26, 2011).
|
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(8)
|
Incorporated by reference to the Registrant’s Form 10-Q for the quarter ended September 30, 2011.
|
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(9)
|
Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 2011.
|
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(10)
|
Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 2012.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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ANCHOR FUNDING SERVICES, INC.
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|||
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Date: May 14, 2013
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By:
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/s/ Morry F. Rubin | |
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Morry F. Rubin
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|||
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Chief Executive Officer
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|||
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Date: May 14, 2013
|
By:
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/s/ Brad Bernstein | |
|
Brad Bernstein
|
|||
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President and Chief Financial Officer
|
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24
TABLE OF CONTENTS
Part I. Financial InformationItem 1. Financial StatementsItem 2. Management 's Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal Proceedings:Item 1A. Risk Factors:Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds:Item 3. Defaults Upon Senior Securities:Item 4. Mine Safety DisclosuresItem 5. Other Information:Item 6. Exhibits: