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 September 30, 2012March 31, 2013

Commission File Number: 0-52589

ANCHOR FUNDING SERVICES, INC.
(Exact name of registrant as specified in its charter)

GRAPHICLOGO
Delaware 20-5456087
(State of jurisdiction of Incorporation)(I.R.S. Employer Identification No.)
  
 
10801 Johnston Road. Suite 210
Charlotte, NC                  
   (Address of Principal Executive Offices)
 
 
28226
(Zip Code)
 
                  (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][ 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.
 
Large accelerated filer [  ]   Accelerated filer [  ]
 
 Non-accelerated filer [  ] (Do not check if a smaller reporting company) Smaller reporting company [X]
 
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 September 30, 2012,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.

 
1

 
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.
 
 
2

 
ANCHOR FUNDING SERVICES, INC.

Form 10-Q Quarterly Report
Table of Contents

 
 Page
  
PART I.  FINANCIAL INFORMATION 
  
4
   
 
4
   
 
5
   
 
6
   
 
7
   
 
8-17 8
   
18-2417
   
24 21
   
24 21
  
PART II.     OTHER INFORMATION
 
  
24 22
   
2422
   
25 22
   
25 22
   
25 22
   
25 22
   
26 23
  
27
24
  
Certifications28-31
 
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3

 
PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
ANCHOR FUNDING SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
      
ASSETSASSETS    
 (Unaudited)     (Unaudited)    
 September 30,  December 31,  March 31,  December 31, 
 2012  2011  2013  2012 
CURRENT ASSETS:            
Cash $1,416,592  $306,571  $697,269  $610,439 
Retained interest in purchased accounts receivable, net  6,370,882   6,331,156   7,517,934   7,019,463 
Due from client  372,149   - 
Earned but uncollected fee income  134,202   157,070   174,112   168,805 
Prepaid expenses and other  71,375   70,924   96,056   100,998 
Total current assets  7,993,051   6,865,721   8,857,520   7,899,705 
                
PROPERTY AND EQUIPMENT, net  16,539   17,030   23,517   14,257 
                
SECURITY DEPOSITS  5,486   5,486   6,023   6,023 
                
 $8,015,076  $6,888,237  $8,887,060  $7,919,985 
                
LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES AND STOCKHOLDERS' EQUITY    
                
CURRENT LIABILITIES:                
Due to financial institution $5,192,328  $4,427,343  $5,966,448  $4,977,763 
Accounts payable  50,949   45,376   46,259   86,772 
Accrued payroll and related taxes  51,370   60,918   55,458   69,338 
Accrued expenses  70,604   29,609   33,882   59,252 
Collected but unearned fee income  22,053   36,939   29,737   28,642 
Total current liabilities  5,387,304   4,600,185   6,131,784   5,221,767 
                
COMMITMENTS AND CONTINGENCIES                
                
PREFERRED STOCK, net of issuance costs of        
STOCKHOLDERS’ EQUITY
PREFERRED STOCK, net of issuance costs of
        
$1,209,383  671,409   671,409   671,409   671,409 
COMMON STOCK  1,863   1,863   1,863   1,863 
ADDITIONAL PAID IN CAPITAL  7,488,719   7,465,386   7,500,835   7,496,693 
ACCUMULATED DEFICIT  (5,534,219)  (5,850,606)  (5,418,831)  (5,471,747)
  2,627,772   2,288,052   2,755,276   2,698,218 
                
 $8,015,076  $6,888,237  $8,887,060  $7,919,985 
                
 
The accompanying notes to the consolidated financial statements are an integral part of these statements.
4

ANCHOR FUNDING SERVICES, INC.
For the three months ended March 31,
 
       
       
  (Unaudited)  (Unaudited) 
  2013  2012 
FINANCE REVENUES $602,607  $542,496 
INTEREST EXPENSE - financial institution  (102,381)  (90,323)
         
NET FINANCE REVENUES  500,226   452,173 
(PROVISION) BENEFIT FOR CREDIT LOSSES  -   - 
         
FINANCE REVENUES, NET OF INTEREST EXPENSE        
 AND CREDIT LOSSES  500,226   452,173 
         
OPERATING EXPENSES  447,310   415,404 
         
INCOME BEFORE  INCOME TAXES  52,916   36,769 
         
INCOME TAXES  -   - 
         
NET INCOME $52,916  $36,769 
         
         
NET INCOME PER SHARE:        
  Basic $-  $- 
  Dilutive $-  $- 
         
WEIGHTED AVERAGE SHARES:        
  Basic  18,634,369   18,634,369 
  Dilutive  20,691,517   20,516,132 
         

The accompanying notes to the consolidated financial statements are an integral part of these statements.
 
 
 
45

 
ANCHOR FUNDING SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
   
(Unaudited)
For the three months ending
September 30,
   
(Unaudited)
For the nine months ending
September 30,
 
   2012   2011   2012   2011 
FINANCE REVENUES $677,313  $561,014  $1,932,558  $1,880,154 
INTEREST EXPENSE - financial institutions  (118,470)  (107,595)  (352,292)  (394,881)
INTEREST EXPENSE - related party  (11,013)  -   (15,123)  (16,669)
                 
NET FINANCE REVENUES  547,830   453,419   1,565,143   1,468,604 
(PROVISION) BENEFIT FOR CREDIT LOSSES  (43,901)  1,646   (29,797)  1,472 
                 
FINANCE REVENUES, NET OF INTEREST EXPENSE                
 AND CREDIT LOSSES  503,929   455,065   1,535,346   1,470,076 
                 
OPERATING EXPENSES  392,911   393,617   1,218,959   1,214,095 
                 
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES  111,018   61,448   316,387   255,981 
                 
INCOME TAXES  -   -   -   - 
                 
INCOME FROM CONTINUING OPERATIONS  111,018   61,448   316,387   255,981 
                 
LOSS FROM DISCONTINUED OPERATIONS  -   -   -   (4,000)
                 
NET INCOME $111,018  $61,448  $316,387  $251,981 
                 
                 
BASIC EARNINGS PER COMMON SHARE:                
   INCOME FROM CONTINUING OPERATIONS $0.01  $-  $0.02  $0.01 
   LOSS FROM DISCONTINUED OPERATIONS  -   -   -   - 
   NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDER $0.01  $-  $0.02  $0.01 
                 
                 
DILUTED EARNINGS PER COMMON SHARE:                
   INCOME FROM CONTINUING OPERATIONS $0.01  $-  $0.02  $0.01 
   LOSS FROM DISCONTINUED OPERATIONS  -   -   -   - 
   NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDER $0.01  $-  $0.02  $0.01 
                 
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING                
  Basic  18,634,369   17,763,618   18,634,369   17,763,618 
  Dilutive  20,843,574   20,572,341   20,773,102   20,572,341 
                 
  

The accompanying notes to consolidated financial statements are an integral part of these statements. 
5

ANCHOR FUNDING SERVICES, INC.
CONSOLIDATED STATEMENTSTATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the ninethree months ended September 30, 2012


                
  Preferred  Common  Additional  Accumulated    
  Stock  Stock  Paid in Capital  Deficit  Total 
Balance, December 31, 2011 $671,409  $1,863  $7,465,386  $(5,850,606) $2,288,052 
                     
Provision for compensation expense related to issued stock options  -   -   8,003   -   8,003 
                     
Provision for compensation expense related to issued warrants  -   -   15,330   -   15,330 
                     
Net income  -   -   -   316,387   316,387 
                     
Balance, September 30, 2012 (unaudited) $671,409  $1,863  $7,488,719  $(5,534,219) $2,627,772 
                     

March 31, 2013
 
                
  Preferred  Common  Additional  Accumulated    
  Stock  Stock  Paid in Capital  Deficit  Total 
Balance, December 31, 2012 $671,409  $1,863  $7,496,693  $(5,471,747) $2,698,218 
                     
Provision for compensation expense related to issued stock options  -   -   2,226   -   2,226 
                     
Provision  for compensation expense related to issued warrants  -   -   1,916   -   1,916 
                     
Net income  -   -   -   52,916   52,916 
                     
Balance, March 31, 2013 (unaudited) $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.
statements
 
 
6

ANCHOR FUNDING SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the ninethree months ended September 30,March 31,

  (Unaudited)  (Unaudited) 
CASH FLOWS FROM OPERATING ACTIVITIES: 2012  2011 
  Net income $316,387  $255,981 
  Loss from discontinued operations  -   (4,000)
  Adjustments to reconcile net income to net cash        
    provided by operating activities:        
    Depreciation and amortization  15,255   15,259 
    Net compensation expense related to issuance of stock options and warrants  23,333   2,432 
    Allowance for uncollectible accounts  29,797   - 
    (Increase) decrease in retained interest in purchased        
       accounts receivable  (69,523)  1,674,907 
    Decrease in earned but uncollected  22,868   77,876 
    (Increase) decrease in prepaid expenses and other  (451)  1,817 
    Increase (decrease) in accounts payable  5,573   (1,713)
    (Decrease) in accrued payroll and related taxes  (9,548)  (2,385)
    (Decrease) increase in collected but not earned  (14,886)  2,851 
    Increase (decrease) in accrued expenses  40,995   (33,368)
      Net cash provided by operating activities  359,800   1,989,657 
         
CASH FLOWS FROM INVESTING ACTIVITIES:        
  Purchases of property and equipment  (14,764)  (17,768)
      Net cash used in investing activities  (14,764)  (17,768)
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
 Proceeds from (payments to) financial institution, net  764,985   (1,761,668)
 Payments to lender  -   (290,000)
     Net cash provided by (used in) financing activities  764,985   (2,051,668)
         
         
INCREASE (DECREASE) IN CASH  1,110,021   (79,779)
         
CASH, beginning of period  306,571   163,320 
         
CASH, end of period $1,416,592  $83,541 
         
       
  (Unaudited)  (Unaudited) 
CASH FLOWS FROM OPERATING ACTIVITIES: 2013  2012 
  Net income $52,916  $36,769 
  Adjustments to reconcile net income to net cash        
    (used in) provided by operating activities:        
    Depreciation and amortization  4,163   5,041 
    Compensation expense related to issuance of stock options  2,226   1,302 
    Compensation expense related to issuance of warrants  1,916   3,834 
    (Increase) in retained interest in purchased        
       accounts receivable  (498,471)  (857,153)
    (Increase) in due from client  (372,149)  - 
    (Increase) decrease in earned but uncollected  (5,307)  21,186 
    Decrease (increase) in prepaid expenses and other  4,942   (1,522)
    (Decrease) increase in accounts payable  (40,513)  27,635 
    (Decrease) in accrued payroll and related taxes  (13,880)  (2,792)
    Increase (decrease)  in collected but not earned  1,095   (4,768)
    (Decrease) increase in accrued expenses  (25,370)  3,525 
      Net cash used in operating activities  (888,432)  (766,943)
         
CASH FLOWS FROM INVESTING ACTIVITIES:        
  Purchases of property and equipment  (13,423)  (2,349)
      Net cash used in investing activities  (13,423)  (2,349)
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
  Proceeds from financial institution, net  988,685   986,391 
     Net cash provided by financing activities  988,685   986,391 
         
INCREASE IN CASH  86,830   217,099 
         
CASH, beginning of period  610,439   306,571 
         
CASH, end of period $697,269  $523,670 
         
 
The accompanying notes to the consolidated financial statements are an integral part of these statements.

 
7


           ANCHOR FUNDING SERVICES, INC.

Notes To Consolidated Financial Statements

For the Three Months Ended March 31, 2013 and Nine Months Ended September 30, 2012 and 2011

(Unaudited)

The Consolidated Balance Sheet as of September 30, 2012,March 31, 2013, the Consolidated Statements of Operations and Consolidated StatementStatements of Changes inIn Stockholders’ Equity for the ninethree months ended September 30, 2012March 31, 2013 and the Consolidated Statements of Cash Flows for the ninethree months ended September 30,March 31, 2013 and 2012 and 2011 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 September 30, 2012,March 31, 2013, results of operations for the three months ended March 31, 2013 and nine months ended September 30, 2012 and 2011 and cash flows for the ninethree months ended September 30,March 31, 2013 and 2012, and 2011, 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, 2011.2012.

1.  BACKGROUND AND DESCRIPTION OF BUSINESS:
 
The consolidated financial statements include the accounts of Anchor Funding Services, Inc. (the “Company”(formerly BTHC XI, Inc.) and its wholly owned subsidiary, Anchor Funding Services, LLC (“Anchor”).  On October 6, 2010, we completed the rescission of our acquisition of certain assets of Brookridge Funding, LLC that occurred on December 7, 2009. On October 6, 2010, the Minority members of our 80% owned subsidiary Brookridge Funding Services, LLC (“Brookridge”) purchased Anchor’s interest in Brookridge at book value of approximately $783,000. The consolidated statements of operations for the three and nine months ended September 30, 2011 and the consolidated statements of cash flows for the nine months ended September 30, 2011 reflect the historical operations of Brookridge as discontinued operations. Accordingly, we have generally presented the notes to our consolidated financial statements on the basis of continuing operations which has caused certain reclassifications within the financial statements and related footnotes. In addition, unless stated otherwise, any reference to income statement items in these financial statements refers to results from continuing operations.

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 (continuing operations). Anchor’s former 80% interest in Brookridge Funding Services, LLC is reflected in the consolidated statements of operations for the three and nine months ended September 30, 2011 and the consolidated statement of cash flows for the nine months ended September 30, 2011 as discontinued operations.LLC.

Estimates – The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America  (“US GAAP”) 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)  
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)  
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.
8


For both fixedFixed and variable transactionVariable 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.

8

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 ninesix 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 up to 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 variousvarying types of personal guarantees from their customers relating to the purchased accounts receivable and purchase order advances.

Management considered approximately $68,500$80,449 of their September 30, 2012March 31, 2013 and $17,500 of their December 31, 20112012 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 termshort-term nature of the purchased receivable and the fact that the majority of these invoices have been subsequently collected. As of September 30, 2012,March 31, 2013, accounts receivable purchased over 90 days old and still accruing fees totaled approximately $146,000. As of December 31, 2011, accounts receivable purchased over 90 days old and still accruing fees totaled approximately $195,222.
Property and Equipment – Property and equipment, consisting of furniture and fixtures and computers and software, are stated at cost.  Depreciation is provided over the estimated useful lives of the depreciable assets using the straight-line method.  Estimated useful lives range from 2 to 7 years.$307,300.

Advertising Costs – The Company charges advertising costs to expense as incurred.  Total advertising costs were approximately $67,000$66,000 and $65,000$68,000 for the quarters ended September 30,March 31, 2013 and 2012, and 2011, respectively, and $202,700 and $179,200 for the nine months ended September 30, 2012 and September 30, 2011, 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.
9


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:
9

 
The following tables present a reconciliation of the components used to derive basic and diluted EPS for the periods indicated:
The following tables present a reconciliation of the components used to derive basic and diluted EPS for the periods indicated:
 
                    2013   2012 
    2012        2011        (Denominator)        (Denominator)    
 (Numerator)  (Denominator)     (Numerator)  (Denominator)        Weighted-  Per     Weighted-  Per 
    Weighted-  Per     Weighted-  Per  (Numerator)  Average  Share  (Numerator)  Average  Share 
    Average  Share     Average  Share  Net Income  Shares  Amount  Net Income  Shares  Amount 
 Net Income  Shares  Amount  Net Income  Shares  Amount 
Three Months Ended September 30,                  
Three Months Ended March 31,                  
Basic EPS $111,018   18,634,369  $0.01  $61,448   17,763,618  $0.00  $52,916   18,634,369  $-  $36,769   18,634,369  $- 
Effect of Dilutive Securities – Options and                                                
Convertible Preferred Stock  -   2,209,205   -   -   2,808,723   -   -   2,057,148   -   -   1,881,763   - 
Diluted EPS $111,018   20,843,574  $0.01  $61,448   20,572,341  $0.00  $52,916   20,691,517  $-  $36,769   20,516,132  $- 
                        
Nine Months Ended September 30,                        
Basic EPS $316,387   18,634,369  $0.02  $251,981   17,763,618  $0.01 
Effect of Dilutive Securities – Options and                        
Convertible Preferred Stock  -   2,138,733   -   -   2,808,723   - 
Diluted EPS $316,387   20,773,102  $0.02  $251,981   20,572,341  $0.01 


Stock Based Compensation - The fair value of transactions in which the Company exchanges its equity instruments for employee services (share-based payment transactions) must beis 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 98 for the impact on the operating results for the three months ended March 31, 2013 and nine months ended September 30, 2012 and 2011.2012.

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 –The Effective January 31, 2007, the Company isbecame 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:

·Compensation costs related to the issuance of stock options
·Use of the reserve method of accounting for bad debts
·Expenses related to the issuance of equity instruments
·Differences in basis of property and equipment between financial and income tax reporting
·Net operating loss carryforwards.
·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.
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The Company applied guidance forthe provisions of ASC 740-10-50, “Accounting For Uncertainty In Income Taxes”, which provides clarification related to the process associated with accounting for uncertaintyuncertain tax positions recognized in income tax positionsour 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 ninethree months ended September 30,March 31, 2013 and 2012, and 2011, the Company recognizedconcluded that it had no liability formaterial 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.

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Recent Accounting Pronouncements

In May 2011,The FASB amended the Financial Accounting Standards Board (“FASB”) issued an update to Topic 820—Fair Value Measurements and DisclosuresComprehensive Income topic of the Accounting Standards Codification. This update provides guidance on how fair value accounting should be applied where its use is already required or permitted byASC in February 2013. The amendment addresses reporting of amounts reclassified out of accumulated other standards. The guidancecomprehensive income. Specifically, the amendment does not extendchange the usecurrent 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 fair value accounting. Weaccumulated 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.

In September 2011,Other accounting standards that have been issued or proposed by the FASB issued an updateor other standards-setting bodies are not expected to Topic 220—Comprehensive Income of the Accounting Standards Codification. The update is intended to increase the prominence of other comprehensive incomehave a material impact in the Company’s financial statements. The guidance requires that we present componentsposition, results of comprehensive income in either one continuousoperations or two separate, but consecutive, financial statements and no longer permits the presentation of comprehensive income in the Consolidated Statement of Shareholders’ Equity. We adopted this new guidance effective January 1, 2012, as required. The adoption did not have a significant impact on our consolidated financial statements. We are now presenting components of comprehensive income on one statement, our unaudited Consolidated Statements of Income and Other Comprehensive Income.cash flows.

3.  RETAINED INTEREST IN PURCHASED ACCOUNTS RECEIVABLE:

Retained interest in purchased accounts receivable consists of the following:

 September 30, 2012  December 31, 2011  March 31, 2013  December 31, 2012 
Purchased accounts receivable outstanding $7,912,772  $7,655,933 
Purchased invoices $9,076,705  $8,921,203 
Purchase order advances  76,980   105,000   90,000   21,156 
Reserve account  (1,550,421)  (1,412,277)  (1,568,322)  (1,842,447)
Allowance for uncollectible invoices  (68,449)  (17,500)  (80,449)  (80,449)
 $6,370,882  $6,331,156  $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:

  September 30, 2012  December 31, 2011 
Staffing $317,467  $548,031 
Transportation  1,704,642   1,831,051 
Service  3,420,457   3,969,574 
Other  996,765   - 
  $6,439,331  $6,348,656 
Total purchased invoices were as follows: 
  
For the quarters ended
September 30,
  For the nine months ended September 30, 
  2012  2011  2012  2011 
Purchased invoices $23,305,210  $17,744,294  $71,651,930  $58,853,420 
Purchase order advances  105,634   538,264   317,595   2,526,054 
  $23,410,844  $18,282,558  $71,969,525  $61,379,474 

  March 31, 2013  December 31, 2012 
Staffing $280,684  $185,557 
Transportation  1,685,042   1,773,290 
Service  4,385,993   4,528,668 
Manufacturing  832,183   612,397 
Apparel  414,481   - 
  $7,598,383  $7,099,912 
 
 
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Adjustments to the allowance for uncollectible invoices were as follows:

  For the quarters ended March 31, 
  2013  2012 
Balance - beginning of quarter $80,449  $17,500 
Provision for credit losses  -   - 
Write-offs  -   - 
Balance - end of quarter $80,449  $17,500 

Total purchased invoices and purchase order advances were as follows:

  For the quarters ended March 31, 
  2013  2012 
Purchased invoices $23,538,188  $20,245,117 
Purchase order advances  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:

        
 Estimated Useful Lives 
September 30,
2012
  
December 31,
 2011
 
Furniture and fixtures2-5 years $44,731  $44,731 
Computers and software3-7 years  187,325   172,561 
    232,056   217,292 
Less: accumulated depreciation   (215,517)  (200,262)
   $16,539  $17,030 
Property and equipment consist of the following:
 Estimated      
 Useful Lives March 31, 2013  December 31, 2012 
Furniture and fixtures2-5 years $46,818  $46,818 
Computers and software3-7 years  200,928   187,505 
    247,746   234,323 
Less: accumulated depreciation   (224,229)  (220,066)
   $23,517  $14,257 

Depreciation expense was $5,230 and $5,078 for the quarters ended September 30, 2012 and 2011, respectively and $15,255 and $15,259 for the nine months ended September 30, 2012 and 2011, respectively.
Depreciation expense was $4,163 and $5,041 for the quarters ended March 31, 2013 and 2012, respectively.

5.6.  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 no more than four to one (4:1).  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, 2012 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 $5,192,328 as of September 30, 2012 and $4,427,343On 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, 2011.
On, November 30, 2009, Anchor Funding Services, LLC, entered into a $7 million senior Accounts Receivable (A/R) Credit Facility with a maximum amount of up to $9 million with lender approval.  This funding facility was based upon Anchor's submission and approval of eligible accounts receivable. This facility replaced Anchor’s revolving credit facility from another financial institution.  Anchor paid .5% of the face value of each invoice funded for the first 30 days outstanding and .016% for each day thereafter until collected. In addition, interest on advances was paid monthly at the Prime Rate plus 2.0%.  Anchor paid the financial institution various other monthly fees as defined in the agreement. The agreement required that Anchor use $1,000,000 of its own funds first to finance its clients.  The agreement contained customary representations and warranties, events of default and limitations, among other provisions. The agreement was collateralized by a first lien on all Anchors’ assets.  Borrowings on this agreement were partially guaranteed by the Company’s President and Chief Executive Officer.  The partial guarantee was $250,000 each.  On February 10, 2011, Anchor’s agreement with this financial institution was amended such that beginning February 10, 2011, Anchor would no longer pay discount fees and Anchor would pay interest on advances at the Prime Rate plus 8.0%  through November 30, 2011 and at the Prime Rate plus 9.0% thereafter. On September 22, 2011, Anchor gave notice to this financial institution that it was electing not to renew the facility when it expired at the end of its current term on November 30, 2011, so that it could enter into the Rediscount Credit Facility described above.
6. DUE TO PARTICIPANT:
On May 25, 2012, Anchor entered into a Participation Agreement with a funding company (Participant) whereby it sold an interest in one of its accounts so that it could accommodate the accounts funding requirements and also mitigate some of Anchor’s credit exposure in the account. Anchor sold a 50% interest in the account to the Participant. Provided Anchor follows a standard of care as agreed to in the Participation Agreement, any credit losses, if they occur, would be shared equally between Anchor and the Participant. The Participant’s fee is paid monthly and is charged at the rate of 21% per annum of the average outstanding balance due to the Participant.
The fee paid to the Participant was $11,563 and $25,020 for the three and nine months ended September 30, 2012, respectively, and is included in interest expense - financial institutions. Anchor owed the Participant $-0- as of September 30, 2012.

 
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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 wereare paid annually on December 31st in the form of additional Series 1 Convertible Preferred Stock unless the Board of Directors approvedapproves a cash dividend.  Dividends on Series 1 Convertible Preferred Stock ceasedshall cease to accrue on the earlier of December 31, 2009, or on the date they wereare 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 shares issued forchanges in Series 1 Convertible Preferred Stock and Common Stock as of September 30, 2012 and Decembershares for the quarter ended March 31, 20112013 is summarized as follows:

 Series 1 Convertible  Common  Series 1 Convertible  Common 
 Preferred Stock  Stock  Preferred Stock  Stock 
Balance, December 31, 2011  376,387   18,634,369 
Balance, December 31, 2012  376,387   18,634,369 
Preferred Stock Conversions  -   -   -   - 
Common Stock Issuances  -   -   -   - 
Balance September 30, 2012  376,387   18,634,369 
 
Balance March 31, 2013  376,387   18,634,369 
 
8.  RELATED PARTY TRANSACTIONS: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 $15,123$0 of interest on these notes for the nine monthsquarters ended September 30,March 31, 2013 and 2012.

Due to Lender
Options granted to officers and directors.

On April 26, 2011, upon approvalMarch 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 Board, Anchor entered into a Promissory Note for up to $2 million from MGM Funding, LLC (MGM). Morry Rubin is the managing member of MGM.Company’s Common Stock. The money to be borrowed under the note was subordinate to Anchor’s accounts receivable credit facility with a senior lender, which required funds employed to be no less than $5,000,000 before Anchor borrowed funds from MGM. The Promissory Note was to assist Anchor in providing factoring and purchase order funding facilities to some of its clients and it replaced an earlier agreement between the parties. This facility was to supplement Anchor's $10 Million Rediscount Credit Facility with a Commercial Bank. The MGM Promissory Note was a demand note payable together with interest at the rate of 11% per annum.  If mutually agreed upon in writing by Anchor and MGM, and if Anchor's purchase order fundings exceeded $1 Million, then interest could accrue on the portionholders of the unpaid balanceSeries 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 this Note that is funding purchase order advances that are in excessAnchor’s common stock exercisable at $.25 per share. The options vest one-third immediately and one-third on each of $1 Million at a rate equal to twenty percent (20%) per annum. This note was paid in full as of December 31, 2011 and is no longer available to Anchor.  Anchor paid $0 and $2,240 of interest to MGM for the nine months ended September 30, 2012 and 2011, respectively.successive anniversary dates from Mr. Healy joining the board until fully vested.

 
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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, 2013.2014.

·  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 Company’s 2007 Omnibus Equity Compensation Plan. AsAll of February 28, 2009, thesethe aforementioned options are fully vested.

·  In March 2012, M. Rubin received 10 year options to purchase 250,000 shares of the Company’s Common Stock at     an exercise price of $.17 per share.
 
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, 2013.2014.

·  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 20112012 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 US 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 Company’s 2007 Omnibus Equity Compensation Plan. AsAll of February 28, 2009, thesethe aforementioned options are fully vested.

·  In March 2012, Brad Bernstein received 10 year options to purchase 250,000 shares of the Company’s Common Stock at an exercise price of $.17 per share.
 
The following table summarizes employeeinformation about stock option agreements entered into with five employees:options as of March 31, 2013:
 
·  10-year options to purchase 50,000 shares exercisable at prices of $1.00 and $1.25 per share, pursuant to the Company’s 2007 Omnibus Equity Compensation Plan. The grant dates range from September 28, 2007 to November 30, 2009.  Vesting periods range from one to four years. If any employee ceases being employed by the Company for any reason, all vested and unvested options shall terminate immediately.
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 
 
 
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The following table summarizes information about stock options as of September 30, 2012:

         
Exercise  Number Remaining Number 
Price  Outstanding Contractual Life Exercisable 
$1.25   1,605,000 6 years  1,603,750 
$1.00   45,000 8 years  22,500 
$0.62   500,000 8 years  500,000 
$0.17   500,000 10 years  500,000 
$0.25   180,000 10 years  60,000 
     2,830,000    2,686,250 
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:
 
The Company recorded the issuance of these options in accordance with ASC 718.  The following information was input into a BSM.
Exercise price  $0.17.17 to $1.25
Term 10 years
Volatility .41 to 2.50
Dividends  
0%
0%
Discount rate 0.08% to 4.75%
 
The pre-tax fair value effectamounts recorded for these options in the statement of operations was $2,226 and $1,302 for the quarters ending September 30,ended March 31, 2013 and 2012, and 2011 was as follows:
respectively.
 
   2012  2011 
Fully vested stock options $-  $- 
Unvested portion of stock options  8,003   1,185 
   8,003   1,185 
Benefit for expired stock options  -   - 
Provision, net $8,003  $1,185 

10. WARRANTSWARRANTS:

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:
 
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 for an additional year. The following information was input into BSM to compute a per warrant price of $.240:
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.
 
Exercise price $1.10
Term 6 years
Volatility  42%
Dividends  0%
Discount rate  .05%

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 September 30, 2012: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:

     Weighted Average   
Exercise  Number Remaining Number 
Price  Outstanding Contractual Life Exercisable 
$1.10   1,342,500 4 months   1,342,500 
$1.00   2,000,004   8 years  2,000,004 
     3,342,504    3,342,504 
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.

 
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11.  CONCENTRATIONS:
Revenues –Client Accounts - The Company recordedAs 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 from United States companies in the following industries as follows:
  
For the three months ended
September 30,
  
For the nine months ended
September 30,
 
  2012  2011  2012  2011 
Apparel $77,173  $-  $141,930  $- 
Transportation  141,728   177,841   477,777   503,881 
Staffing  22,168   33,680   66,544   103,408 
Service  344,309   349,493   1,070,872   1,043,485 
Other  91,935   -   175,435   135,371 
Publishing  -   -   -   94,009 
  $677,313  $561,014  $1,932,558  $1,880,154 
Major Customers – Forfor the three months ended September 30, 2012,March 31, 2013.  The transactions and balances with these clients as of and for the Company had an apparel importer in Florida that accounted for 10% or more of its revenues.three months ended March 31, 2013 are summarized below:
 
For
  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 nine months ended September 30, 2012,Company’s total potential loss would be $3,309,762; however, the majority of these balances were subsequently collected and the Company did not have a customer that accounted for 10% or more of its revenues.deems them all collectible.

As of September 30, 2012, the Company had a paper packaging company client that represented 10.4% of the purchased accounts receivable outstanding. As of December 31, 2012, a food facility management company represented 11.8% of the purchased accounts receivable outstanding.
Cash – The Company places its cash and cash equivalents on deposit with financial institutions in the United States. All funds in a “Non interest-bearing transaction account” are insured in full by theThe Federal Deposit Insurance Corporation (“FDIC”)(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 December 31, 2011 through December 31, 2012. This temporary unlimited coverage istime to time may have had amounts on deposit in addition to, and separate from, the coverage of at least $250,000 available to depositors under the FDIC’s general deposit insurance rules. Currently allexcess of the Company’s domestic cash balances meet these criteria.insured limits.

12.  SUPPLEMENTAL DISCLOSURES OF CASH FLOW:

Cash paid for interest to a financial institution was as follows:$102,288 and $90,323 for the quarters ended March 31, 2013 and 2012, respectively.

  For the nine months ending September 30, 
  2012  2011 
To a financial institution $349,700  $404,354 
To a related party  15,123   16,669 
Total $364,823  $421,023 
Non-cash financing and investing activities consisted of the following:

For the three months ending September 30, 2012March 31, 2013
None
None.
For the three months ending September 30, 2011

None.March 31, 2012
 
None

13.  INCOME TAXES:

As of December 31, 2011,2012, the Company had approximately $4$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 September 30, 2012March 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.

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14. COMMITMENTS AND CONTINGENCIES:

Lease Commitments

The Company has lease agreements for office space in Charlotte, NC, and Boca Raton, FL.FL and Medley, Florida.  All lease agreements are with unrelated parties.

There areThe Company has two Charlotte leases for adjoining spacesspace that expire on May 31, 2013 and may be renewedthe company plans to renew for an additionalanother 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.FL, and on November 1, 2011 renewed for another two years. The monthly rental is approximately $1,313. On October 6, 2011, this$1,413.
Beginning November 12, 2012, the company entered into a six month lease was renewed for office space in Medley, FL, with an additional two years.option to renew for twelve month terms. The monthly rental is $800.

The rental expense for the ninethree months ended September 30,March 31, 2013 and 2012 and 2011 was approximately $34,500 for each period.

$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.
  
15. ACQUSITION AND DISCONTINUED OPERATIONS:

On October 6, 2010, Anchor Funding Services, Inc. entered into a Rescission Agreement with the Minority Members, namely, John A. McNiff, III and Michael P. Hilton (collectively the "Buyers") of Brookridge Funding Services, LLC ("Brookridge"). Any Brookridge transactions are reclassified as discontinued operations in the Consolidated Financial Statements for the nine months ended September 30, 2012 and 2011.  For the nine months ended September 30, 2012 and 2011 there were $0 and $4,000 of expenses related to discontinued operations, respectively.

 
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MANAGEMENT'S
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the followingThis 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, 2011.2012. 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. You should review theThe “Risk Factors” section of our Form 10-K for the fiscal year ended December 31, 20112012 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, purchase order fundingtrade finance and government contract funding. For certain service businesses, Anchor also provides back office support, including payroll payroll tax compliance 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 and internal growth through various marketing initiatives.that could provide cross-selling opportunities.  Our principal operations for Anchor are located in Charlotte, North Carolina. WeCarolina and we maintain an executive office in Boca Raton, Florida, which includes the Company’sits 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.

Summary of Critical Accounting Policies and Estimates
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 (continuing operations). Anchor’s former 80% interest in Brookridge Funding Services, LLC is reflected in the consolidated statements of operations for the three and nine months ended September 30, 2011 and the consolidated statements of cash flows for the nine months ended September 30, 2011 as discontinued operations.LLC.

Estimates – The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) 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.
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)  
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 fixedFixed and variable transactionVariable Transaction fees, the Company recognizes revenue by using one of two methods depending on the type ofcustomer.of customer.  For new customers the Company recognizes revenue using the cost recovery method.  For established customers theCompanythe Company recognizes revenue using the accrual method.

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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 ninesix 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.
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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 up to 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 variousvarying types of personal guarantees from their customers relating to the purchased accounts receivable and purchase order advances.

Management considered approximately $68,500$80,500 of their September 30, 2012March 31, 2013 and $17,500 of their December 31, 20112012 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 termshort-term nature of the purchased receivable and the fact that the majority of these invoices have been subsequently collected. As of September 30, 2012,March 31, 2013, accounts receivable purchased over 90 days old and still accruing fees totaled approximately $146,000. As of December 31, 2011, accounts receivable purchased over 90 days old and still accruing fees totaled approximately $195,222.
Property and Equipment – Property and equipment, consisting of furniture and fixtures and computers and software, are stated at cost.  Depreciation is provided over the estimated useful lives of the depreciable assets using the straight-line method.  Estimated useful lives range from 2 to 7 years.$307,300.

Advertising Costs – The Company charges advertising costs to expense as incurred.  Total advertising costs were approximately $67,000$66,000 and $65,000$68,000 for the quarters ended September 30,March 31, 2013 and 2012, and 2011, respectively, and $202,700 and $179,200 for the nine months ended September 30, 2012 and September 30, 2011, 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: 
                   
   2012   2011 
  (Numerator)  (Denominator)     (Numerator)  (Denominator)    
     Weighted-  Per     Weighted-  Per 
     Average  Share     Average  Share 
  Net Income  Shares  Amount  Net Income  Shares  Amount 
Three Months Ended September 30,                  
Basic EPS $111,018   18,634,369  $0.01  $61,448   17,763,618  $0.00 
Effect of Dilutive Securities – Options and                        
  Convertible Preferred Stock  -   2,209,205   -   -   2,808,723   - 
Diluted EPS $111,018   20,843,574  $0.01  $61,448   20,572,341  $0.00 
                         
Nine Months Ended September 30,                        
Basic EPS $316,387   18,634,369  $0.02  $251,981   17,763,618  $0.01 
Effect of Dilutive Securities – Options and                        
  Convertible Preferred Stock  -   2,138,733   -   -   2,808,723   - 
Diluted EPS $316,387   20,773,102  $0.02  $251,981   20,572,341  $0.01 

 
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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) must beis 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 nine months ended September 30, 2012 and 2011.2012.

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 –The Effective January 31, 2007, the Company isbecame 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:

·Compensation costs related to the issuance of stock options
·Use of the reserve method of accounting for bad debts
·Expenses related to the issuance of equity instruments
·Differences in basis of property and equipment between financial and income tax reporting
·Net operating loss carryforwards.
·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 guidance forthe provisions of ASC 740-10-50, “Accounting For Uncertainty In Income Taxes”, which provides clarification related to the process associated with accounting for uncertaintyuncertain tax positions recognized in income tax positionsour 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 ninethree months ended September 30,March 31, 2013 and 2012, and 2011, the Company recognizedconcluded that it had no liability formaterial uncertain tax positions.
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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 September 30, 2012March 31, 2013 vs. Three Months Ended September 30, 2011


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March 31, 2012

The following table compares the operating results for the three months ended September 30, 2012March 31, 2013 and September 30, 2011:March 31, 2012:

  Three Months Ended September 30,   Three Months Ended March 31,       
 2012  2011  $ Change  % Change  2013  2012  $ Change  % Change 
Finance revenues $677,313  $561,014  $116,299   20.7  $602,607  $542,496  $60,111   11.1 
Interest expense, net and commissions  (129,483)  (107,595)  (21,888)  20.3 
Interest income (expense), net and commissions  (102,381)  (90,323)  12,058   13.3 
Net finance revenues  547,830   453,419   94,411   20.8   500,226   452,173   48,053   10.6 
(Provision) benefit for credit losses  (43,901)  1,646   (45,547)  -   -   -   -   - 
Finance revenues, net of interest expense and credit losses  503,929   455,065   48,864   10.7   500,226   452,173   48,053   10.6 
Operating expenses  392,911   393,617   (706)  (0.2)  447,310   415,404   31,906   7.7 
Net income before income taxes  111,018   61,448   49,570   80.7   52,916   36,769   16,147   43.9 
Income tax (provision) benefit:  -   -   -   -   -   -   -   - 
Net income $111,018  $61,448  $49,570   80.7  $52,916  $36,769  $16,147   43.9 
Loss from discontinued operations  -   -   -   - 
Net income $111,018  $61,448  $49,570   80.7 

Finance revenues from continuing operations increased approximately 20.7%to $602,607 for the three months ended September 30, 2012 to $677,313March 31, 2013 compared to $561,014$542,496 for the comparable period of the prior year.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 from continuing operations of $129,483$102,381 for the three months ended September 30, 2012March 31, 2013 compared to net interest expense of $107,595$90,323 for the three months ended September 30, 2011. While the Company refinanced its credit facility with a commercial bank in November 2011 that lowered its cost of funds, the Company’s average borrowings were higher for the three months ended September 30,March 31, 2012. This in addition to the Company incurring higher interest expense for borrowings under its participation arrangement and promissory notes payable (see Notes 6 and 8), partially offsetting the savings from the reduced cost of the commercial banks’ credit facility.

The Company incurred credit losses of $43,901 for the three months ended September 30, 2012 compared to a benefit for credit losses of $1,646 for the three months ended September 30, 2011. The increase in credit losses for the period is primarily related to a client that ceased operations. The client’s customers are claiming and taking credits against certain invoices that Anchor purchased.
While the Company has reserved for amounts it estimates are uncollectible, it continues to examine and will pursue other collection remedies. Such credit losses are a risk factor in Anchor’s business.

Operating expenses from continuing operations for the three months ended September 30, 2012 were $392,911 compared to $393,617 for the three months ended September 30, 2011, a $706 difference.  This is consistent with the Company’s current objective to keep operating expenses constant.

The Company’s net income from continuing operations for the three months ended September 30, 2012 was $111,018 compared to $61,448 for the three months ended September 30, 2011. Increased business from new and existing clients more than offset the increased provision for credit losses, resulting in an increase in net income of approximately $49,570 for the three months ended September 30, 2012.

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Nine Months Ended September 30, 2012 vs. Nine Months Ended September 30, 2011

The following table compares the operating results for the nine months ended September 30, 2012 and September 30, 2011:
  Nine Months Ended September 30,       
  2012  2011  $ Change  % Change 
Finance revenues $1,932,558  $1,880,154  $52,404   2.8 
Interest expense, net  and commissions  (367,415)  (411,550)  44,135   (10.7)
Net finance revenues  1,565,143   1,468,604   96,539   6.6 
(Provision) benefit for credit losses  (29,797)  1,472   (31,269)  - 
Finance revenues, net of interest expense and credit losses  1,535,346   1,470,076   65,270   4.4 
Operating expenses  1,218,959   1,214,095   4,864   0.4 
Net income from continuing operations before income taxes  316,387   255,981   60,406   23.6 
Income tax (provision) benefit:  -   -   -   - 
Income from continuing operations  316,387   255,981   60,406   23.6 
Loss from discontinued operations  -   (4,000)  4,000   - 
Net income $316,387  $251,981  $64,406   23.6 

Finance revenues from continuing operations increased 2.8% for the nine months ended September 30, 2012 to $1,932,558 compared to $1,880,154 for the comparable period of the prior year. Finance revenues increased due to an increase in business from existing clients and new clients. 
The Company had interest expense from continuing operations of $367,415 for the nine months ended September 30, 2012 compared to interest expense of $411,550 for the nine months ended September 30, 2011. This change is primarily the result of the Company refinancing its credit facility with a commercial bank at a lower cost in November 2011.

The Company incurred credit losses of $29,797 for the nine months ended September 30, 2012 comparedborrowing more to a benefit for credit losses of $1,472 for the nine months ended September 30, 2011. The increase in credit losses for the period is primarily related to a client that ceased operations. The client’s customers are claiming and taking credits against certain invoices that Anchor purchased.
While the Company has reserved for amounts it estimates are uncollectible, it continues to examine and will pursue other collection remedies. Such credit losses are a risk factor in Anchor’s business.purchase invoices.

Operating expenses from continuing operations for the ninethree months ended September 30, 2012March 31, 2013 were $1,218,959$447,310 compared to $1,214,095$415,404 for the ninethree months ended September 30, 2011,March 31, 2012, a $4,864 difference.$31,906 increase. This 7.7% increase is consistentprimarily the result of additional payroll costs associated with the Company’s current objective to keep operating expenses constant.opening of a sales office in Medley, Florida.

Reduced interest expense, combined with an increase inIncreased finance revenues more than offset the increaseincreases in the provision for credit lossesinterest and operating expenses and resulted in net income from continuing operations for the ninethree months ended March 31, 2013 of $316,387$52,916 compared to $251,981net income of $36,769 for the ninethree months ended September 30,March 31, 2012.

Liquidity

Cash Flow Summary

Cash Flows from Operating Activities

Net cash provided byused in operating activities was $359,800$888,432 for the ninethree months ended September 30,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 our net income for the period.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.

NetCash Flows from Investing Activities
For the three months ended March 31, 2013, net cash provided by operatingused in investing activities was $1,989,657$13,423 for the nine months ended September 30, 2011purchase of property and was primarily due to our net income for the period and cash provided by operating assets, primarily from a decrease of $1,674,907 in purchased 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.
equipment.
 
 
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Cash Flows from Investing Activities
For the ninethree months ended September 30,March 31, 2012, net cash used in investing activities was $14,764$2,349 for the purchase of property and equipment.
For the nine months ended September 30, 2011, net cash used in investing activities was $17,768 for the purchase of property and equipment.

Cash Flows from Financing Activities
 
Net cash provided by financing activities was $764,985$988,685 for the ninethree months ended September 30, 2012, andMarch 31, 2013. This was primarily due tothe result of proceeds from a financial institution.the Company’s rediscount credit facility.

Net cash used inprovided by financing activities (from continuing operations) was $2,051,668$986,391 for the ninethree months ended September 30, 2011, andMarch 31, 2012. This was primarily due to repayments on borrowingsthe result of proceeds from a financial institution and lender.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, 20122013 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. Since the Company has not provided notice, the facility will expire November 30, 2013. 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.
 
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 $15,123 of interest on these notes for the nine months ended September 30, 2012.

On May 25, 2012, Anchor entered into a Participation Agreement with a funding company (Participant) whereby it sold an interest in one of its accounts so that it could accommodate the accounts funding requirements and also mitigate some of Anchor’s credit exposure in the account. Anchor sold a 50% interest in the account to the Participant. Provided Anchor follows a standard of care as agreed to in the Participation Agreement, any credit losses, if they occur, would be shared equally between Anchor and the Participant. The Participant’s fee is paid monthly and is charged at the rate of 21% per annum of the average outstanding balance due to the Participant.
The fee paid to the Participant was $11,191 and $25,020 for the three and nine months ended September 30, 2012, respectively, and is included in interest expense - financial institutions. Anchor owed the Participant $-0- as of September 30, 2012.

On April 26, 2011, upon approval of the Board, Anchor entered into a Promissory Note for up to $2 million from MGM Funding, LLC (MGM). Morry Rubin is the managing member of MGM. The money to be borrowed under the note was subordinate to Anchor’s accounts receivable credit facility with a senior lender, which required funds employed to be no less than $5,000,000 before Anchor borrowed funds from MGM. The Promissory Note was to assist Anchor in providing factoring and purchase order funding facilities to some of its clients and it replaced an earlier agreement between the parties. This facility was to supplement Anchor's $10 Million Rediscount Credit Facility with a Commercial Bank. The MGM Promissory Note was a demand note payable together with interest at the rate of 11% per annum.  If mutually agreed upon in writing by Anchor and MGM, and if Anchor's purchase order fundings exceeded $1 Million, then interest could accrue on the portion of the unpaid balance of this Note that is funding purchase order advances that are in excess of $1 Million at a rate equal to twenty percent (20%) per annum. This note was paid in full as of December 31, 2011 and is no longer available to Anchor.  Anchor paid $0 and $2,240 of interest to MGM for the nine months ended September 30, 2012 and 2011, respectively. 
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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.
 
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
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.

ITEM 4.CONTROLS AND PROCEDURES

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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PART II. OTHER INFORMATION
 
LEGAL PROCEEDINGS:
 
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 September 30, 2012,March 31, 2013, there were no current developments involving the current legal proceeding.
 
Risk Factors:RISK FACTORS:
 
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:
 
(a)  For the ninethree months ended September 30, 2012,March 31, 2013, there were no sales of unregistered securities, except as follows:securities.
 Date of Sale  Title of Security   Number Sold Consideration Received Commissions   Purchasers    Exemption from Registration Claimed
March 2012
Common Stock
Options (1)
  500,000
Securities granted under Equity Compensation Plan;
no cash received;
no commissions paid
Employees, Directors and/or
Officers
Section 4(2) of the Securities Act of 1933 and/or Rule 506 promulgated
thereunder
June 2012
Common Stock
Options (2)
  180,000
Securities granted under Equity Compensation Plan;
no cash received;
no commissions paid
Employees, Directors and/or
Officers
Section 4(2) of the Securities Act of 1933 and/or Rule 506 promulgated
thereunder
(1)  Options are exercisable at $0.17 per share; (2) options are exercisable at 0.25 per share.

(b)  Rule 463 of the Securities Act is not applicable to the Company.
(c) In the ninethree months ended September 30, 2012,March 31, 2013, there were no repurchases by the Company of its Common  Stock.

DEFAULTS UPON SENIOR SECURITIES:
 
Not applicable.
 
MINE SAFETY DISCLOSURES:DISCLOSURES.
 
Not applicable.

OTHER INFORMATION:
 
Not applicable.
 
 
 
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ITEM 6.EXHIBITS:
EXHIBITS:

The following exhibits are all previously filed in connection with our Form 10-SB, as amended, unless otherwise noted.
 
2.1Exchange Agreement
3.1Certificate of Incorporation-BTHC,INC.
3.2Certificate of Merger of BTHC XI, LLC into BTHC XI, Inc.
3.3Certificate of Amendment
3.4Designation of Rights and Preferences-Series 1 Convertible Preferred Stock
3.5Amended and Restated By-laws
4.1Form of Placement Agent Warrant issued to Fordham Financial Management
10.1Directors’ Compensation Agreement-George Rubin
10.2Employment Contract-Morry F. Rubin
10.3Employment Contract-Brad Bernstein
10.4Agreement-Line of Credit
10.5Fordham Financial Management-Consulting Agreement
10.6Facilities Lease – Florida
10.7Facilities Lease – North Carolina
10.8Loan and Security Agreement (1)
10.9Revolving Note (1)
10.10Debt Subordination Agreement (1)
10.11Guaranty Agreement (Morry Rubin) (1)
10.12Guaranty Agreement (Brad Bernstein)(1)
10.13Continuing Guaranty Agreement (1)
10.14Pledge Agreement (1)
10.16Asset Purchase Agreement between the Company and Brookridge Funding LLC (2)
10.17Senior Credit Facility between the Company and MGM Funding LLC (2)
10.18Senior Credit Facility Guarantee - Michael P. Hilton and John A. McNiff III (4)
10.19Employment Agreement - Michael P. Hilton (4)
10.20Employment Agreement - John A. McNiff (4)
10.21Accounts Receivable Credit Facility with Greystone Commercial Services LP (3)
10.22Memorandum of Understanding - Re: Rescission Agreement*
10.23Rescission Agreement and Exhibits Thereto (5)
10.24Termination Agreement by and between Brookridge Funding Services LLC and MGM Funding LLC.(5)
10.25First Amendment to Factoring Agreement (6)
10.26Promissory Note dated April 26, 2011 between Anchor Funding Services, Inc. and MGM Funding, LLC (7)
10.27Rediscount Facility Agreement with TAB Bank (8)
10.28Form of Validity Warranty to TAB Bank (8)
10.29Amendment to Employment Agreement of Morry F. Rubin (10)
21.21Subsidiaries of Registrant listing state of incorporation (4)
99.12007 Omnibus Equity Compensation Plan
99.2Form of Non-Qualified Option under 2007 Omnibus Equity Compensation Plan
99.3Amendment to 2007 Omnibus Equity Compensation Plan increasing the Plan to 4,200,000 shares (9)
101.INSXBRL Instance Document,XBRL Taxonomy Extension Schema *
101.SCHDocument, XBRL Taxonomy Extension *
101.CALCalculation Linkbase, XBRL Taxonomy Extension Definition *
101.DEFLinkbase,XBRL Taxonomy Extension Labels *
101.LABLinkbase, XBRL Taxonomy Extension *
101.PREPresentation Linkbase *
 ___________________
 * Filed herewith.

(1)  
Incorporated by reference to the Registrant’s Form 8-K filed November 24, 2008 (date of earliest event NovembereventNovember 21, 2008).
 
(2)  
Incorporated by reference to the Registrant's Form 8-K filed December 8, 2009 (date of earliest event -event-   December 4, 2009).
 
(3)  
Incorporated by reference to the Registrant's Form 8-K filed December 2, 2009 (date of earliest event - Novemberevent-November 30, 2009).
 
(4)  Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 2009.
 
(5)  
Incorporated by reference to the Registrant's Form 8-K filed October 12, 2010 (date of earliest event - October-October 6, 2010).
 
(6)  Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 2010.
 
(7)  
Incorporated by reference to the Registrant's Form 8-K filed April 28, 2011 (date of earliest event - April-April 26, 2011).
 
(8)  Incorporated by reference to the Registrant’s Form 10-Q for the quarter ended September 30, 2011.
 
(9)  Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 2011.
 

(10)  Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 2012.


SIGNATURES

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.
 
 
ANCHOR FUNDING SERVICES, INC.
 
    
Date:  November 13, 2012May 14, 2013
By:/s/ Morry F. Rubin    
  Morry F. Rubin 
  PrincipalChief Executive Officer 
    

    
Date: November 13, 2012 May 14, 2013
By:/s/ Brad Bernstein  
  Brad Bernstein 
  President and PrincipalChief Financial Officer 
    
 
 

 
 
 
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