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.

The Consolidated Balance Sheet as of JuneSeptember 30, 2013, the Consolidated Statements of Operations for the three months and nine months ended September 30, 2013 and September 30, 2012, and the Consolidated Statements of Changes In Stockholders’ Equity for the sixnine months ended JuneSeptember 30, 2013, and the Consolidated Statements of Cash Flows for the sixnine months ended JuneSeptember 30, 2013 and 2012 have been prepared by us without audit.  In the opinion of Management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly in all material respects our financial position as of JuneSeptember 30, 2013, results of operations for the three months and sixnine months ended JuneSeptember 30, 2013 and 2012 and cash flows for the sixnine months ended JuneSeptember 30, 2013 and 2012, and are not necessarily indicative of the results to be expected for the full year.

The consolidated financial statements include the accounts of FlexShopper, Inc. (formerly Anchor Funding Services, Inc. (formerly BTHC XI, Inc.the “Company” ) and its wholly owned subsidiaries, Anchor Funding Services, LLC (“Anchor”) and FlexShopper, LLC (“FlexShopper”).

Anchor Funding Services,FlexShopper, Inc. is a Delaware holding corporation. Anchor Funding Services, Inc. has no operations; substantiallySubstantially all operations of the Company are the responsibility of Anchor Funding Services, LLC.Anchor.

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.

FlexShopper LLC is a North Carolina limited liability company. It was formed for the purpose ofFlexShopper is developing a business that will provide certain typescategories of durable goods to consumers on a lease to own basis and also provide lease to own terms to consumers of third party retailers.

 

For both Fixed and Variable Transaction fees, the CompanyAnchor recognizes revenue by using one of two methods depending on the type of customer.  For new customers the CompanyAnchor recognizes revenue using the cost recovery method.  For established customers the CompanyAnchor 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.

For established customers the CompanyAnchor uses the accrual method of accounting.  The CompanyAnchor 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’sAnchor’s last sixnine months of experience with the customer along with the Company’sAnchor’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 CompanyAnchor 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.

The Company’sAnchor’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 CompanyAnchor has a security interest in the accounts receivable and inventory purchased and, on a case-by-case basis, may have additional collateral.  The CompanyAnchor 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 CompanyAnchor has varying types of personal guarantees from their customers relating to the purchased accounts receivable and purchase order advances.

Management considered approximately $185,449$80,449 of their JuneSeptember 30, 2013 and December 31, 2012 retained interest in purchased accounts receivable to be uncollectible.

Management believes the fair value of the retained interest in purchased accounts receivable approximates its recorded value because of the relatively short-term nature of the purchased receivable and the fact that the majority of these invoices have been subsequently collected. As of JuneSeptember 30, 2013, accounts receivable purchased over 90 days old and still accruing fees totaled approximately $151,400.$85,300.

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.  

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 NoteNotes 9 and 10 for the impact on the operating results for the three months and sixnine months ended JuneSeptember 30, 2013 and 2012.

The primary differences between financial statement and taxable income for the Company are as follows:

The deferred tax asset represents the future tax return consequences of utilizing these items.   Deferred tax assets are reduced by a valuation reserve, when management is uncertain if the net deferred tax assets will ever be realized.

The Company applied the provisions of ASC 740-10-50, “Accounting For Uncertainty In Income Taxes”, which provides clarification related to the process associated with accounting for uncertain tax positions recognized in our financial statements. The Company applied this guidance to all its tax positions, including tax positions taken and those expected to be taken, under the transition provision of the interpretation. For the sixnine months ended JuneSeptember 30, 2013 and 2012, the Company concluded that it had no material uncertain tax positions.

The Company classifies interest accrued on unrecognized tax benefits with interest expense.  Penalties accrued on unrecognized tax benefits are classified with operating expenses.

The FASB amended the Comprehensive Income topic of the ASC in February 2013. The amendment addresses reporting of amounts reclassified out of accumulated other comprehensive income. Specifically, the amendment does not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendment does require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, in certain circumstances an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. The amendment will be effective for the Company on a prospective basis for reporting periods beginning after December 15, 2012. Early adoption is permitted. The Company adopted this guidance effective January 1, 2013, as required, and this adoption did not have a significant impact toon our consolidated financial statements.

In February 2013, the FASB Issued ASU No. 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income," which requires entities to present information about reclassification adjustments from accumulated other comprehensive income in their annual financial statements in a single note or on the face of the financial statements. We adopted this ASU on March 1, 2013 and it had no impact on our financial statements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact in the Company’s financial position, results of operations or cash flows.

Retained interest in purchased accounts receivable consists of the following:

Retained interest in purchased accounts receivable consists, excluding the allowance for uncollectible invoices, of United States companies in the following industries:

Total purchased invoices and purchase order advances were as follows:

As of JuneSeptember 30, 2013, Anchor was owed $503,500 from a Food Service Company from whom Anchor had purchased invoices. In July 2013, Anchor determined that the Food Service Company advanced a food service company $229,899 in excesshad misdirected certain payments due to Anchor, and Anchor ceased funding this client. On August 8, 2013, the Food Service Company filed Chapter 11 Bankruptcy. At the time of its accounts receivable.  This amount was included in a subsequent invoice for completed services that were assignedthe bankruptcy filing, Anchor's total funding employed to the Company. See Note 11.  CONCENTRATIONS , Client Accounts.Food Service Company was approximately $1,450,000. Under a Court Order approved settlement with the Food Service Company, Anchor collected approximately $950,000 of the Food Service Company’s accounts receivable through September 30, 2013, leaving a remaining balance of $503,500. Subsequent to September 30, 2013, Anchor was paid an additional $203,500; by Court Order, the final balance of $300,000 is to be paid to Anchor in twelve monthly installments of $25,000 beginning November 8, 2013.

Property and equipment consist of the following:

Depreciation expense was $8,495$7,023 and $4,983$5,230 for the quarters ended JuneSeptember 30, 2013 and 2012, respectively and $12,658$19,681 and $9,995$15,255 for the sixnine months ended JuneSeptember 30, 2013 and 1012, respectively.

On November 8, 2011, Anchor entered into a Rediscount Credit Facility with a Commercial Bank that was effective November 30, 2011 and replaced its prior credit facility. The maximum amount that can be borrowed under the facility is $10 million and the Bank will advance up to 80% of Anchor's advances to its clients. Anchor pays interest on advances monthly at the 90 Day Libor Rate plus 6.25% and various other monthly fees as defined in the agreement. The agreement requires that Anchor maintain at all times a ratio of debt to tangible net worth of not more than four to one (4:1).  As of JuneSeptember 30, 2013, the CompanyAnchor 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 CompanyAnchor has not provided 60 days’ notice to the Bank in advance of the anniversary date. Anchor has not provided notice. 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 $5,424,619$3,693,884 as of JuneSeptember 30, 2013 and $4,977,763 as of December 31, 2012.

The Company’s capital structure consists of preferred and common stock as described below:

On January 31, 2007, the Company filed a Certificate of Designation with the Secretary of State of Delaware.  Effective with this filing, 2,000,000 preferred shares became Series 1 Convertible Preferred Stock.  Series 1 Convertible Preferred Stock will rank senior to Common Stock.

Series 1 Convertible Preferred Stock is convertible into 5.1 shares of the Company’s Common Stock.  The holder of the Series 1 Convertible Preferred Stock has the option to convert the shares to Common Stock at any time.  Upon conversion all accumulated and unpaid dividends will be paid as additional shares of Common Stock.

The dividend rate on Series 1 Convertible Preferred Stock is 8%.  Dividends are paid annually on December 31st in the form of additional Series 1 Convertible Preferred Stock unless the Board of Directors approves a cash dividend.  Dividends on Series 1 Convertible Preferred Stock shall cease to accrue on the earlier of December 31, 2009, or on the date they are converted to Common Shares.  Thereafter, the holders of Series 1 Convertible Preferred Stock have the same dividend rights as holders of Common Stock, as if the Series 1 Convertible Preferred Stock had been converted to Common Stock.

The changes in Series 1 Convertible Preferred Stock and Common Stock shares for the sixnine months ended JuneSeptember 30, 2013 is summarized as follows:

Promissory notes payable

On June 5, 2012, upon approval of the Board, Anchor entered into two Promissory Notes totaling $400,000, one with Morry Rubin and the other with a major shareholder of the company. Each Promissory Note was for $200,000, had a 90 day term, and earned interest (payable monthly) at 15% per annum. The Promissory Notes were to assist Anchor in providing factoring and purchase order funding facilities to some of its clients. The Promissory Notes were subordinate to and supplemented Anchor's $10 Million Rediscount Credit Facility with a Commercial Bank. Both promissory notes were paid on September 5, 2012. Anchor paid $0 and $4,110$11,013 of interest on these notes for the three months ended JuneSeptember 30, 2013 and 2012, respectively. Anchor paid $0 and $4,110$15,123 of interest on these notes for the sixnine months ended JuneSeptember 30, 2013 and 2012, respectively.

On March 20, 2012, M. Rubin and B. Bernstein were each granted 10 year options to purchase 250,000 shares of common stock each for a total of 500,000 shares, with the options vesting over a period of 10 years. On May 17, 2013, the Board approved the accelerated vesting of these options such that they all became vested. Due to the anti-dilution provisions of our Series 1 Convertible Preferred Stock, this grant caused an adjustment of our preferred stock into common stock. Each share of Series 1 Preferred Stock is now convertible into 5.1 shares of the Company’s Common Stock. The holders of the Series 1 Convertible Preferred Stock have the option to convert the shares to Common Stock at any time. See Note 9.

In June 2012, Paul Healy was granted 10-year non-statutory stock options to purchase 180,000 shares of Anchor’s common stock exercisable at $.25 per share. The options vest one-third immediately and one-third on each of the successive anniversary dates from Mr. Healy joining the board until fully vested.

In June 2013, the Company granted the Chief Information Officer of FlexShopper, 10-year Incentive Stock Options to purchase 100,000 shares of Anchor’s Common Stock, exercisable at $.35 per share. The options vest one-third immediately, and one-third on each of the successive anniversary dates from the date the FlexShopper Chief Information Officer commenced work.

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.

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, 2013 but were 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:

For the sixnine months ended JuneSeptember 30, 2013 and 2012 the Company recorded compensation expense of $1,916 and $9,582$15,330 respectively, related to the issuance of these warrants.

For the three months and sixnine months ended JuneSeptember 30, 2012, the CompanyAnchor did not have a customer that accounted for 10% or more of its revenues.

Non-cash financing and investing activities consisted of the following:

None

None

As of December 31, 2012, the Company had approximately $3.6 million of net operating loss carryforwards (“NOL”) for income tax purposes.   The NOL’s expire in various years from 2022 through 2025.  The Company’s use of operating loss carryforwards is subject to limitations imposed by the Internal Revenue Code.  Management believes that the deferred tax assets as of JuneSeptember 30, 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.

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

The CompanyAnchor has two Charlotte leases for adjoining space that expire May 31, 2014.  The monthly rent for the combined space is approximately $2,340.

Beginning November 1, 2009, the companyAnchor entered into a 24 month lease for office space in Boca Raton, FL, and on November 1, 2011 renewed for another two years. This lease expired on September 30, 2013 and was not renewed. The monthly rental iswas approximately $1,413.

On August 1, 2013, FlexShopper entered into a 39 month lease for additional office space in Boca Raton, FL to accommodate the FlexShopper business and its additional employees. The Company hasmonthly rent is approximately $6,800.

Anchor had a lease for office space in Medley, FL, which expireswas to expire on May 12, 2014. The monthly rental is approximately $800.Anchor terminated this lease early and forfeited its security deposit.

The rental expense for the sixnine months ended JuneSeptember 30, 2013 and 2012 was approximately $28,586$42,365 and $21,880$34,500 respectively.

We are not a party to any pending material legal proceedings except as described below. Tobelow and in Note 4 and 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 CompanyAnchor 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.

On August 1, 2013, the Company entered into a 39 month lease for additional office space in Boca Raton, FL to accommodate the FlexShopper business and its additional employees. The monthly rent is approximately $6,800.

This discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and the related notes appearing at the end of our Form 10-K for the fiscal year ended December 31, 2012. Some of the information contained in this discussion and analysis or set forth elsewhere in this formForm 10-Q, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. The “Risk Factors” section of our Form 10-K for the fiscal year ended December 31, 2012 should be read for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Executive Overview

One of our business objectives is to create a well-recognized, national financial services firm for small businesses providing accounts receivable funding (factoring), purchase order finance, outsourcing of accounts receivable management including collections and the risk of customer default and other specialty finance products including, but not limited to, trade finance and government contract funding. For certain service businesses, Anchor also provides back office support, including payroll and invoice processing services. We provide our services to clients nationwide.   We plan to achieve our growth objectives through internal growth through a network of business development personnel and mass media marketing initiatives. Our principal operations are located in Charlotte, North Carolina and we maintain an executive office in Boca Raton, Florida, which includes its sales and marketing functions. We have a sales office in Medley, Florida which sells freight bill funding services to transportation companies under our TruckerFunds.com trade name.

In June 2013, we formed a wholly owned subsidiary, of Anchor, FlexShopper, LLC, for the purpose of developing a business that will provide certain typescategories of durable goods to consumers on a lease to own (“LTO”) basis and also provide lease to own terms to consumers of third party retailers. The Company anticipates generating revenues from this new line of business later this year, while maintaining its existing business.  Management believes that the introduction of FlexShopper’s LTO programs support broad untapped expansion opportunities within the U.S. consumer e-commerce and retail marketplaces.  FlexShopper and its online LTO products will provide consumers the ability to acquire durable goods, including electronics, computers and furniture they need, on a low payment, lease basis. Concurrently, e-tailers and retailers that work with FlexShopper may substantially increase their sales by utilizing FlexShopper’s online channels to connect with consumers that want to acquire products on an LTO basis.  One method currently in development by FlexShopper that connects retailers/e-tailers with these consumers is a patent pending system that enables consumers to buy products on an LTO basis using mobile devices and tablets. FlexShopper has been hiring employees to implement its business plan including a Chief Information Officer, Vice President of eCommerce and programmers. The Company anticipates additional expenses to develop this line of business of approximately $100,000 per month and potentially higher as the Company implements its programs and builds an infrastructure to support its revenues and business objectives.

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.

For both Fixed and Variable Transaction fees, the CompanyAnchor recognizes revenue by using one of two methods depending on the type of customer.  For new customers the CompanyAnchor recognizes revenue using the cost recovery method.  For established customers the CompanyAnchor 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 CompanyAnchor 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 CompanyAnchor obtains sufficient historical experience, it will begin using the accrual method to recognize revenue.

For established customers the CompanyAnchor uses the accrual method of accounting.  The CompanyAnchor 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’sAnchor’s last sixnine months of experience with the customer along with the Company’sAnchor’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 CompanyAnchor 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.

The Company’sAnchor’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 CompanyAnchor has a security interest in the accounts receivable and inventory purchased and, on a case-by-case basis, may have additional collateral.  The CompanyAnchor 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 CompanyAnchor has varying types of personal guarantees from their customers relating to the purchased accounts receivable and purchase order advances.

Management considered approximately $185,449$80,449 of their JuneSeptember 30, 2013 and December 31, 2012 retained interest in purchased accounts receivable to be uncollectible.

Management believes the fair value of the retained interest in purchased accounts receivable approximates its recorded value because of the relatively short-term nature of the purchased receivable and the fact that the majority of these invoices have been subsequently collected. As of JuneSeptember 30, 2013, accounts receivable purchased over 90 days old and still accruing fees totaled approximately $151,400.$85,300.

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.