SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act Of 1934
For The Quarterly Period Ended March 31, 2009
Commission File Number: 0-52589
ANCHOR FUNDING SERVICES, INC.
(Exact name of registrant as specified in its charter)
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 [ ] 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 March 31, 2009, the Company had a total of 12,940,378 shares of Common Stock outstanding, excluding 1,314,369 outstanding shares of Series 1 Preferred Stock convertible into 6,571,845 shares of Common Stock.
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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 assumption 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.
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ANCHOR FUNDING SERVICES, INC.
Form 10-Q Quarterly Report
Table of Contents
Page | ||
PART I. FINANCIAL INFORMATION | ||
Item 1. | Financial Statements | 4 |
Consolidated Balance Sheets as of March 31, 2009 (unaudited) and December 31, 2008 | 4 | |
Consolidated Statements of Operations for the Three Months Ended March 31, 2009 and 2008 (unaudited) | 5 | |
Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2009 (unaudited) | 6 | |
Consolidated Statements of Cash Flows for Three Months Ended March 31, 2009 and 2008 (unaudited) | 7 | |
Notes to Consolidated Financial Statements | 8 | |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 19 |
Item 3. | Quantitative and Quantitative Disclosures about Market Risk | 23 |
Item 4. | Controls and Procedures | 23 |
PART II. OTHER INFORMATION | ||
Item 1. | Legal Proceedings | 24 |
Item 2. | Changes in Securities | 24 |
Item 3. | Defaults Upon Senior Securities | 24 |
Item 4. | Submissions of Matters to a Vote of Security Holders | 24 |
Item 5 | Other Information | 24 |
Item 6. | Exhibits and Reports on Form 8-K | 25 |
Signatures | 26 |
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ANCHOR FUNDING SERVICES, INC. | ||||||||
CONSOLIDATED BALANCE SHEETS | ||||||||
ASSETS | ||||||||
(Unaudited) | (Audited) | |||||||
March 31, | December 31, | |||||||
2009 | 2008 | |||||||
CURRENT ASSETS: | ||||||||
Cash | $ | 369,387 | $ | 401,104 | ||||
Retained interest in purchased accounts receivable, net | 4,394,063 | 4,292,366 | ||||||
Earned but uncollected fee income | 114,130 | 87,529 | ||||||
Prepaid expenses and other | 92,828 | 116,950 | ||||||
Deferred financing cost | 121,212 | 85,131 | ||||||
Total current assets | 5,091,620 | 4,983,079 | ||||||
PROPERTY AND EQUIPMENT, net | 67,009 | 70,181 | ||||||
DEFERRED FINANCING COSTS, non-current | 191,734 | 156,073 | ||||||
SECURITY DEPOSITS | 19,500 | 19,500 | ||||||
$ | 5,369,863 | $ | 5,228,833 | |||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
CURRENT LIABILITIES: | ||||||||
Due to financial institution | $ | 1,538,941 | $ | 1,187,224 | ||||
Accounts payable | 143,566 | 122,900 | ||||||
Accrued payroll and related taxes | 60,174 | 35,067 | ||||||
Accrued expenses | 19,735 | 45,141 | ||||||
Collected but unearned fee income | 63,351 | 58,707 | ||||||
Loan fees payable | 50,000 | 50,000 | ||||||
Preferred dividends payable | 129,635 | 0 | ||||||
Total current liabilities | 2,005,402 | 1,499,039 | ||||||
LOAN FEES PAYABLE, non-current | 50,000 | 50,000 | ||||||
TOTAL LIABILITIES | 2,055,402 | 1,549,039 | ||||||
COMMITMENTS AND CONTINGENCIES | ||||||||
PREFERRED STOCK, net of issuance costs of | ||||||||
$1,209,383 | 5,361,512 | 5,361,512 | ||||||
COMMON STOCK | 12,941 | 12,941 | ||||||
ADDITIONAL PAID IN CAPITAL | 1,750,699 | 1,660,516 | ||||||
ACCUMULATED DEFICIT | (3,810,691 | ) | (3,355,175 | ) | ||||
3,314,461 | 3,679,794 | |||||||
$ | 5,369,863 | $ | 5,228,833 | |||||
The accompanying notes to the consolidated financial statements are an integral part of these statements.
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ANCHOR FUNDING SERVICES, INC. | ||||||||
CONSOLIDATED STATEMENTS OF OPERATIONS | ||||||||
For the three months ended March 31, 2009 and 2008 | ||||||||
(Unaudited) | (Unaudited) | |||||||
2009 | 2008 | |||||||
FINANCE REVENUES | $ | 404,278 | $ | 211,661 | ||||
INTEREST EXPENSE, net - financial institution | (12,899 | ) | - | |||||
INTEREST INCOME | - | 23,617 | ||||||
NET FINANCE REVENUES | 391,379 | 235,278 | ||||||
(PROVISION) FOR CREDIT LOSSES / BENEFIT FOR | ||||||||
RECOVERIES | (6,063 | ) | 6,096 | |||||
FINANCE REVENUES, NET OF INTEREST EXPENSE | ||||||||
AND CREDIT LOSSES | 385,316 | 241,374 | ||||||
OPERATING EXPENSES | 711,197 | 664,255 | ||||||
LOSS BEFORE INCOME TAXES | (325,881 | ) | (422,881 | ) | ||||
INCOME TAXES | - | - | ||||||
NET LOSS | (325,881 | ) | (422,881 | ) | ||||
DEEMED DIVIDEND ON CONVERTIBLE PREFERRED STOCK | (129,635 | ) | (136,404 | ) | ||||
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDER | $ | (455,516 | ) | $ | (559,285 | ) | ||
NET LOSS ATTRIBUTABLE TO COMMON | ||||||||
STOCKHOLDER, per share | ||||||||
Basic | $ | (0.04 | ) | $ | (0.05 | ) | ||
Dilutive | $ | (0.04 | ) | $ | (0.05 | ) | ||
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING | ||||||||
Basic and dilutive | 12,940,378 | 12,100,860 | ||||||
The accompanying notes to the consolidated financial statements are an integral part of these statements.
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ANCHOR FUNDING SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the three months ended March 31, 2009
Preferred | Common | Additional | Accumulated | |||||||||||||
Stock | Stock | Paid in Capital | Deficit | |||||||||||||
Beginning Balance, December 31, 2008 (audited) | $ | 5,361,512 | $ | 12,941 | $ | 1,660,516 | $ | (3,355,175 | ) | |||||||
Provision for compensation expense related to issued stock options | - | - | 2,607 | - | ||||||||||||
Benefit for compensation expense related to expired stock options | - | - | (8,424 | ) | - | |||||||||||
Stock options issued to directors/officers related to financing agreement obtained | - | - | 96,000 | - | ||||||||||||
To record preferred stock dividends | - | - | - | (129,635 | ) | |||||||||||
Net loss for the quarter ended March 31, 2009 | - | - | - | (325,881 | ) | |||||||||||
Ending Balance, March 31, 2009 (unaudited) | $ | 5,361,512 | $ | 12,941 | $ | 1,750,699 | $ | (3,810,691 | ) | |||||||
The accompanying notes to the consolidated financial statements are an integral part of these statements.
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ANCHOR FUNDING SERVICES, INC. | ||||||||
CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||
For the three months ended March 31, 2009 and 2008 | ||||||||
(Unaudited) | (Unaudited) | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | 2009 | 2008 | ||||||
Net loss: | $ | (325,881 | ) | $ | (422,881 | ) | ||
Adjustments to reconcile net loss to net cash | ||||||||
used in operating activities: | ||||||||
Depreciation | 13,047 | 8,531 | ||||||
Provision for uncollectible accounts | 6,063 | - | ||||||
Compensation expense related to issuance of stock options | (5,817 | ) | 6,398 | |||||
Amortization of loan fees | 24,257 | - | ||||||
Changes in operating assets and liabilities: | ||||||||
Increase in retained interest in purchased | ||||||||
accounts receivable | (107,760 | ) | (491,249 | ) | ||||
Increase in earned but uncollected fee income | (26,601 | ) | (15,284 | ) | ||||
Decrease (increase) in prepaid expenses and other | 24,122 | (19,542 | ) | |||||
Increase in accounts payable | 20,666 | 34,946 | ||||||
Increase in collected but unearned fee income | 4,644 | 3,777 | ||||||
Increase in accrued payroll and related taxes | 25,107 | 5,689 | ||||||
Decrease in accrued expenses | (25,406 | ) | (39,388 | ) | ||||
Net cash used in operating activities | (373,560 | ) | (929,003 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchases of property and equipment | (9,874 | ) | (5,973 | ) | ||||
Net cash used in investing activities | (9,874 | ) | (5,973 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Proceeds from line of credit, net | 351,717 | - | ||||||
Net cash provided by financing activities | 351,717 | 0 | ||||||
DECREASE IN CASH | (31,717 | ) | (934,976 | ) | ||||
CASH, beginning of period | 401,104 | 3,499,044 | ||||||
CASH, end of period | $ | 369,387 | $ | 2,564,068 | ||||
See Note 12 for supplemental disclosures of cash flow | ||||||||
The accompanying notes to the consolidated financial statements are an integral part of these statements.
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PART I. FINANCIAL INFORMATION
ANCHOR FUNDING SERVICES, INC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Three months ended March 31, 2009 and 2008
The Consolidated Balance Sheet as of March 31, 2009, the Consolidated Statement of Changes in Stockholders’ Equity for the three months ended March 31, 2009 and the Consolidated Statements of Operations and Cash Flows for the three months ended March 31, 2009 and 2008 have been prepared by us without audit. In the opinion of Management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly in all material respects our financial position as of March 31, 2009 and results of operations and cash flows for the three months ended March 31, 2009 and 2008. The results of operations and cash flows for the three months ended March 31, 2009 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, 2008.
1. BACKGROUND AND DESCRIPTION OF BUSINESS:
The consolidated financial statements include the accounts of Anchor Funding Services, Inc. and its wholly owned subsidiary, Anchor Funding Services, LLC (“the Company”). All significant intercompany balances and transactions have been eliminated in consolidation. |
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:
Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. |
Revenue Recognition – The Company charges fees to its customers in one of two ways as follows: |
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1) | Fixed Transaction Fee - Fixed transaction fees are derived from a fixed percentage of the purchased invoice. This percentage does not change from the date the purchased invoice is funded until the date the purchased invoice is collected. |
2) | Variable Transaction Fee - Variable transaction fees vary based on the length of time the purchased invoice is outstanding. As specified in its contract with the client, the Company charges variable increasing percentages of the purchased invoice as time elapses from the purchase date to the collection date. |
For both fixed and variable transaction fees, the Company recognizes revenue by using one of two methods depending on the type of customer. For new customers the Company recognizes revenue using the cost recovery method. For established customers the Company recognizes revenue using the accrual method. |
Under the cost recovery method, all revenue is recognized upon collection of the entire amount of purchased accounts receivable. |
The Company considers new customers to be accounts whose initial funding has been within the last three months or less. Management believes it needs three months of history to reasonably estimate a customer’s collection period and accrued revenues. If three months of history has a limited number of transactions, the cost recovery method will continue to be used until a reasonable revenue estimate can be made based on additional history. Once the Company obtains sufficient historical experience, it will begin using the accrual method to recognize revenue. |
For established customers the Company uses the accrual method of accounting. The Company applies this method by multiplying the historical yield, for each customer, times the amount advanced on each purchased invoice outstanding for that customer, times the portion of a year that the advance is outstanding. The customers’ historical yield is based on the Company’s last six months of experience with the customer along with the Company’s experience in the customer’s industry, if applicable. |
The amounts recorded as revenue under the accrual method described above are estimates. As purchased invoices are collected, the Company records the appropriate adjustments to record the actual revenue earned on each purchased invoice. These 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 from factoring customers less amounts maintained in a reserve account. 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. Upon collection, the retained interest is refunded back to the client. |
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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 monthly to determine if any are uncollectible. The Company has a security interest in the accounts receivable purchased and on a case-by-case basis, may have additional collateral. The Company files security interests in the property securing their advances. Access to this collateral is dependent upon the laws and regulations in each state where the security interest is filed. Additionally, the Company has varying types of personal guarantees from their factoring customers relating to the purchased accounts receivable.
Management considered approximately $101,000 of their March 31, 2009 and $94,000 of their December 31, 2008 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. |
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. |
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Deferred Financing Costs – Costs incurred to obtain financing are capitalized and amortized over the term of the debt using the straight-line method, which approximates the effective interest method. |
In March 2009, the Company issued stock options to its Chief Executive Officer and President (see Note 7). These options were issued to reward these executive’s for providing personal guarantees on the Company’s financing agreement obtained in November of 2008 (see Note 5). The fair value of these options were computed as specified by current accounting standards (see Note 7) and recorded as deferred financing costs. This amount will be amortized to operations over the remaining term of the financing agreement.
As of March 31, 2009 and December 31, 2008, the total amount capitalized and accumulated amortization is as follows: |
March 31, 2009 | December 31, 2008 | |||||||
Cash paid or payable | $ | 246,634 | $ | 246,634 | ||||
Stock options granted | 96,000 | - | ||||||
Accumulated amortization | (29,688 | ) | (5,431 | ) | ||||
$ | 312,946 | $ | 241,203 |
The net amount is classified in the balance sheets based on future expected amortization as follows: |
March 31, 2009 | December 31, 2008 | |||||||
Current | $ | 121,212 | $ | 85,131 | ||||
Non-current | 191,734 | 156,073 | ||||||
$ | 312,946 | $ | 241,204 |
The loan agreement requires $100,000 of these costs to be paid as follows: |
2009 | $ | 50,000 | ||
2010 | 50,000 | |||
$ | 100,000 |
Advertising Costs – The Company charges advertising costs to expense as incurred. Total advertising costs were approximately $87,000 and $151,400 for the quarters ending March 31, 2009 and 2008, respectively. |
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Earnings per Share – 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 includes 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 dilutive effect when the average price of common stock during the period exceeds the exercise price of the options and warrants. |
Also when there is a year-to-date loss from continuing operations, potential common shares should not be included in the computation of diluted earnings per share. For the quarters ending March 31, 2009 and 2008, there was a year-to-date loss from continuing operations. |
Stock Based Compensation – The fair value of transactions in which the Company exchanges its equity instruments for employee services (share-based payment transactions) must be recognized as an expense in the financial statements as services are performed. |
See Note 7 for the impact on the operating results for the quarters ended March 31, 2009 and 2008. |
Fair Value of Financial Instruments – The carrying value of cash equivalents, retained interest in purchased accounts receivable, due from/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 – Income taxes are provided for the tax effects of transactions reported in the 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 |
· | Differences in bases of property and equipment between financial and income tax reporting |
· | 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 recognizes in its consolidated financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The Company analyzed all its tax positions, including tax positions taken and those expected to be taken.
For the quarters ended March 31, 2009 and 2008, the Company recognized no liability or benefit for uncertain tax positions (see Note 10).
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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3. RETAINED INTEREST IN PURCHASED ACCOUNTS RECEIVABLE:
Retained interest in purchased accounts receivable consists of the following: |
March 31, 2009 | December 31, 2008 | |||||||
Purchased accounts receivable outstanding | $ | 5,375,462 | $ | 5,340,975 | ||||
Reserve account | (880,831 | ) | (954,104 | ) | ||||
Allowance for uncollectible accounts | (100,568 | ) | (94,505 | ) | ||||
$ | 4,394,063 | $ | 4,292,366 |
Total accounts receivable purchased were approximately $11,397,000 and $6,038,000 for the quarters ended March 31, 2009 and March 31, 2008, respectively. |
Retained interest in purchased accounts receivable consists of United States companies in the following industries: |
Industry | March 31, 2009 | December 31, 2008 | ||||||
Staffing | $ | 670,184 | $ | 1,049,623 | ||||
Transportation | 1,561,906 | 1,666,895 | ||||||
Publishing | 2,664 | 2,664 | ||||||
Construction | 5,218 | 5,218 | ||||||
Service | 2,149,376 | 1,417,615 | ||||||
Other | 105,283 | 244,856 | ||||||
$ | 4,494,631 | $ | 4,386,871 |
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following: |
Estimated | |||||||||
Useful Lives | March 31, 2009 | December 31, 2008 | |||||||
Furniture and fixtures | 2-5 years | $ | 33,960 | $ | 33,960 | ||||
Computers and software | 3-7 years | 130,888 | 121,012 | ||||||
164,848 | 154,972 | ||||||||
Less accumulated depreciation | (97,839 | ) | (84,791 | ) | |||||
$ | 67,009 | $ | 70,181 |
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5. DUE FROM/TO FINANCIAL INSTITUTION:
In November 2008, the Company entered into an agreement with a financial institution to finance the factoring of receivables and to provide ongoing working capital. The agreement is a revolving credit facility that allows the Company to borrow up to $15,000,000. This agreement expires in November 2011. |
Borrowings are made at the request of the Company. The amount eligible to be borrowed is based on a borrowing base formula as defined in the agreement. The interest on borrowings is paid monthly at LIBOR rate plus 4%. In addition to interest, the Company pays the financial institution various monthly fees as defined in the agreement. |
The agreement is collateralized by a first lien on all Company assets. Borrowings on this agreement are partially guaranteed by the Company’s President and Chief Executive Officer. The partial guarantee is $250,000 each. |
The agreement, among other covenants, requires the Company to maintain certain financial ratios. As of March 31, 2009 and December 31, 2008, the Company was in compliance with, or obtained waivers for, all provisions of this agreement. |
6. 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 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. Accrued dividends at March 31, 2009 and December 31, 2008 were $129,635 and $0 respectively. |
Common Stock – The Company is authorized to issue 40,000,000 shares of $.001 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 in Series 1 Convertible Preferred Stock and Common Stock as of March 31, 2009 and December 31, 2008 is summarized as follows: |
Series 1 Convertible | Common | |||||||
Preferred Stock | Stock | |||||||
Balance, December 31, 2008 | 1,314,359 | 12,940,378 | ||||||
Balance, March 31, 2009 | 1,314,359 | 12,940,378 |
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7. EMPLOYMENT AND STOCK OPTION AGREEMENTS:
Employee/Directors |
The Company has employment and stock option agreements with its Chief Executive Officer, Morry Rubin (“M. Rubin”) and its President, Brad Bernstein (“B. Bernstein”) |
The following summarizes M. Rubin’s employment agreement and stock options: |
· | The employment agreement (dated January 31, 2007) with M. Rubin retains his services as Co-chairman and Chief Executive Officer for a three-year period. |
· | 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. Vesting of the options was one-third immediately, one-third on February 29, 2008 and one-third on February 28, 2009. |
· | 10-year options to purchase 250,000 shares exercisable at $.62 per share, pursuant to agreements entered into in March 2009. These options were issued in March 2009 in connection with a personal guarantee provided to a financial institution (see Note 5). These options were recorded as deferred financing costs and will be amortized to operations over the remaining life of the line of credit agreement. |
The following summarizes B. Bernstein’s employment agreement and stock options: |
· | The employment agreement (dated January 31, 2007) with B. Bernstein retains his services as President for a three-year period. |
· | An annual salary of $205,000 during the first year, $220,000 during the second year and $240,000 during the third year and any additional year of employment. 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. B. Bernstein is eligible to receive annual bonuses as determined by the Company’s compensation committee. 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. Vesting of the options is one-third immediately, one-third on February 29, 2008 and one-third on February 28, 2009. |
· | 10-year options to purchase 250,000 shares exercisable at $.62 per share, pursuant to agreements entered into in March 2009. These options were issued in March 2009 in connection with a personal guarantee provided to a financial institution (see Note 5). These options were recorded as deferred financing costs and will be amortized to operations over the remaining life of the line of credit agreement. |
Outside Directors |
The Company entered into stock option agreements with outside directors. The following summarizes stock option agreements entered into with these directors: |
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· | As of March 31, 2008, there were 460,000 shares exercisable at $1.25 per share, pursuant to the Company’s 2007 Omnibus Equity Compensation Plan. The exercise period for these options is 10 years. Vesting of the options was one-third immediately, one-third from the grant date and the remainder two years from grant date. If any director ceases serving the Company for any reason, all unvested options shall terminate immediately and all vested options must be exercised within 90 days after the director ceases serving as a director. In December 2008, one of these directors resigned. As of March 31, 2009, all options granted to this director expired. |
As of March 31, 2009, there were 280,000 shares exercisable at $1.25 per share, pursuant to the Company’s 2007 Omnibus Equity Compensation Plan. The exercise period for these options is 10 years. All of these options are fully vested. If any director ceases serving the Company for any reason, the options must be exercised within 90 days after the director ceases serving as a director.
Managerial Employees |
The following summarizes stock option agreements entered into with five managerial employees: |
· | 10-year options to purchase 69,000 shares exercisable at $1.00 to $1.25 per share, pursuant to the Company’s 2007 Omnibus Equity Compensation Plan. The grant dates vary from September 2007 to March 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. |
The following table summarizes information about stock options as of March 31, 2009: |
Weighted Average | |||||||||||
Exercise | Number | Remaining | Number | ||||||||
Price | Outstanding | Contractual Life | Exercisable | ||||||||
$ | .62 to $1.25 | 2,445,000 | 10 years | 2,318,833 |
The Company records the issuance of these options in accordance with SFAS No. 123(R). The following information was input into a Black Scholes option pricing model to compute a per option price range of $.0468 to $.19: |
Exercise price | $ | .62 to $1.25 | ||
Term | 10 years | |||
Volatility | 83% to 250% | |||
Dividends | 0 | % | ||
Discount rate | 2.82% to 4.75% |
The approximate financial effect of these options to record over their life is as follows: |
Options to value | 1,945,000 | 500,000 | 2,445,000 | |||||||||
Option value | $ | 0.0468 | $ | 0.1920 | ||||||||
$ | 91,026 | $ | 96,000 | $ | 187,026 |
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The pre-tax fair value recorded for these options in the statement of operations for the quarters ending March 31, 2009 and 2008 was as follows: |
March 31, 2009 | March 31, 2008 | |||||||
Fully vested stock options | $ | 1,982 | $ | 2,080 | ||||
Unvest portions of stock options | 625 | 4,318 | ||||||
2,607 | 6,398 | |||||||
Benefit for expired stock options | (8,424 | ) | - | |||||
(Benefit) provision, net | $ | (5,817 | ) | $ | 6,398 |
8. STOCK WARRANTS:
In connection with the Company’s initial public offering in 2007, the Company issued warrants to purchase 1,342,500 shares of the Company’s common stock. The following information was input into a Black Scholes option pricing model to compute a per warrant price of $.0462:
The following table summarizes information about stock warrants as of March 31, 2009:
Exercise price | $ | 1.10 | ||
Term | 5 years | |||
Volatility | 2.5 | |||
Dividends | 0 | % | ||
Discount rate | 4.70 | % |
Weighted Average | |||||||||||
Exercise | Number | Remaining | Number | ||||||||
Price | Outstanding | Contractual Life | Exercisable | ||||||||
$ | 1.10 | 1,342,500 | 5 years | 1,342,500 |
9. CONCENTRATIONS:
Revenues – During the quarters ending March 31, 2009 and March 31, 2008, the Company recorded revenues from United States companies in the following industries: |
Industry | March 31, 2009 | March 31, 2008 | ||||||
Staffing | $ | 76,006 | $ | 83,101 | ||||
Transportation | 159,735 | 50,815 | ||||||
Construction | - | 1,367 | ||||||
Service | 154,404 | 61,780 | ||||||
Other | 14,133 | 14,598 | ||||||
$ | 404,278 | $ | 211,661 |
Major Customers – The Company had the following transactions and balances with unrelated customers (1 in quarter ending March 31, 2009 and 2 in quarter ending March 31, 2008) which represent 10 percent or more of its revenues for the quarters ending March 31, 2009 and 2008 as follows: |
For the quarter | |||||
ended March 31, 2009 | |||||
Revenues | $ | 50,567 | |||
As of March 31,2009 | |||||
Purchased accounts | |||||
receivable outstanding | $ | 719,288 | |||
For the quarter | ||||||||
ended March 31, 2008 | ||||||||
Revenues | $ | 30,534 | $ | 26,360 | ||||
As of March 31,2008 | ||||||||
Purchased accounts | ||||||||
receivable outstanding | $ | 170,527 | $ | 395,317 |
Cash – The Company places its cash and cash equivalents on deposit with a North Carolina financial institution. In October and November, 2008 the Federal Deposit Insurance Corporation (FDIC) temporarily increased coverage to $250,000 for substantially all depository accounts and temporarily provides unlimited coverage for certain qualifying and participating non-interest bearing transaction accounts. The increased coverage is scheduled to expire on December 31, 2009, at which time it is anticipated amounts insured by the FDIC will return to $100,000. During the year, the Company from time to time may have had amounts on deposit in excess of the insured limits. |
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10. INCOME TAXES:
The income tax benefit for the quarters ending March 31, 2009 and 2008 consists of the following: |
March 31, 2009 | March 31, 2008 | |||||||
Current provision | $ | 0 | $ | 0 | ||||
Deferred benefit | 121,000 | 166,000 | ||||||
121,000 | 166,000 | |||||||
Valuation reserve | (121,000 | ) | (166,000 | ) | ||||
$ | 0 | $ | 0 |
The net operating loss carryforward generated in the quarters ending March 31, 2009 and 2008 was approximately $323,000 and $421,000, respectively. The deferred tax assets related to these net operating loss carryforwards was approximately $121,000 and $166,000 as March 31, 2009 and 2008, respectively. These deferred tax assets have been reduced by valuation allowances. Management is uncertain if this net operating loss will ever be utilized, therefore it has been fully reserved. |
11. FACILITY LEASES:
In May 2007, the Company executed lease agreements for office space in Charlotte, NC and Boca Raton, FL. Both lease agreements are with unrelated parties. |
The Charlotte lease is effective on August 15, 2007, is for a twenty-four month term and includes an option to renew for an additional three year term at substantially the same terms. On November 1, 2007, the Company entered into a lease for additional space adjoining its Charlotte office. The lease is for 19 months and includes a two year renewal option at substantially the same terms. The monthly rental for the combined space is approximately $2,250. |
The Boca Raton lease was effective on August 20, 2007 and is for a sixty-one month term. The monthly rental is approximately $8,300. |
The rental expense for the quarters ending March 31, 2009 and 2008, was approximately $34,800 and $34,300, respectively. |
12. SUPPLEMENTAL DISCLOSURES OF CASH FLOW:
Cash paid for interest for the quarters ended March 31, 2009 and 2008 was $12,900 and $0, respectively. |
Non-cash financing and investing activities consisted of the following: |
For the quarter ending March 31, 2009- |
None |
For the quarter ending March 31, 2008- |
94,685 preferred shares issued in satisfaction of the accrued dividend obligation as of December 31, 2007. |
Exchange of 120,000 preferred shares for 606,690 of common shares. |
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ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
You should read the following discussion and analysis of our financial condition and results of operations 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, 2008. 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 the “Risk Factors” section of our Form 10-K for the fiscal year ended December 31, 2008 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), outsourcing of accounts receivable management including collections support and assumption of risk of customer default. 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 a combination of strategic and add-on acquisitions of other factoring and related specialty finance firms that serve small businesses in the United States and Canada and internal growth through 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 sales and marketing functions.
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
Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the 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 derived from a fixed percentage of the purchased invoice. This percentage does not change from the date the purchased invoice is funded until the date the purchased invoice is collected. |
2) | Variable Transaction Fee - Variable transaction fees vary based on the length of time the purchased invoice is outstanding. As specified in its contract with the client, the Company charges variable increasing percentages of the purchased invoice as time elapses from the purchase date to the collection date. |
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For both fixed and variable transaction fees, the Company recognizes revenue by using one of two methods depending on the type of customer. For new customers the Company recognizes revenue using the cost recovery method. For established customers the Company recognizes revenue using the accrual method. |
Under the cost recovery method, all revenue is recognized upon collection of the entire amount of purchased accounts receivable. |
The Company considers new customers to be accounts whose initial funding has been within the last three months or less. Management believes it needs three months of history to reasonably estimate a customer’s collection period and accrued revenues. If three months of history has a limited number of transactions, the cost recovery method will continue to be used until a reasonable revenue estimate can be made based on additional history. Once the Company obtains sufficient historical experience, it will begin using the accrual method to recognize revenue. |
For established customers the Company uses the accrual method of accounting. The Company applies this method by multiplying the historical yield, for each customer, times the amount advanced on each purchased invoice outstanding for that customer, times the portion of a year that the advance is outstanding. The customers’ historical yield is based on the Company’s last six months of experience with the customer along with the Company’s experience in the customer’s industry, if applicable. |
The amounts recorded as revenue under the accrual method described above are estimates. As purchased invoices are collected, the Company records the appropriate adjustments to record the actual revenue earned on each purchased invoice. These 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 from factoring customers less amounts maintained in a reserve account. 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. Upon collection, the retained interest is refunded back to the client. |
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 monthly to determine if any are uncollectible. The Company has a security interest in the accounts receivable purchased and on a case-by-case basis, may have additional collateral. The Company files security interests in the property securing their advances. Access to this collateral is dependent upon the laws and regulations in each state where the security interest is filed. Additionally, the Company has varying types of personal guarantees from their factoring customers relating to the purchased accounts receivable.
Management considered approximately $101,000 of their March 31, 2009 and $94,000 of their December 31, 2008 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. |
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. |
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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. |
Deferred Financing Costs – Costs incurred to obtain financing are capitalized and amortized over the term of the debt using the straight-line method, which approximates the effective interest method. |
In March 2009, the Company issued stock options to its Chief Executive Officer and President (see Note 7). These options were issued to reward these executive’s for providing personal guarantees on the Company’s financing agreement obtained in November of 2008 (see Note 5). The fair value of these options were computed as specified by current accounting standards (see Note 7) and recorded as deferred financing costs. This amount will be amortized to operations over the remaining term of the financing agreement.
As of March 31, 2009 and December 31, 2008, the total amount capitalized and accumulated amortization is as follows: |
March 31, 2009 | December 31, 2008 | |||||||
Cash paid or payable | $ | 246,634 | $ | 246,634 | ||||
Stock options granted | 96,000 | - | ||||||
Accumulated amortization | (29,688 | ) | (5,431 | ) | ||||
$ | 312,946 | $ | 241,203 | |||||
The net amount is classified in the balance sheets based on future expected amortization as follows:
March 31, 2009 | December 31, 2008 | |||||||
Current | $ | 121,212 | $ | 85,131 | ||||
Non-current | 191,734 | 156,073 | ||||||
$ | 312,946 | $ | 241,204 |
The loan agreement requires $100,000 of these costs to be as follows:
2009 | $ | 50,000 | ||
2010 | 50,000 | |||
$ | 100,000 |
Advertising Costs – The Company charges advertising costs to expense as incurred. Total advertising costs were approximately $87,000 and $151,400 for the quarters ending March 31, 2009 and 2008, respectively. |
Earnings per Share – 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 includes 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 dilutive effect when the average price of common stock during the period exceeds the exercise price of the options and warrants. |
Also when there is a year-to-date loss from continuing operations, potential common shares should not be included in the computation of diluted earnings per share. For the quarters ending March 31, 2009 and 2008, there was a year-to-date loss from continuing operations. |
Stock Based Compensation – The fair value of transactions in which the Company exchanges its equity instruments for employee services (share-based payment transactions) must be recognized as an expense in the financial statements as services are performed. |
See Note 7 for the impact on the operating results for the quarters ended March 31, 2009 and 2008. |
Fair Value of Financial Instruments – The carrying value of cash equivalents, retained interest in purchased accounts receivable, due from/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 – Income taxes are provided for the tax effects of transactions reported in the 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 |
· | Differences in bases of property and equipment between financial and income tax reporting |
· | 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 recognizes in its consolidated financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The Company analyzed all its tax positions, including tax positions taken and those expected to be taken.
For the quarters ended March 31, 2009 and 2008, the Company recognized no liability or benefit for uncertain tax positions (see Note 10).
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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Results of Operations
Three Months Ended March 31, 2009 vs. Three Months Ended March 31, 2008
Finance revenues increased 91.1% for the three months ended March 31, 2009 to $404,278 compared to $211,661 for the comparable period of the prior year. The change in revenue and resulting reduction in net loss described below was primarily due to an increase in the number of clients. As of March 31, 2009, the Company had 94 active clients compared to 64 active clients as of March 31, 2008.
The Company had interest expense of $12,899 for the three months ended March 31, 2009 compared to interest income of $23,617 for the three months ended March 31, 2008. This change is primarily the result of the decrease in cash in interest bearing accounts due to the Company’s using its cash and borrowing on its line of credit to fund its purchasing of clients’ accounts receivable.
The Company had a provision for credit losses of $6,063 for the three months ended March 31, 2009 compared to a benefit for recoveries for the three months ended March 31, 2008 of $6,096.
Operating expenses for three months ended March 31, 2009 were $711,197 compared to $664,255 for the three months ended March 31, 2008, an 7.1% increase. This increase is primarily attributable to the Company’s incurring additional costs to grow Anchor’s core business and support the growth.
Net loss for the three months ended March 31, 2009 was $(325,881) compared to $(422,881) for the three months ended March 31, 2008.
The following table compares the operating results for the three months ended March 31, 2009 and March 31, 2008:
Three Months Ended March 31, | ||||||||||||||||
2009 | 2008 | $ Change | % Change | |||||||||||||
Finance revenues | $ | 404,278 | $ | 211,661 | $ | 192,617 | 91.1 | |||||||||
Interest income (expense), net | (12,899 | ) | 23,617 | (36,516 | ) | |||||||||||
Net finance revenues | 391,379 | 235,278 | 156,101 | 66.4 | ||||||||||||
Benefit for recoveries (Provision for credit losses) | (6,063 | ) | 6,096 | |||||||||||||
Finance revenues, net of interest expense and credit losses | 385,316 | 241,374 | 143,942 | 59.6 | ||||||||||||
Operating expenses | 711,197 | 664,255 | 46,942 | 7.1 | ||||||||||||
Net loss before income taxes | (325,881 | ) | (422,881 | ) | 97,000 | |||||||||||
Income tax (provision) benefit: | ||||||||||||||||
Net loss | $ | (325,881 | ) | $ | (422,881 | ) | $ | 97,000 |
Client Accounts
As of and for the three months ended March 31, 2009, we have three clients that account for an aggregate of approximately 32.3% of our accounts receivable portfolio and approximately 30.9% of our revenues. The transactions and balances with these clients as of and for the three months ended March 31, 2009 are summarized below:
Percentage of Revenues for | ||||||||
Percentage of Accounts Receivable Portfolio as of | The Three Months Ended | |||||||
Entity | March 31, 2009 | March 31, 2009 | ||||||
Transportation Company in Virginia | 13.4 | 13.2 | ||||||
Medical Staffing Company in New York | 5.5 | 7.2 | ||||||
Pharmaceutical manufacturer in Arizona | 13.4 | 10.5 |
A client’s fraud could cause us to suffer material losses.
Liquidity
Cash Flow Summary
Cash Flows from Operating Activities
Net cash used by operating activities was $373,560 for the three months ended March 31, 2009 and was primarily due to our net loss for the period and cash used in acquiring operating assets, primarily to purchase accounts receivable. Cash used for operating assets and liabilities was primarily due to an increase of $107,760 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.
Net cash used by operating activities was $929,003 for the three months ended March 31, 2008 and was primarily due to our net loss for the period and cash used in acquiring operating assets, primarily to purchase accounts receivable. Cash used for operating assets and liabilities was primarily due to an increase of $491,249 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 a
Cash Flows from Investing Activities
For the three months ended March 31, 2009, net cash used in investing activities was $9,874 for the purchase of property and equipment. For the three months ended March 31, 2008, net cash used in investing activities was $5,973 for the purchase of property and equipment
Cash Flows from Financing Activities
Net cash provided by financing activities was $351,717 for the three months ended March 31, 2009 and was primarily due to increased borrowings from a financial institution to fund the purchase of accounts receivable.
Net cash provided by financing activities was $0 for the three months ended March 31, 2008.
2007 Financing
Between January 31, 2007 and April 5, 2007, we raised $6,712,500 in gross proceeds from the sale of 1,342,500 shares of our Series 1 Convertible Preferred Stock to expand our operations both internally and through possible acquisitions as more fully described under “Description of Business.”
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Capital Resources
Based on numerous financial covenants, we have the availability to borrow up to $15 million (expandable to $25 million) senior credit facility through November 2011 with an institutional asset based lender which advanced funds against up to 85% of “eligible net factored accounts receivable” (minus client reserves as lender may establish in good faith) as defined in Anchor’s agreement with its institutional lender. This facility, which is secured by our assets, contains certain covenants related to tangible net worth, change in control and other matters. 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 agreement, which could subject us to penalty rates of interest and accelerate the maturity of the outstanding balances. In the event we are not able to maintain adequate credit facilities for our factoring 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. Further, our institutional lender has announced its intention to leave the asset based financing business and it has indicated to us that it would abide by the terms of our senior credit facility until such time as we obtain a new facility. We can provide no assurances that a replacement facility will be obtained by us on terms satisfactory to us, if at all. Our two executive officers have each personally guaranteed the indebtedness under our existing credit facility up to $250,000 per person for a total of $500,000. We can provide no assurances that personal guarantees will be provided by our executive officers to a new institutional lender or how that may impact the definitive terms of any new facility.
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.
Management has not yet completed, and is not yet required to have completed, its assessment of the effectiveness of internal control over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002, as amended.
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PART II. OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS: |
As of the filing date of this Form 10-Q we are not a party to any pending legal proceedings.
Item 1A. | 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.
ITEM 2. | CHANGES IN SECURITIES. |
(a) For the three months ended March 31, 2009, there were no sales of unregistered securities, except as follows:
Date of Sale | Title of Security | Number Sold | Consideration Received, Commissions | Purchasers | Exemption from Registration Claimed | ||||||
March 2009 | Common Stock Options | 51,500 | 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 (6) | ||||||
March 2009 | Common Stock Options | 500,000 | Securities granted outside 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 (6) |
(b) Rule 463 of the Securities Act is not applicable to the Company.
(c) In the three months ended March 31, 2009, there were no repurchases by the Company of its Common
Stock.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES: |
Not applicable.
ITEM 4. | SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS: |
Not applicable.
ITEM 5. | OTHER INFORMATION: |
Not applicable.
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ITEM 6. EXHIBITS:
The following exhibits are all previously filed in connection with our Form 10-SB, as amended, unless otherwise noted.
2.1 | Exchange Agreement |
3.1 | Certificate of Incorporation-BTHC,INC. |
3.2 | Certificate of Merger of BTHC XI, LLC into BTHC XI, Inc. |
3.3 | Certificate of Amendment |
3.4 | Designation of Rights and Preferences-Series 1 Convertible Preferred Stock |
3.5 | Amended and Restated By-laws |
4.1 | Form of Placement Agent Warrant issued to Fordham Financial Management |
10.1 | Directors’ Compensation Agreement-George Rubin |
10.2 | Employment Contract-Morry F. Rubin |
10.3 | Employment Contract-Brad Bernstein |
10.4 | Agreement-Line of Credit |
10.5 | Fordham Financial Management-Consulting Agreement |
10.6 | Facilities Lease – Florida |
10.7 | Facilities Lease – North Carolina |
10.8 | Loan and Security Agreement (1) |
10.9 | Revolving Note (1) |
10.10 | Debt Subordination Agreement (1) |
10.11 | Guaranty Agreement (Morry Rubin) (1) |
10.12 | Guaranty Agreement (Brad Bernstein) (1) |
10.13 | Continuing Guaranty Agreement (1) |
10.14 | Pledge Agreement (1) |
31(a) | Rule 13a-14(a) Certification – Chief Executive Officer * |
31(b) | Rule 13a-14(a) Certification – Chief Financial Officer * |
32(a) | Section 1350 Certification – Chief Executive Officer * |
32(b) | Section 1350 Certification – Chief Financial Officer * |
99.1 | 2007 Omnibus Equity Compensation Plan |
99.2 | Form of Non-Qualified Option under 2007 Omnibus Equity Compensation Plan |
99.3 | Press Release – Results of Operations – First Quarter 2009* |
_______________
*Filed herewith.
(1) | Incorporated by reference to the Registrant’s Form 8-K filed November 24, 2008 (date of earliest event November 21, 2008). |
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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: May 14, 2009 | By: | /s/ Morry F. Rubin | |
Morry F. Rubin | |||
Chief Executive Officer | |||
Date: May 14, 2009 | By: | /s/ Brad Bernstein | |
Brad Bernstein | |||
President and Chief Financial Officer | |||
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