Morse
& Morse, PLLC
1400
Old
Country Road, Suite 302
Westbury,
NY 11590
Tel:
516-487-1446
Fax:
516-487-1452
Email:
morgold@aol.com
| Paul Fischer, Staff Attorney Division of Corporation Finance |
August
31, 2007
|
|
| Telephone Number: 202-551-3415 | ||
| Facsimile Number. 202-7729205 | ||
|
Mail
Stop 3720
|
| Re: | Anchor Funding Services, Inc. |
| Registration Statement on Form 10-SB | |
| Filed on April 30, 2007 | |
| File No. 0-52589 |
|
|
Dear
Mr. Fischer:
|
On
August 14, 2007 we electronically
filed a response letter (the Staff’s letter was dated August 9, 2007)
.
The
attached response letter replaces our August 14, 2007 response letter in its
entirety. Please completely disregard our August 14, 2007 response
letter.
As
requested by you, the significant differences between our August 14, 2007
response letter and the attached response letter are as follows:
Fee
Income
As
we
continued to research and analyze Staff comments, we determined all our fees
are
time based. We do not charge a transaction fee. The
confusion occurred because we withhold the initial time based fee when a
purchased invoice is funded. By definition, in our Factoring and
Security Agreement, these withheld amounts are non-refundable. We
were mistakenly under the impression that withholding this non-refundable money
was a transaction fee.
The
attached response letter states our current fee structure.
Estimating
Timing of Collections
As
we
continued to research and analyze Staff comments, we determined our yield rate
would give us an accurate estimate of the timing of our
collections. In our August 14, 2007 response letter we had not yet
thought of analyzing this data to determine an estimate of our collection
period.
The
attached response letter explains this in further detail.
After
you
review the attached please contact Jeff Cline (704-552-0553). Once we
agree on the resolution of the matters raised in your August 9, 2007 comment
letter (specifically items 1, 2 and 3), as necessary, we intend to amend our
previous filings.
We
appreciate your prompt attention to this matter.
| Very truly yours, | |||
| MORSE & MORSE, PLLC | |||
|
|
|
/s/ Steven Morse, Managing Member | |
2
Morse
& Morse, PLLC
1400
Old Country Road, Suite 302
Westbury,
NY 11590
Tel:
516-487-1446
Fax:
516-487-1452
Email:
morgold@aol.com
| Paul Fischer, Staff Attorney Division of Corporation Finance |
August
31, 2007
|
|
| Telephone Number: 202-551-3415 | ||
| Facsimile Number. 202-7729205 | ||
|
Mail
Stop 3720
|
| Re: | Anchor Funding Services, Inc. |
| Registration Statement on Form 10-SB | |
| Filed on April 30, 2007 | |
| File No. 0-52589 |
|
|
Dear
Mr. Fischer:
|
As
counsel to the above captioned
corporation, the following letter is in response to the Staff’s August 9, 2007
comment letter with respect to Anchor Funding Services, Inc.’s Form 10/A-SB
Registration Statement. We have both electronically filed this response letter
and have provided you with hard copy to your mail stop via overnight
courier.
|
1.
|
Comment
|
We
refer
to your response to prior comment 5. To help us better understand your
arrangements and the related accounting, please provide us with an example
(including the amounts representing the funded amount, invoice amount, factor
commission, etc.) that provides insight into one of your factoring arrangements.
Also provide us with the relevant journal entries recording such
amounts.
Response
Please
see responses to comments 2 and 3, including the attached Exhibits which provide
additional information on our business and related revenue recognition
accounting. If after you review our responses to Comments 2 and 3 you
need additional information please contact us.
Based
on
your comments, our research and consultation with outside professionals we
are
changing our revenue recognition policy in the next
amendment. Accordingly, we will be amending our Form 10/A-SB filed on
August 3, 2007 and our Form 10Q filed on August 19, 2007.
3
|
2.
|
Comment
|
Tell
us
the how you applied the provisions of SFAS 140 in accounting for your purchase
of accounts receivable and the amounts that were maintained in a reserve
account. If you believe that SFAS 140 does not apply to you, tell us why and
refer to the basis in literature that supports your accounting.
Response
Comment
complied with. Please see Exhibit I to this letter.
|
3.
|
Comment
|
We
note
that you record the factor commission as revenue once an invoice is funded.
Please note pursuant to paragraph 8 of SOP 01-6 that transfers of
receivables under factoring arrangements meeting the sale criteria of paragraph
9 of SFAS 140 are accounted for by the factor as purchases of receivables.
The
acquisition of receivables and accounting for purchase discounts such as
factoring commissions should be recognized in accordance with SFAS 91 or
AICPA
Practice Bulletin No. 6, as applicable. Transfers not meeting the sale criteria
in SFAS 140 are accounted for as secured loans (that is, loans collateralized
by
customer accounts or receivables). Paragraph 15 of SFAS 140 provides additional
guidance in those situations. Factoring commissions under these arrangements
should be recognized over the period of the loan contract in accordance with
SFAS 91. That period begins when the finance company (or an entity with
financing activities [including trade receivables]) funds a customer's credit
and ends when the customer's account is settled.
Response
Comment
complied with. Please see Exhibit II to this letter.
4
|
4.
|
Comment
|
Please
refer to prior comment 6. Please expand your disclosure on page F-13 to include
the missing information following the two colons. In this regard, please
add the
table that is referred to in your statement, ""The following table summarizes
information about stock options as of January 31, 2007." Also, add the
information that should follow your statement, "The financial effect of these
option agreements will be recorded in the January 31, 2007 financial statements
and is anticipated to be as follows."
Response
Comment
complied with. Note 9 to the December 31, 2006 and 2005 financial
statements, has been revised appropriately to include the missing
information.
|
5.
|
Comment
|
We
note
that your consolidated balance sheet as of March 31, 2007 is labeled as
unaudited however, your consolidated balance sheet as of December 31, 2006
is
not labeled. Please revise.
Response
Comment
complied with. Please see revised December 31, 2006 balance
sheet.
|
|
Very
truly yours,
|
| MORSE & MORSE, PLLC | |||
|
Date
|
By:
|
/s/ Steven Morse | |
| Steven Morse | |||
| Managing Member | |||
5
Exhibit
I
Anchor
Funding Services, LLC
Memo
re: Accounting Treatment for Invoices Acquired
December
31, 2006
Facts
Anchor
Funding Services (“AFS”) is a factor for small to medium size companies located
throughout the United States. Each factoring customer must execute
AFS’s Factoring and Security Agreement (“Agreement”) before AFS will perform any
services for the customer.
The
Agreement does not require the customer to send all of its invoices to
AFS for
purchase. It is the customer’s choice/option to select the invoices
they send to AFS. Once AFS receives invoices the customer requests
them to purchase, the Agreement does not require AFS to purchase those
invoices. The Agreement gives AFS the choice/option to select which
invoices presented to them they will purchase.
If
AFS
does choose to purchase invoices requested by a customer, the Agreement
specifies all terms, conditions, rights and responsibilities of AFS and
the
customer. AFS makes this determination once they are satisfied the
invoice is creditworthy. The term of the agreement varies but is
usually for one year. AFS’s customer can opt out of the Agreement,
typically with written notice of at least ninety days prior to the Agreement’s
expiration date. If not terminated, the Agreement automatically
renews on its anniversary date.
If
AFS
decides to purchase a customer’s invoices, AFS will fund that invoice usually
within 1 to 2 days. The payment terms on substantially all purchased
invoices require payment within 30 or less days from the invoice
date. AFS will typically fund 75% to 85% of the face value of each
invoice purchased. The difference between the funded amount and
invoice amount (less amounts withheld to cover future fee income) is maintained
in a reserve account. This reserve protects AFS against invoice
amounts that may not be collected due to dispute or other
reasons. Once AFS collects on the purchased invoice, AFS will usually
remit any balances due to the customer within 1-2 days.
AFS
charges/collects from their customers in one of two ways as
follows:
|
1)
|
Fixed
Transaction Fee. Transaction fees are a fixed
percentage of the purchased invoice. This percentage remains
the same from the date the purchased invoice is funded until
the date the
purchased invoice is collected. AFS will collect a percentage
of the purchased invoice on the date the invoice is funded and
in certain
instances on the date the invoice is collected. This method is
referred to as the “Fixed Transaction Fee”
method.
|
|
2)
|
Variable
Transaction Fee. Transaction fees are variable
based on the length of time the purchased invoice is
outstanding. AFS will collect a percentage of the
purchased invoice on the date the invoice is funded. Typically,
AFS will charge variable percentages for every 15 days a purchased
invoice
is outstanding, up to a maximum amount, until the purchased invoice
is
collected. This method is referred to as the “Variable
Transaction Fee” method.
|
6
For
approximately the last two years, AFS has only provided customers with
Variable
Transaction Fee pricing and will continue to do so.
All
percentages (whether a “Fixed Transaction Fee” or “Variable Transaction Fee”)
are specified in the Agreement and they vary between customers.
In
Fixed
Transaction Fee and Variable Transaction Fee contracts, AFS withholds a
portion
of their fees from the initial advance. This is the Initial
Transaction Fee.
The
Initial Transaction Fee in Fixed Transaction Fee contracts is a percentage,
specified in the contract, withheld from the initial funding. This
fee is non-refundable.
The
Initial Transaction Fee in Variable Transaction Fee contracts is AFS’s time
based fee for the first 15 days an invoice is outstanding. This fee
is non-refundable.
“Variable
Transaction Fees” are computed as a percentage of the invoice from the date of
the funding until AFS collects the purchased invoice. The various
percentages are specified in the Agreement and they vary between
customers. The Agreement specifies a percentage to be charged for
various time periods and once a purchased invoice “ages” into a certain time
period the fee is computed as if the purchased invoice is outstanding for
the
entire period.
If
a
purchased invoice is unpaid after a specified number of days (usually after
60
or 75 days), under certain conditions, AFS may be able to present the purchased
invoice to the customer to purchase it back from AFS. The purchase
price equals the amount AFS advanced to the customer, plus any earned fees
(either “Variable or Fixed”). The Agreement specifies the number of
days AFS must hold a purchased invoice before presenting it back to the
customer
for re-purchase. The Agreement does not permit AFS to submit invoices
back to the customer, if the account debtor goes out of business usually
within
45 to 60 days of AFS’s purchasing the invoice. AFS therefore takes
the credit risk of the account debtor becoming insolvent for this period
of
time.
One
measure of tracking profitability of a transaction is “yield.” AFS
can monitor yield by customer. Yield is expressed as a percentage and
is calculated as follows:
(Fee
Income/Amount Funded) x (360/#Days Invoice is outstanding) x 100
7
Since
the
yield is a function of the length of time a purchased invoice is outstanding,
AFS can estimate by customer, the number of days between invoice purchase
and
invoice collection.
Question
Should
AFS account for the above activity as a purchase of accounts receivable
or a
secured borrowing with a pledge of collateral?
Research
SFAS
140
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities is the authorative literature on these issues.
SFAS
140 (paragraph #9) states that a transfer of financial assets (or all
or a portion of a financial asset) in which the transferor surrenders
control over those financial assets shall be accounted for as a sale to
the
extent that consideration other than beneficial interests in the transferred
assets is received in exchange. The transferor has surrendered
control over transferred assets if and only if all of the following conditions
are met:
|
·
|
The
transferred assets have been isolated from the transferor-put
presumptively beyond the reach of the transferor and its creditors,
even
in bankruptcy or other receivership
|
|
·
|
Each
transferee has the right to pledge or exchange the assets it
received, and
no condition both constrains the transferee from taking advantage
of its
right to pledge or exchange and provides more than a trivial
benefit to
the transferor
|
|
·
|
The
transferor does not maintain effective control over the transferred
assets
through either (1) an agreement that both entitles and obligates
the
transferor to repurchase or redeem them before their maturity
or (2) the
ability to unilaterally cause the holder to return specific assets,
other
than through a cleanup call
|
Analysis
|
1)
|
The
transferred assets have been isolated from the transferor-put
presumptively beyond the reach of the transferor and its creditors,
even
in bankruptcy or other
receivership.
|
The
Agreement clearly specifies all invoices purchased are the property of
AFS and
AFS files a security interest in all invoices purchased. Management
had various outside professionals draft and review the Agreement and is
confident the terms in it will hold up if challenged.
Condition
- Met
8
|
2)
|
Each
transferee has the right to pledge or exchange the assets it
received, and
no condition both constrains the transferee from taking advantage
of its
right to pledge or exchange and provides more than a trivial
benefit to
the transferor.
|
The
Agreement clearly specifies AFS can transfer, sell or pledge any invoices
purchased by AFS. Management had various outside professionals draft
and review the Agreement and is confident the terms in it will hold up
if
challenged.
Condition
- Met
|
3)
|
The
transferor does not maintain effective control over the transferred
assets
through either (1) an agreement that both entitles and obligates
the
transferor to repurchase or redeem them before their maturity
or (2) the
ability to unilaterally cause the holder to return specific assets,
other
than through a cleanup call.
|
The
Agreement specifies that the transferor has the obligation to repurchase
a
factored invoice after a specified number of days. This time frame is
not before the maturity of the purchased invoice. In addition, AFS bears
the
loss if the Account Debtor becomes insolvent for a period of time after
AFS
purchases the invoice that is greater than the maturity of the
invoice.
The
Agreement provides no ability to unilaterally cause the holder to return
specific assets.
Condition
- Met
Conclusion
AFS
meets
all conditions above and should account for the acquisition of their customer’s
invoices as a purchase. AFS should recognize all assets obtained and
any liabilities incurred and initially measure them at fair value.
9
Exhibit
II
Anchor
Funding Services, LLC
Memo
re: Accounting Treatment for Recognizing Revenue
December
31, 2006
Facts
See
Exhibit I for complete facts on AFS and conclusion that Anchor Funding
Services,
Inc. (AFS) should account for the acquisition of their customer’s invoices as a
purchase under SFAS No. 140.
Question
How
should AFS account for their Fixed Transaction Fee and Variable Transaction
Fee?
Research
The
appropriate literature on this topic consists of the following:
|
|
1)
SOP 01-6 Accounting by Certain Entities (Including Entities with
Trade
Receivables) That Lend to or Finance the Activities of
Others
|
|
|
2)
AICPA Practice Bulletin No. 6 – Amortization of Discounts on Certain
Acquired Loans
|
|
|
3)
SFAS 91 Accounting for Nonrefundable Fees and Costs Associated
with
Originating or Acquiring Loans and Initial Direct Costs of
Lease
|
Paragraph
8(m) of SOP 01-6 states the following:
|
m.
|
Factoring
Arrangements. Transfers of receivables under factoring
arrangements meeting the sale criteria of paragraph 9 of FASB
Statement
No. 140 are accounted for by the factor as purchases of
receivables. The acquisition of receivables and accounting for
purchase discounts such as factoring commissions should be recognized
in
accordance with FASB Statement No. 91 or AICPA Practice Bulletin
No. 6,
Amortization of Discounts on Certain Acquired
Loans.
|
Paragraph
13 of AICPA Practice Bulletin No. 6 states the following:
At
the
time of acquisition, the sum of the acquisition amount of the loan and
the
discount to be amortized should not exceed the undiscounted future cash
collections that are both reasonably estimable and probable. The
discount on an acquired loan should be amortized over the period in which
the
payments are probable of collection only if the amounts and timing of
collections, whether characterized as interest or principal, are reasonably
estimable and the ultimate collectibility of the acquisition amount of
the loan
and the discount is probable. If these criteria are not satisfied,
the loan should be accounted for using the cost-recovery method.
10
Paragraph
15 of SFAS No. 91 states the following:
The
initial investment in a purchased loan or group of loans shall include
the
amount paid to the seller plus any fees paid or less any fees
received. The initial investment frequently differs from the related
loan’s principal amount at the date of purchase. This difference
shall be recognized as an adjustment of yield over the life of the
loan. All other costs incurred in connection with acquiring purchased
loans or committing to purchase loans shall be charged to expense as
incurred.
Analysis
Since
AFS’s acquisition of receivables is considered a purchase of receivables its
fees associated with this activity need to be accounted for under AICPA
Practice
Bulletin No. 6 or SFAS No. 91 as appropriate.
AICPA
Practice Bulleting No. 6 addresses purchase discounts on acquired
loans. These situations occur when an entity acquires loans for a
discount and then is entitled to receive the entire loan balance. The
difference between the purchase price and full loan amount is the purchase
discount. A common characteristic of these transactions is that the
seller never receives an amount in excess of the face value of the loans
sold.
SFAS
No.
91 addresses fees received when loans are purchased. These situations
occur when an entity buys loans for a fee. The acquiring entity then
continues to receive payments (principal and interest) over the life of
the
loan. The fee is amortized over the life of the loan. In
these transactions, the seller can receive more than the face value of
the
loans.
Conclusion
AICPA
Practice Bulletin No. 6 is more appropriate revenue recognition for AFS’s
fees. SFAS No. 91 discusses situations where an acquiring entity may
pay an amount in excess of the face value of the loaned amounts. This
is an activity AFS would never do.
To
comply
with AICPA Practice Bulleting No. 6, upon purchasing an invoice, AFS will
determine that the acquisition cost less discount (Fixed or Variable Transaction
Fee) will exceed the undiscounted future cash collections that are reasonably
estimable and probable.
AFS
does
appropriate credit analysis prior to funding an invoice and believes the
amounts
to be collected will be in excess of their purchase price.
11
AFS
must
analyze its two different fee structures and determine the appropriate
revenue
recognition method.
Fixed
Transaction Fees
The
up-front fee (collected when the purchased invoice is funded) and the back-end
fee (collected when the purchased invoice is paid), can be amortized over
the
period in which payments are probable of collection only if:
|
1)
|
Amounts
to be collected, whether characterized as interest or principal,
are
reasonably estimable
|
Analysis
Based
on
AFS’s history with a customer and/or its investigation of the
customer’s
customer
base, amounts to be collected can be reasonably estimated
|
2)
|
Timing
of collections, whether characterized as interest or principal,
are
reasonably estimable
|
Analysis
Based
on
AFS’s history with a customer it can use historical yield information to
estimate timing of collections. AFS can apply a daily yield rate, by
customer, to uncollected balances and determine the amount of earned but
uncollected fee income.
|
3)
|
Ultimate
collectibility of the acquisition amount and discount are
probable.
|
Analysis
Based
on
AFS’s history with a customer and/or its investigation of the
customer’s
customer
base, ultimate collection is probable.
AFS
meets
conditions 1,2 and 3.
AFS
will
recognize all revenue on its Fixed Transaction Fee customers using the
accrual
method.
An
example of our Fixed Transaction Fee revenue recognition under the following
assumptions would be as follows:
Invoice
amount purchased - $10,000
Factor
Fee - 5% (2.5% collected upon funding and 2.5% collected upon collection
from
the account debtor)
Advance
Rate – 75%
Date
Acquired – 7-1-07
Date
Collected – 8-20-07
Historical
Yield Rate – 48%
12
Our
journal entries in July 2007 for this transaction would be as
follows:
|
#1
To record Purchase
|
|||
|
Retained
Interest in Purchased Accounts Receivable
|
10,000
|
||
|
Unearned
Fee Income
|
|
250
|
|
|
Reserve
Payable
|
|
2,500
|
|
|
Cash
|
|
7,250
|
|
|
#2
To accrue fee income on 7-31
|
|||
|
Earned
but Uncollected Fee Income
|
310
|
|
|
|
Factoring
Revenues (31/360) x (7,500 x .48)
|
|
310
|
|
|
Our
journal entries in the month of August 2007 would be as
follows:
|
|||
|
#1
To record collection
|
|||
|
Cash
|
10,000
|
||
|
Retained
Interest in Purchased Accounts
Receivable
|
|
10,000
|
|
|
#2
To record settlement with customer
|
|||
|
Reserve
Payable
|
2,500
|
||
|
Unearned
Fee Income
|
250
|
||
|
Factoring
Revenues
|
|
500
|
|
|
Cash
|
|
2,250
|
|
|
#3
To reverse 7-31 fee accrual
|
|||
|
Factoring
Revenues
|
310
|
||
|
Earned
but Uncollected Fee Income
|
|
310
|
Variable
Transaction Fees
These
fees are collected when the purchased invoice is funded and paid and can
be
amortized over the period in which payments are probable of collection
only
if:
|
1)
|
Amounts
to be collected, whether characterized as interest or principal,
are
reasonably estimable
|
Analysis
Based
on
AFS’s history with a customer and/or its investigation of the
customer’s
customer
base, amounts to be collected can be reasonably estimated
|
2)
|
Timing
of collections, whether characterized as interest or principal,
are
reasonably estimable
|
13
Analysis
Based
on
AFS’s history with a customer it can use historical yield information to
estimate timing of collections. AFS can apply a daily yield rate, by
customer, to uncollected balances that determines the amount of earned
but
uncollected fee income.
|
3)
|
Ultimate
collectibility of the acquisition amount and discount are
probable.
|
Analysis
Based
on
AFS’s history with a customer and/or its investigation of the
customer’s
customer
base, ultimate collection is probable.
AFS
meets
conditions 1,2 and 3.
AFS
will
recognize all revenue on its Variable Transaction Fee customers using the
accrual method.
Examples
of our Variable Transaction Fee revenue recognition under the following
assumptions would be as follows:
Base
Assumptions
Invoice
amount purchased - $10,000
Factor
fee – 2.00% if purchased invoice is outstanding for any portion of 1
to 15 days
3.00%
if purchased invoice is outstanding for any
portion of 16 to 30 days
4.00%
if
purchased invoice is outstanding for any portion of 31 to 44
days
5.00% if purchased invoice is outstanding for over 45
days
Withheld
Amount – 2.00% of purchased invoice
Advance
Rate – 75%
Date
Acquired – 7-1-07
Historical
Yield Rate – 49%
Example
1
Using
above base assumptions and a date collected of 7-21-07.
Our
journal entries for the month of July 2007 would be:
|
#1
To record purchase
|
|||
|
Retained
Interest in Purchased Accounts Receivable
|
10,000
|
||
|
Reserve
Payable
|
|
2,500
|
|
|
Unearned
Fee Income
|
|
200
|
|
|
Cash
|
|
7,300
|
|
|
#2
To record collection
|
|||
|
Cash
|
10,000
|
||
|
Retained
Interest in Purchased Accounts Receivable
|
|
10,000
|
|
|
#3
To record settlement with customer
|
|||
|
Reserve
Payable
|
2,500
|
||
|
Unearned
Fee Income
|
200
|
||
|
Factoring
Revenues
|
|
300
|
|
|
Cash
|
|
2,400
|
14
Example
2
Using
above base assumptions and a date collected of 8-8-07.
Our
journal entries for the month of July 2007 would be:
|
#1
To record purchase
|
|||
|
Retained
Interest in Purchased Accounts Receivable
|
10,000
|
||
|
Unearned
Fee Income
|
|
200
|
|
|
Reserve
Payable
|
|
2,500
|
|
|
Cash
|
|
7,300
|
|
|
#2
To accrue fee income
|
|||
|
Earned
but Uncollected Fee Income
|
316
|
||
|
Factoring
Revenues (31/360) x (7,500 x .49)
|
|
316
|
|
|
Our
journal entries for the month of August 2007 would be:
|
|||
|
#1
To record collection
|
|||
|
Cash
|
10,000
|
||
|
Retained
Interest in Purchased Accounts Receivable
|
|
10,000
|
|
|
#2
To record settlement with customer
|
|||
|
Reserve
Payable
|
2,500
|
||
|
Unearned
Fee Income
|
200
|
||
|
Factoring
Revenues
|
|
400
|
|
|
Cash
|
|
2,300
|
|
|
#3
To reverse 7-31 fee income accrual
|
|||
|
Factoring
Revenues
|
316
|
||
|
Earned
but Uncollected Fee
Income
|
|
316
|
15