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EXCEL - IDEA: XBRL DOCUMENT - ALLTEMP, INC.Financial_Report.xls
EX-31.2 - EXHIBIT 31.2 - ALLTEMP, INC.f10q1214ex31ii_sourcefinan.htm
EX-32.1 - EXHIBIT 32.1 - ALLTEMP, INC.f10q1214ex32i_sourcefinan.htm
EX-31.1 - EXHIBIT 31.1 - ALLTEMP, INC.f10q1214ex31i_sourcefinan.htm
EX-32.2 - EXHIBIT 32.2 - ALLTEMP, INC.f10q1214ex32ii_sourcefinan.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

 

FORM 10-Q

 

 

 

x     Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended December 31, 2014

 

☐     Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from                      to                     .

 

Commission File Number 000-55122

 

SOURCE FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

     
Delaware   80-0142655

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. employer

identification number)

 

Level 6 / 97 Pacific Highway

North Sydney NSW 2060

Australia

(Address of principal executive offices and zip code)

 

+61 2 8907-2500

(Registrant’s telephone number, including area code)

 

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 Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.  As of January 8, 2015, the Registrant had outstanding 7,671,632 shares of common stock, par value $0.001 per share.

 

 

 

 
 

 

SOURCE FINANCIAL, INC.

FORM 10-Q

 

CONTENTS

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS 1
PART I     FINANCIAL INFORMATION 2
Item 1.    Financial statements 2
Condensed consolidated balance sheet 2
Condensed consolidated statement of operations and comprehensive loss 3
Condensed consolidated statement of stockholder’s equity 4
Condensed consolidated statement of cash flows 5
Notes to condensed consolidated financial statements 6
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations 23
Item 3.    Quantitative and Qualitative Disclosures about Market Risk 37
Item 4.    Controls and Procedures 37
PART II     OTHER INFORMATION 38
Item 1A. Risk Factors 38
Item 5.    Other Information 38
Item 6.    Exhibits 38

 

ii
 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This document contains certain statements of a forward-looking nature. Such forward-looking statements, including but not limited to statements regarding projected growth, trends and strategies, future operating and financial results, financial expectations and current business indicators are based upon current information and expectations and are subject to change based on factors beyond the control of the Company.  Forward-looking statements typically are identified by the use of terms such as “look,” “may,” “should,” “might,” “believe,” “plan,” “expect,” “anticipate,” “estimate” and similar words, although some forward-looking statements are expressed differently.  The accuracy of such statements may be impacted by a number of risks and uncertainties that could cause actual results to differ materially from those projected or anticipated, including but not limited to those set forth herein and in our Annual Report on Forms 10-K and 10-K/A for the fiscal year ended June 30, 2014 filed on October 14, 2014 and January 13, 2015.

 

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.  Except as required by the federal securities laws, we undertake no obligation to update forward-looking information.  Nonetheless, the Company reserves the right to make such updates from time to time by press release, periodic report or other method of public disclosure without the need for specific reference to this Report. No such update shall be deemed to indicate that other statements not addressed by such update remain correct or create an obligation to provide any other updates.

 

1
 

 

PART I     FINANCIAL INFORMATION

 

Item 1. Financial statements

 

SOURCE FINANCIAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

ASSETS  December 31,
2014
   June 30,
2014
 
   (Unaudited)     
CURRENT ASSETS        
Cash and cash equivalents  $7,999,111   $10,730,743 
Trade receivables, net   19,120,955    24,870,297 
Inventories   17,919    18,450 
Deferred tax asset   246,060    282,600 
Other current assets   989,311    837,705 
TOTAL CURRENT ASSETS   28,373,356    36,739,795 
           
NON-CURRENT ASSETS          
Intangible assets, net   3,176,274    3,632,536 
Deferred tax asset   1,001,441    1,288,887 
Property, plant and equipment, net   380,281    519,321 
Goodwill   62,018    71,227 
TOTAL NON-CURRENT ASSETS   4,620,014    5,511,971 
           
TOTAL ASSETS  $32,993,370   $42,251,766 
           
LIABILITIES AND STOCKHOLDER'S EQUITY          
           
CURRENT LIABILITIES          
Trade and other payables  $5,295,899   $7,023,958 
Wholesale loan facility   21,265,457    27,746,303 
Cash reserve   1,125,724    878,747 
TOTAL CURRENT LIABILITIES   27,687,080    35,649,008 
           
NON-CURRENT LIABILITIES          
           
Shareholder's loan   41,002    47,100 
TOTAL NON-CURRENT LIABILITIES   41,002    47,100 
           
TOTAL LIABILITIES   27,728,082    35,696,108 
           
STOCKHOLDER'S EQUITY          

Preferred stock, $0.01 par value, 1,000,000 shares authorized, none issued and outstanding

   -    - 
Designated as Series B Preferred stock, $0.01 par value, 5,000 shares authorized, 5,000 issued and outstanding   50    50 
Common Stock, $0.001 and $0.1 par value, 50,000,000 shares authorized, 7,671,632 issued and outstanding at December 31, 2014 and June 30, 2014, respectively   7,672    7,672 
Additional paid-in capital   15,103,653    15,027,915 
Other accumulated comprehensive loss   (1,763,479)   (864,766)
Accumulated deficit   (8,082,608)   (7,615,213)
TOTAL STOCKHOLDER'S EQUITY   5,265,288    6,555,658 
           
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY  $32,993,370   $42,251,766 

  

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

2
 

 

SOURCE FINANCIAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

(UNAUDITED)

 

   Three months ended   Six months ended 
   December 31,
2014
   December 31,
2013
   December 31,
2014
   December 31,
2013
 
       (Restated)       (Restated) 
                 
Revenue  $1,135,870   $1,521,818   $2,279,040   $2,714,213 
Cost of revenue   675,154    723,508    1,491,972    1,497,715 
Gross profit   460,716    798,310    787,068    1,216,498 
                     
Operating Expenses                    
                     
Compensation expenses   279,662    289,144    616,786    444,320 
Research and development expense   200,851    109,397    331,390    218,795 
Bad debt expenses   (21,955)   30,420    63,670    254,355 
Bad debts recovered   (127,539)   (161)   (145,211)   (3,103)
Professional expenses   141,252    190,647    226,256    218,021 
Occupancy expenses   52,960    70,104    115,483    129,176 
Depreciation expense   15,891    16,833    34,321    36,907 
General and administration expenses   83,947    226,427    210,899    352,404 
Total operating expenses   625,069    932,811    1,453,594    1,650,875 
(Loss) from operations   (164,353)   (134,501)   (666,526)   (434,377)
                     
Other Income (Expense)                    
Research and development grant   128,148    111,900    280,823    295,200 
Interest income   23,916    26,383    53,908    53,222 
Other income (expense)   (1,908)   142    (4,371)   (2,927)
Total Other Income   150,156    138,425    330,360    345,495 
                     
(Loss) income from continuing operations before income taxes   (14,197)   3,924    (336,166)   (88,882)
                     
Provision for income taxes   125,392    128,220    131,229    177,372 
                     
Net (loss) from continuing operations   (139,589)   (124,296)   (467,395)   (266,254)
                     
Net (loss) from discontinued operations   -    (126,376)   -    (297,530)
                     
Net (loss)   (139,589)   (250,672)   (467,395)   (563,784)
                     
Other comprehensive income                    
Foreign currency translation   (403,911)   (297,550)   (898,713)   (156,257)
                     
Comprehensive loss  $(543,500)  $(548,222)  $(1,366,108)  $(720,041)
                     
Net (loss) per share                    
Basic and Diluted:                    
Continuing operations  $(0.018)  $(0.012)  $(0.061)  $(0.026)
Discontinued   -    (0.012)   -    (0.029)
Total  $(0.018)  $(0.024)  $(0.061)  $(0.055)
                     
Weighted average number of shares used in computing basic and diluted net (loss) per share:                    
                     
Basic   7,671,632    10,197,283    7,671,632    10,248,641 
Diluted   7,671,632    10,197,283    7,671,632    10,248,641 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

3
 

  

SOURCE FINANCIAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY

(UNAUDITED)

 

   Common Stock   Preferred Stock   Additional   Comprehensive   Accumulated   Stockholder's 
   Shares   Amount   Shares   Amount   Paid in Capital   Loss   Deficit   Equity 
                                 
Balance June 30, 2014    7,671,632   $7,672    5,000   $50   $15,027,915   $(864,766)  $(7,615,213)  $6,555,658 
                                         
Issuance of stock options   -    -    -    -    75,738    -    -    75,738 
                                         
Net (loss) for the six months ended December 31, 2014   -    -    -    -    -    (898,713)   (467,395)   (1,366,108)
                                         
Balance December 31, 2014   7,671,632   $7,672    5,000   $50   $15,103,653   $(1,763,479)  $(8,082,608)  $5,265,288 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

4
 

 

SOURCE FINANCIAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

  

   Six months ended 
   December 31,
2014
   December 31,
2013
 
       (Restated) 
         
Net (loss)  $(467,395)  $(563,784)
Net (loss) from discontinued operations   -    (297,530)
Net (loss) from continuing operations   (467,395)   (266,254)
           
Adjustments to reconcile net (loss) to net cash provided by (used in)          
operating activities:          
Depreciation and amortization   384,958    357,687 
Stock options issued for compensation   75,738    178,356 
           
(Increase) decrease in assets:          
Trade receivables, net   2,753,876    (316,347)
Inventories   (2,016)   10,034 
Deferred tax asset   131,295    177,381 
Other assets   (277,394)   (460,935)
(Decrease) increase in current liabilities:          
Trade payables   (985,816)   187,821 
Net cash provided by (used in) operating activities   1,613,246    (132,257)
           
Cash flows from investing activities          
Purchase of property, plant and equipment   (11,643)   (73,053)
Development of intangible assets   (309,762)   (322,875)
Net cash (used in) investing activities   (321,405)   (395,928)
           
Cash flows from financing activities          
Wholesale loan facility, net   (3,144,779)   457,395 
Capital Reserve   391,946    (28,096)
Net cash (used in) provided by financing activities   (2,752,833)   429,299 
           
Net cash (used in) continuing operations   (1,460,992)   (98,886)
           
Cash flows from discontinued operations          
Net cash (used in) operating activities from discontinued operations   -    (209,381)
Net cash (used in) investing activities from discontinued operations   -    (5,906)
Net cash provided by financing activities from discontinued operations   -    150,000 
Net cash (used in) discontinued operations   -    (65,287)
           
Effect of exchange rate changes on cash and cash equivalents   (1,270,640)   (141,916)
Net increase in cash and cash equivalents   (2,731,632)   (306,089)
Cash and cash equivalents at beginning of period - continuing operations   10,730,743    7,140,539 
Cash and cash equivalents at beginning of period - discontinued operations   -    65,288 
Cash and cash equivalents at the end of the period  $7,999,111   $6,899,738 
           
Supplemental disclosures          
Cash paid during the period for:          
Income tax payments  $-   $- 
Interest payments  $866,325   $888,684 
           
Supplemental schedule of non-cash financing activities:          
Issuance of stock options  $75,738   $115,492 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

5
 

 

SOURCE FINANCIAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

 

Note 1 – BASIS OF PRESENTATION AND ORGANIZATION

 

The accompanying condensed consolidated financial statements were prepared in conformity with generally accepted accounting principles in the United States (“US GAAP”) and with the instructions to Form 10-Q.

 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to U.S. GAAP rules and regulations for presentation of interim financial information. Therefore, the unaudited condensed interim consolidated financial statements should be read in conjunction with the financial statements and the notes thereto, included in the Company’s Annual Report on the Forms 10-K and 10-K/A for the fiscal years ended June 30, 2014.  Current and future financial statements may not be directly comparable to the Company’s historical financial statements.  However, except as disclosed herein, there have been no material changes in the information disclosed in the notes to the financial statements for the year ended June 30, 2014 included in the Company’s Annual Report on Forms 10-K and 10-K/A filed with the Securities and Exchange Commission. The unaudited consolidated financial statements should be read in conjunction with the financial statements included in the Form10-K.  In the opinion of Management, all adjustments considered necessary for a fair presentation, consisting solely of normal recurring adjustments, have been made. Operating results for the three and six months ended December 31, 2014 are not necessarily indicative of the results that may be expected for the year ending June 30, 2015.

 

When used in these notes, the terms "Company," "we," "our," or "us" mean Source Financial, Inc. and its subsidiaries.

 

Note 2 – DISCONTINUED OPERATIONS

 

On February 11, 2014, we entered into a Separation Agreement with, pursuant to which (i) the Wiki Technologies, Inc (Wiki or WTI) Escrow Shares were delivered to Marco Garibaldi and Edward DeFeudis, as a result of which we no longer own any equity interest in WTI, and (ii) 2,140,000 of the GD Escrow Shares were delivered to us for cancellation, with the remaining 100,000 shares delivered to a note holder of WTI (the “Noteholder”).

 

Our Board of Directors authorized the Settlement Agreement based upon an evaluation of the operations of WTI during which it became apparent that without significant additional financing WTI would not be able to generate significant revenues and become profitable, and thus was unlikely to satisfy the financial benchmarks specified in the Share Exchange Agreement by June 30, 2014.  Accordingly, our Board of Directors determined that relinquishing our equity interest in WTI on the terms and subject to the conditions set forth in the Settlement Agreement was in the best interests of our company and its stockholders.

 

Revenue and expenses, and gains and losses relating to the discontinued business have been reclassified from the results of continuing operations and are reflected as net loss from discontinued operations in the statement of operations and comprehensive loss.

 

As this is a non-reciprocal transfer of non-monetary assets with a certain group of shareholders, this transfer has been recorded at the fair value of the asset transferred. Management believes the net book value of the assets transferred, which is the same as the investment in Wiki Technologies, Inc., is the reasonable fair market value. It has been booked on transfer date at the recorded amount (less any impairment on assets distributed) in accordance with modifications of the basic principle of using Fair Value. As such a $0 loss on disposal has been reported in the year ended June 30, 2014.

 

6
 

 

The assets and liabilities and operating results of the discontinued operation are summarized as follows:

  

NET RESULT FROM DISCONTINUED OPERATIONS  For the three months ended   For the six months ended 
   December 31   December 31 
   2014   2013   2014   2013 
Revenue  $-   $1,008   $-   $2,647 
Cost of Revenue   -    48,128    -    70,460 
Gross (Loss)   -    (47,120)   -    (67,813)
Operating Expenses   -    80,476    -    230,277 
(Loss) from operations   -    (127,596)   -    (298,090)
Other income   -    1,220    -    560 
(Loss) before tax   -    (126,376)   -    (297,530)
Tax   -    -    -    - 
(Loss) after tax  $-   $(126,376)  $-   $(297,530)

 

The discontinued operations of Wiki Technologies, Inc. were reported in the United States of America segment in our geographic segment information as per Note 16.

 

Note 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Source Financial (“Source”) and its wholly owned subsidiaries Moneytech Limited (“Moneytech”), Moneytech Finance Pty Ltd, mPayments Pty Ltd., Moneytech POS Pty Ltd., Moneytech Services Pty Ltd, Moneytech USA and WikiTechnologies, Inc., collectively referred to as the Company. All material intercompany accounts, transactions and profits were eliminated in consolidation.

 

Equity Investments

 

The Company uses the equity method of accounting for investments when the percentage of ownership of the investment is between 20% and 50%. The Company includes the proportionate share of the profit or loss as part of the carrying value of the investment.

 

Use of Estimates

 

The preparation of financial statements in conformity with US GAAP requires management to make certain estimates and assumptions 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. Significant estimates include collectability of accounts receivable, accounts payable, sales returns and recoverability of long-term assets.

 

Exchange (Loss) Gain

 

During the three and six months ended December 31, 2014 and 2013, the transactions of Moneytech and its wholly owned subsidiaries were denominated in foreign currency and were recorded in Australian dollar (AUD) at the rates of exchange in effect when the transactions occurred. Exchange gains and losses are recognized for the different foreign exchange rates applied when the foreign currency assets and liabilities are settled.

 

Foreign Currency Translation and Comprehensive (Loss) Income

 

The accounts of Moneytech Limited and its wholly owned subsidiaries were maintained, and its financial statements were expressed, in AUD. Such financial statements were translated into USD with the AUD as the functional currency. All assets and liabilities were translated at the exchange rate at the balance sheet date, stockholder’s equity is translated at the historical rates and income statement items are translated at the average exchange rate for the period. Transactions in foreign currencies are initially recorded at the functional currency rate ruling at the date of transaction. Any differences between the initially recorded amount and the settlement amount are recorded as a gain or loss on foreign currency transaction in the consolidated statements of operations. The resulting translation adjustments are reported under other comprehensive income as a component of shareholders’ equity.

 

7
 

 

Reportable Segment

 

The Company has one reportable segment. The Company’s activities are interrelated and each activity is dependent upon and supportive of the other. Accordingly, all significant operating decisions are based on analysis of financial products provided as a single business unit.

 

Revenue Recognition

 

Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable. Revenue generally is recognized net of allowances for returns and any taxes collected from customers and subsequently remitted to governmental authorities.

 

Cost of Revenue

 

Cost of revenue includes: programs licensed, operating costs including costs of funds and related product support service centers to drive traffic to our websites, costs incurred to support and maintain products and services, including inventory valuation adjustments, costs associated with the delivery of consulting services, and the amortization of capitalized intangible software costs. Capitalized intangible software costs are amortized over the estimated lives of the products.

 

Research and Development

 

Research and development expenses include payroll, employee benefits, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development and programming costs, localization costs incurred to translate software for international markets, and the amortization of purchased software code and services content. Such costs related to software development are included in research and development expense until the point that technological feasibility is reached, which for our software products is generally shortly before the products are put into service. Once technological feasibility is reached, such costs are capitalized and amortized to cost of revenue over the estimated lives of the products. Certain research and development costs are eligible for reimbursement by the Australian government. Research and development expense is included as an operating expense and research and development grant income is reported as other income.

 

Income Taxes

 

The Company utilizes the liability method of accounting for income tax. Under the liability method, deferred income tax assets and liabilities are provided based on the difference between the financial statements and tax basis of assets and liabilities measured by the current enacted tax rates in effect for the years in which these differences are expected to reverse.

 

The Company has adopted accounting standards for the accounting for uncertain income taxes. These standards provide guidance for the accounting and disclosure about uncertain tax positions taken. Management believes that all of the positions taken in its federal and states income tax returns are more likely than not to be sustained upon examination.

 

Concentration of Credit Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk are cash, accounts receivable and other receivables arising from its normal business activities. The Company places its cash in what it believes to be credit-worthy financial institutions. The Company has a diversified customer base, most of which are in Australia. The Company controls credit risk related to accounts receivable through credit approvals, credit limits and monitoring procedures. The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is limited.

 

Risks and Uncertainties

 

The Company is subject to risks from, among other things, competition associated with the industry in general, other risks associated with financing, liquidity requirements, rapidly changing customer requirements, limited operating history, foreign currency exchange rates and the volatility of public markets.

 

Contingencies

 

Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and legal counsel assess such contingent liabilities, and such assessment inherently involves judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.

 

8
 

 

If the assessment of a contingency indicates it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material would be disclosed. Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed.

 

Cash and Cash Equivalents

 

Cash and equivalents include cash in hand and cash in demand deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less. At December 31, 2014 and June 30, 2014, the Company had $7,999,111 and $10,730,743 in cash respectively, all of which was on deposit in Australia and not covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts.

 

Allowance for Doubtful Accounts

 

The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves.

 

Bad Debt Insurance

 

As a condition of the RPA (See Note 9), Moneytech maintains credit insurance on the receivables due Moneytech from its customers or their counterparties.  Pursuant to this policy, Moneytech would bear the first $500,000 of aggregate losses incurred due to defaults in any calendar year, after which any bad debt losses are reimbursed by the insurance company.  This policy is renewed annually.  A receivable from the insurance company is recognized when the criteria set forth in the policy, inclusive of bad debt expenses in excess of $500,000 in any year, are met.  The amount recorded as a receivable is offset against bad debt expense. As of December 31, 2014 and June 30, 2014, the Company had insurance claims receivables of $18,428 and $32,085, respectively.

 

Inventory

 

Inventories are valued at the lower of cost (determined on a weighted average basis) or market. Management compares the cost of inventories with the market value and allowance is made to write down inventories to market value, if lower. As of December 31, 2014 and June 30, 2014, inventory only consisted of finished goods.

 

Property, Plant & Equipment

 

Property and equipment is stated at cost and depreciated using the straight-line method over the shorter of the estimated useful life of the asset or the lease term. The estimated useful lives of our property and equipment are generally as follows:

 

Computer software  3 to 10 years
Computer hardware  5 to 15 years
Furniture and equipment  3 to 5 years

 

As of December 31, 2014 and June 30, 2014, Property, Plant & Equipment consisted of the following:

 

   December 31   June 30 
   2014   2014 
Office equipment  $32,285   $37,079 
Furniture and fixtures   206,996    237,734 
Terminals   76,029    87,319 
Computers and software   1,193,000    1,365,207 
Accumulated Depreciation   (1,128,029)   (1,208,018)
   $380,281   $519,321 

 

9
 

 

For the three and six months ended December 31, 2014 and 2013, depreciation expense consisted of the following:

 

   Three months ended   Six months ended 
   December 31   December 31 
   2014   2013   2014   2013 
Depreciation, cost of revenue  $26,334   $30,464   $55,464   $56,576 
Depreciation, operating   15,891    16,833    34,321    36,907 
Total depreciation expense  $42,225   $47,297   $89,785   $93,483 

 

Fair Value of Financial Instruments

 

For certain of the Company’s financial instruments, including cash and equivalents, restricted cash, accounts receivable, accounts payable, accrued liabilities and short-term debt, the carrying amounts approximate their fair values due to their short maturities. ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments held by the Company. ASC Topic 825, “Financial Instruments,” defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying amounts reported in the consolidated balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:

 

Level 1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.

 

Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

 

Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.

 

The Company analyzes all financial instruments with features of both liabilities and equity under ASC 480, “Distinguishing Liabilities from Equity,” and ASC 815.

 

As of December 31, 2014 and June 30, 2014, the Company did not identify any assets and liabilities that are required to be presented on the balance sheet at fair value.

 

Earnings per Share (EPS)

 

Basic EPS is computed by dividing income available to common shareholders and equivalents by the weighted average number of common shares and equivalents outstanding for the period. Diluted EPS is computed similar to basic net income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if all the potential common shares, warrants and stock options had been issued and if the additional common shares were dilutive. Diluted EPS is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method for the outstanding options and the if-converted method for the outstanding convertible preferred shares. Under the treasury stock method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. Under the if-converted method, convertible outstanding instruments are assumed to be converted into common stock at the beginning of the period (or at the time of issuance, if later).

 

 

10
 

 

The following table sets forth the computation of basic and diluted earnings per share for the three and six months ended December 31, 2014 and 2013:

 

   Three months ended   Six months ended 
   December 31   December 31 
   2014   2013   2014   2013 
Net (loss) from continuing operations  $(139,589)  $(124,296)  $(467,395)  $(266,254)
Net result from discontinued operations   -    (126,376)   -    (297,530)
Net (loss)  $(139,589)  $(250,672)  $(467,395)  $(563,784)
                     
Weighted average number of shares used in computing basic and diluted net (loss) income per share:
                     
Basic   7,671,632    10,197,283    7,671,632    10,248,641 
Dilutive effect of stock options   -    -    -    - 
Diluted   7,671,632    10,197,283    7,671,632    10,248,641 

  

   Three months ended   Six months ended 
   December 31   December 31 
   2014   2013   2014   2013 
Net (loss) per share                
Basic and diluted:                
Continuing operations  $(0.018)  $(0.012)  $(0.061)  $(0.026)
Discontinued  $-   $(0.012)  $-   $(0.029)
Total  $(0.018)  $(0.024)  $(0.061)  $(0.055)

  

Options to purchase up to 139,484 and 62,996 shares of common stock were anti-dilutive during the three and six months ended December 31, 2014 and 2013 respectively.

 

Goodwill

 

Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in a business combination. Goodwill is not amortized but is evaluated for impairment at the reporting unit level annually as of June 30, or more frequently if events or changes in circumstances indicate that impairment may exist.

 

The Company evaluated its goodwill for impairment on December 31, 2014, and concluded there was no impairment as of that date.

 

Intangible Assets

 

The Company records identifiable intangible assets at fair value on the date of acquisition and evaluates the useful life of each asset. Finite-lived intangible assets primarily consist of software development capitalized. Finite-lived intangible assets are amortized on a straight-line basis and are tested for recoverability if events or changes in circumstances indicate that their carrying amounts may not be recoverable. These intangibles have useful lives ranging from 1 to 10 years. No events or changes in circumstances indicate that impairment existed as of December 31, 2014.

 

Stock-Based Compensation

 

We recognize all share-based payments to employees and to non-employee directors as compensation for service on our board of directors as compensation expense in the consolidated financial statements based on the fair values of such payments. Stock-based compensation expense recognized each period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

 

For share-based payments to consultants and other third-parties, compensation expense is determined at the “measurement date.” The expense is recognized over the vesting period of the award. Until the measurement date is reached, the total amount of compensation expense remains uncertain. We record compensation expense based on the fair value of the award at the reporting date. The awards to consultants and other third-parties are then revalued, or the total compensation is recalculated based on the then current fair value, at each subsequent reporting date.

 

11
 

 

Recently Issued Accounting Pronouncements

 

There have been no new accounting pronouncements during the three and six months ended December 31, 2014 that we believe would have a material impact on our financial position or results of operations.

 

Reclassification

 

Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations or cash flow.

 

Note 4 – TRADE RECEIVABLES, NET

 

Trade receivables consist principally of accounts receivable and trade financing and other financial services to small to medium sized businesses and individuals, principally in Australia. Trade receivables are recorded at the invoiced amount and net of allowances for doubtful accounts. Trade receivables bear interest. The allowance for doubtful accounts represents management’s estimate of the amount of probable credit losses in existing accounts receivable, as determined from a review of past due balances and other specific account data. The assessment includes actually incurred historical data as well as current economic conditions. Account balances are written off against the allowance when management determines the receivable is uncollectible.

 

Collectability of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectable are written off by reducing the carrying amount directly. A provision for impairment of trade receivables is raised when there is objective evidence that the consolidated entity or parent entity will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization and default or delinquency in payments (more than 30 days overdue) are considered indicators that the trade receivable may be impaired. The amount of the impairment allowance is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Cash flows relating to short-term receivables are not discounted if the effect of discounting is immaterial.

 

Trade receivables that are past their normal payment terms are overdue and once 30 days past due are considered delinquent. Minimum payment terms vary by product. The maximum payment term for all products is 122 days. All trade receivables that are overdue are individually assessed for impairment.

 

Trade receivables are placed on non-accrual status when legal action commences. Payments received while on non-accrual status will be allocated to the oldest amount outstanding. Accrual of interest will not resume until all amounts owing have been settled.

 

As of December 31, 2014 and June 30, 2014, trade receivables consist of the following:

 

   December 31   June 30 
   2014   2014 
Trade receivables  $19,783,561   $25,573,699 
Allowance for bad debt   (662,606)   (703,402)
Total trade receivables, net  $19,120,955   $24,870,297 

 

12
 

 

 

AGE ANALYSIS OF PAST DUE TRADE  December 31   June 30 
RECEIVABLES  2014   2014 
         
1 - 30 Days Past Due  $834,723   $695,116 
31 - 60 Days Past Due   514,140    59,212 
Greater than 60 Days Past Due   1,020,798    890,205 
Total Past Due   2,369,661    1,644,533 
Current   17,413,900    23,929,166 
Total Trade Receivables  $19,783,561   $25,573,699 
Recorded Investment  > 60 Days and accruing  $112,969   $23,007 
           

ALLOWANCE FOR DOUBTFUL DEBTS AND  December 31   December 31 
RECORDED INVESTMENT  2014   2013 
         
Allowance for doubtful debts        
Beginning balance  $703,402    731,475 
Charge-offs   (4,404)   (169,603)
Recoveries   -    - 
Provision   58,917    290,048 
Other comprehensive income (fx differences)   (95,309)   (18,434)
Ending balance  $662,606   $833,486 
           
Ending balance - individually evaluated for impairment  $636,485   $797,592 
Ending balance - collectively evaluated for impairment  $26,121   $35,894 
           
Trade receivables          
Ending balance  $19,783,561   $25,573,699 
Ending balance - individually evaluated for impairment  $817,246   $1,079,337 
Ending balance - collectively evaluated for impairment  $18,966,315   $24,494,362 

  

TRADE RECEIVABLES ON A NON ACCRUAL BASIS  September 30   June 30 
   2014   2014 
         
Trade receivables  $817,246   $1,079,337 
Total Financing Receivables  $817,246   $1,079,337 

 

13
 

 

IMPAIRED LOANS  December 31, 2014 
   Recorded Investment   Unpaid principal balance   Related allowance   Average recorded investment   Interest income recognised 
                     
With no allowance recorded                    
Trade receivables  $-   $-   $-   $-   $- 
   $-   $-   $-   $-   $- 
With an allowance recorded                         
Trade receivables  $817,246   $576,275   $636,485   $948,783   $6,239 
   $817,246   $576,275   $636,485   $948,783   $6,239 
Total                         
Trade receivables  $817,246   $576,275   $636,485   $948,783   $6,239 
   $817,246   $576,275   $636,485   $948,783   $6,239 

 

The Company’s Recorded Investment in impaired loans and Related Allowance exceeds the unpaid principle balance of loans because a portion of the recorded investment consists of unpaid interest.

 

   June 30, 2014 
   Recorded Investment   Unpaid principal balance   Related allowance   Average recorded investment   Interest income recognised 
                     
With no allowance recorded                    
Trade receivables  $-   $-   $-   $-   $- 
   $-   $-   $-   $-   $- 
With an allowance recorded                         
Trade receivables  $1,079,337   $797,842   $667,508   $1,354,838   $78,488 
   $1,079,337   $797,842   $667,508   $1,354,838   $78,488 
Total                         
Trade receivables  $1,079,337   $797,842   $667,508   $1,354,838   $78,488 
   $1,079,337   $797,842   $667,508   $1,354,838   $78,488 

 

The Company’s Recorded Investment in impaired loans exceeds the unpaid principle balance of loans because a portion of the recorded investment consists of unpaid interest.

 

Note 5 – OTHER ASSETS

 

Other assets consist of the following as of December 31, 2014 and June 30, 2014:

 

   December 31   June 30 
Other current assets  2014   2014 
Research & development grant receivable  $742,281   $555,780 
Insurance claim receivable   18,429    32,085 
Prepayment   18,096    43,697 
Other assets   210,505    206,143 
   $989,311   $837,705 

 

Note 6 – INTANGIBLE ASSETS

 

Intangible assets consist of the following of December 31, 2014 and June 30, 2014:

 

   December 31   June 30 
   2014   2014 
Moneytech and mPayments software  $6,045,494   $6,608,596 
Accumulated amortization   (2,869,220)   (2,976,060)
   $3,176,274   $3,632,536 

 

14
 

 

The intangible assets are amortized over 10-12 years. Amortization expense of $145,095 and $133,024 was included in cost of revenues for the three months ended December 31, 2014 and 2013, respectively and amortization expense of $295,173 and $264,204 was included in cost of revenues for the six months ended December 31, 2014 and 2013, respectively.

  

Amortization for the Company’s intangible assets over the next five fiscal years from December 31, 2014 is estimated to be:

 

Years ending December 31,    
2015  $558,212 
2016   558,212 
2017   558,212 
2018   558,212 
2019   558,212 
Thereafter   385,214 
Total  $3,176,274 

 

Note 7 – GOODWILL

 

As of December 31, 2014 and June 30, 2014, the Goodwill was comprised of the following:

 

   December 31   June 30 
   2014   2014 
Acquisition cost of Moneytech POS Pty Ltd.  $88,172   $101,265 
Fixed assets received   (49,120)   (56,414)
Liability assumed   22,966    26,376 
Acquisition cost assigned to goodwill  $62,018   $71,227 

  

Note 8 – TRADE AND OTHER PAYABLES

 

As of December 31, 2014 and June 30, 2014, trade and other payables consist of the following:

 

   December 31   June 30 
   2014   2014 
Trade payables  $4,388,130   $6,195,424 
Accrued consulting costs   594,930    561,073 
Employee benefits   153,337    161,906 
Other liabilities   159,502    105,555 
Total payables  $5,295,899   $7,023,958 

 

Note 9 – LINE OF CREDIT AND CASH RESERVE LIABILITIES

 

   December 31   June 30 
   2014   2014 
Wholesale loan facility  $21,265,457   $27,746,303 
Cash reserve liabilities   1,125,724    878,747 
   $22,391,181   $28,625,050 

 

Wholesale Loan Facility

 

The Company had a secured line of credit under a Receivables Purchase Agreement (“RPA”) with a bank in Sydney Australia for up to AUD$40 million as of December 31, 2014 and June 30, 2014, respectively. The line of credit is secured mainly by trade receivables. Interest is charged at the bank’s reserve rate plus an agreed upon margin from the bank. The agreement is renewed annually on an agreed anniversary date, the latest of which was December 15, 2014. The facility has been renewed until December 31, 2015. Interest expense charged to cost of revenue related to the loan for the six months ended December 31, 2014 and 2013 was approximately USD $866,325 and USD $884,770 respectively.

 

15
 

 

Cash Reserve

 

The Company is required to maintain certain cash reserves with its senior debt provider in accordance with the RPA. The Required Cash Reserve amount may be provided by the Company or its customers and is held in a ‘Cash Reserve Account’ with its senior debt provider in accordance with the RPA’s terms and conditions.  The Required Cash Reserve balance is adjusted based on the RPA and the total facility limit provided to the Company by the senior lender.

 

Note 10 – SHAREHOLDER’S LOAN

 

   December 31   June 30 
   2014   2014 
Shareholder's loan  $41,002   $47,100 
   $41,002   $47,100 

 

Shareholder’s Loan

 

The Company has a loan payable in the amount of AUD$50,000 to a shareholder.  The loan is due and payable on September 30, 2017. Interest of 8% is only payable if Moneytech has positive retained earnings at the time of repayment.

 

Note 11 – STOCKHOLDER’S EQUITY

 

Preferred Stock

 

The Company has 1,000,000 undesignated shares of Preferred Stock authorized, each having a par value of $0.01, as of December 31, 2014 and June 30, 2014 after giving effect to the authorized shares discussed below. There were 5,000 shares of Series B Preferred Stock authorized, issued and outstanding as of December 31, 2014 and June 30, 2014 (the “Series B Preferred Shares”). Under the terms of the Series B Preferred Stock Certificate of Designation, the holder(s) of the Series B Preferred Shares have the right, until June 30, 2018, to (A) elect the majority of the Company’s Board of Directors and (B) vote on all other matters to come before the holders of common stock (the “Common Stock”) with each vote per share of Series B Preferred Stock equal to 1,000 shares of Common Stock.

 

After June 30, 2018, the Series B Preferred Shares shall have no voting rights and shall be redeemable by the Company for the sum of one tenth of a cent ($0.001) per Series B Preferred Share. The Series B Preferred Shares will not have any conversion rights and shall not be entitled to receive any dividends, distributions, or other economic or financial interest in the Company, and in the event of a liquidation, dissolution, or winding up of the Company, whether voluntary or involuntary, the holders of Class B Preferred Shares will be entitled to receive out of the Company’s assets, whether such assets are capital or surplus, of any nature, the sum of one-tenth of a cent ($0.001) per Series B Preferred Share, after payment to the holders of the Common Stock and the holders of any other series or class of the Company’s equity securities ranking senior to the Common Stock.

 

Common Stock

 

The Company has 50,000,000 shares of Common Stock authorized, each having a par value of $0.001, as of December 31, 2014 and June 30, 2014 after giving effect to the authorized shares discussed below. There were 7,671,632 shares issued and outstanding as of December 31, 2014 and June 30, 2014.

 

On October 3, 2013, the Company amended and restated the certificate of incorporation to decrease the number of authorized shares of Common Stock and Preferred Stock to 50,000,000 and 1,000,000 respectively.  The Company also reduced the par value of the Common Stock to $0.001 from $0.10.

 

On October 29, 2013, 150,000 shares which had previously been issued to contractors were cancelled because performance criteria relating to the issuance of these shares had not been met.

 

On February 11, 2014, 2,140,000 shares which had previously been issued to Edward DeFeudis and Marco Garibaldi were returned for cancellation as per the terms of the Share Settlement agreement as further detailed in Footnote 2.

 

On February 11, 2014, 100,000 of the shares returned in the settlement agreement were issued to a note holder of Wiki as further detailed in Footnote 2.

 

16
 

 

Note 12 – STOCK COMPENSATION

 

Restricted shares

 

On July 23, 2013, the Company entered into a consulting agreement to promote the Company's image in both the industry and capital markets. In connection with the agreements, the Company agreed to issue 170,632 shares of Common Stock valued at $2.02 (stock price at grant date). During the year ended June 30, 2014, the Company determined that performance had not occurred and would not be satisfactorily undertaken and consequently the Company terminated the agreement with the consultant and will not be delivering 170,632 shares of Common stock.

 

   Number of
Shares
 
   December 31   December 31 
   2014   2013 
Granted but not issued at July 1   -    338,368 
Issued during six months ended December 31   -    - 
Granted during six months ended December 31   -    170,632 
Cancelled during six months ended December 31   -    (150,000)
Reclassified to other liabilities during six months ended December 31   -    - 
Granted but not issued at December 31   -    359,000 

 

The Company believes the shares originally to be issued were cancelled due to non-performance as of June 30, 2014.

 

Note 13 – STOCK OPTIONS

 

On April 19, 2013, the Company entered into an agreement with a software developer. Upon achievement of certain milestones, the contractor could receive up to 100,000 Performance Based Stock Options at an exercise price of $2.50 per share. The options vested and become exercisable immediately upon grant with a 3 year life. As of December 31, 2014, 14,500 of the Performance Based Stock Options are vested. As a result of the return of WTI, as further detailed in footnote 2, no additional shares can be vested. The Fair Value of the options was calculated using the following assumptions: estimated life of three years, volatility of 351%, risk free interest rate of .35%, and dividend yield of 0%. The grant date Fair Value of options was $249,995.

 

On July 19, 2013, the Company granted 75,000 Stock Options to each of the three non-employee directors pursuant to the Omnibus Incentive Plan. These Stock Options are exercisable at an exercise price of $2.02 per share. The options vest as to 2,083 shares per non-employee director on September 30, 2013, and as to an additional 2,083 shares each on the last day of each calendar month thereafter through and including August 31, 2016, except that the right to exercise the Options shall vest as to an additional 2,095 shares on the last day of August 31, 2016. The options become exercisable immediately upon vesting and continue in force through June 30, 2020 (the "Expiration Date"), unless sooner terminated as provided herein and in the Plan. The Fair Value of the options was calculated using the following assumptions: estimated life of seven years, volatility of 755 %, risk free interest rate of 2.02%, and dividend yield of 0%. The grant date Fair Value of options was $454,500.

 

On August 22, 2013, the Company granted 25,000 Stock Options to a contractor. These Stock Options are exercisable at an exercise price of $1.30 per share. The options vested and become exercisable immediately upon granting and continue in force through August 22, 2016 (the "Expiration Date"), unless sooner terminated as provided by the agreement. The Fair Value of the options was calculated using the following assumptions: estimated life of three years, volatility of 843%, risk free interest rate of .82%, and dividend yield of 0%. The grant date Fair Value of options was $32,500.

 

The Company recorded $37,869 and $45,369 option expense in the three months ended December 31, 2014 and 2013, respectively and $75,738 and $115,492 option expense in the six months ended December 31, 2014 and 2013, respectively.

 

17
 

 

The following is a summary of the activity and position as of the six months ended December 31, 2014 and 2013.

 

   Stock Options 
   Six months ended 
   December 31 
   2014   2013 
Outstanding at July 1   350,000    100,000 
Granted   -    250,000 
Exercised   -    - 
Expired   -    - 
Outstanding at December 31   350,000    350,000 
Exercisable at December 31   139,484    62,996 

 

Options outstanding at December 31, 2014 are as follows:

 

       Weighted             
       Average   Weighted       Weighted 
       Remaining   Average       Average 
       Life   Exercise       Exercise 
   Options   (Years)   Price   Options   Price 
Exercise Price  (Outstanding)   (Outstanding)   (Outstanding)   (Exercisable)   (Exercisable) 
                          
 $1.30 to $2.50   350,000    4.91   $2.09    139,484   $1.93 

 

The fair value of the equity instruments granted was determined using the closing price on the day the shares were granted in the case of shares issued and using the Black and Scholes option valuation model in the case of share options granted.

 

Note 14 – RELATED PARTY TRANSACTIONS

 

During the three and six months ended December 31, 2014 and 2013, the Company paid a company controlled by the President of Moneytech for consulting services $43,267 and $96,782 (three months ended), respectively, and $122,572 and $122,449 (six months ended), respectively.

 

Note 15 – INCOME TAX

 

The following is the income tax expense reflected in the Statement of Operations for the three and six months ended December 31, 2014 and 2013:

 

INCOME TAX EXPENSE  Three months ended   Three months ended   Three months ended 
   December 31   December 31   December 31 
   2014   2013   2014   2013   2014   2013 
   Australia   United States   Total 
Income tax expense - current  $-   $-   $-   $-   $-   $- 
Income tax expense - deferred   125,392    128,220    -    -    125,392    128,220 
Total  $125,392   $128,220   $-   $-   $125,392   $128,220 

 

18
 

 

INCOME TAX EXPENSE  Six months ended   Six months ended   Six months ended 
   December 31   December 31   December 31 
   2014   2013   2014   2013   2014   2013 
   Australia   United States   Total 
Income tax expense - current  $-   $-   $-   $-   $-   $- 
Income tax expense - deferred   131,229    177,372    -    -    131,229    177,372 
Total  $131,229   $177,372   $-   $-   $131,229   $177,372 

  

The following are the components of income before income tax reflected in the Statement of Operations for the three and six months ended December 31, 2014 and 2013:

 

COMPONENTS OF INCOME BEFORE  Three months ended   Three months ended   Three months ended 
INCOME TAX  December 31   December 31   December 31 
  2014   2013   2014   2013   2014   2013 
   Australia   United States   Total 
(Loss) income from continuing operations  $199,739   $366,866   $(213,936)  $(362,942)  $(14,197)  $3,924 
Net loss from discontinued operations  $-   $-   $-   $(126,376)   -    (126,376)
(Loss) income before Income tax  $199,739   $366,866   $(213,936)  $(489,318)  $(14,197)  $(122,452)
                               
Income tax  $125,392   $128,220   $-   $-   $125,392   $128,220 
Effective tax rate   63%   35%   -%   -%   (883)%   (105)%

 

COMPONENTS OF INCOME BEFORE  Six months ended   Six months ended   Six months ended 
INCOME TAX  December 31   December 31   December 31 
  2014   2013   2014   2013   2014   2013 
   Australia   United States   Total 
(Loss) income from continuing operations  $90,298   $420,680   $(426,464)  $(509,562)  $(336,166)  $(88,882)
Net loss from discontinued operations   -    -    -    (297,530)   -    (297,530)
(Loss) income before Income tax  $90,298   $420,680   $(426,464)  $(807,092)  $(336,166)  $(386,412)
                               
Income tax  $131,229   $177,372   $-   $-   $131,229   $177,372 
Effective tax rate   145%   42%   -%   -%   (39)%   (46)%

 

The Company did not have a United States tax paying entity during the three and six months ended December 31, 2014.

 

The following is a reconciliation of the provision for income taxes at the US federal income tax rate to the income taxes reflected in the Statement of Operations for the three and six months ended December 31, 2014 and 2013:

 

INCOME TAX RATE   Three months ended   Three months ended   Three months ended 
RECONCILIATION  December 31   December 31   December 31 
   2014   2013   2014   2013   2014   2013 
   Australia   United States   Total 
US statutory rates   34%   34%   34%   34%   34%   34%
Tax rate difference   (4)%   (4)%   (4)%   (4)%   (4)%   (4)%
Research and development grant income   (20)%   (11)%   -%   -%   283%   40%
Research and development grant eligible expenditure   30%   7%   -%   -%   (434)%   (24)%
Research and development grant eligible amortisation   23%   9%   -%   -%   (318)%   (31)%
USA losses   -%   -%   (30)%   (30)%   (444)%   (120)%
Tax expenses at actual rate   63%   35%   -%   -%   (883)%   (105)%

 

 

19
 

 

INCOME TAX RATE   Six months ended   Six months ended   Six months ended 
RECONCILIATION  December 31   December 31   December 31 
   2014   2013   2014   2013   2014   2013 
   Australia   United States   Total 
US statutory rates   34%   34%   34%   34%   34%   34%
Tax rate difference   (4)%   (4)%   (4)%   (4)%   (4)%   (4)%
Research and development grant income   (92)%   (20)%   -%   -%   25%   22%
Research and development grant eligible expenditure   109%   14%   -%   -%   (30)%   (15)%
Research and development grant eligible amortisation   98%   18%   -%   -%   (26)%   (20)%
USA losses   -%   -%   (30)%   (30)%   (38)%   (63)%
Tax expenses at actual rate   145%   42%   -%   -%   (39)%   (46)%

 

The following are the components of deferred tax reflected in the Statement of Operations for the three and six months ended December 31, 2014 and 2013:

 

COMPONENTS OF DEFERRED   Three months ended   Three months ended   Three months ended 
TAX EXPENSE  December 31   December 31   December 31 
   2014   2013   2014   2013   2014   2013 
   Australia   United States   Total 
Tax losses carried forward  $115,531   $140,642   $-   $-   $115,531   $140,642 
Doubtful debts reserve   (2,530)   (8,750)   -    -    (2,530)   (8,750)
Accruals   12,391    (3,672)   -    -    12,391    (3,672)
   $125,392   $128,220   $-   $-   $125,392   $128,220 

 

COMPONENTS OF DEFERRED  Six months ended   Six months ended   Six months ended 
TAX EXPENSE  December 31   December 31   December 31 
   2014   2013   2014   2013   2014   2013 
   Australia   United States   Total 
Tax losses carried forward  $153,233   $217,175   $-   $-   $153,233   $217,175 
Doubtful debts reserve   (16,354)   (36,133)   -    -    (16,354)   (36,133)
Accruals   (5,650)   (3,670)   -    -    (5,650)   (3,670)
   $131,229   $177,372   $-   $-   $131,229   $177,372 

 

The following are the components of deferred tax reflected in the Balance Sheet as of December 31, 2014 and June 30, 2014:

 

COMPONENTS OF   December 31   June 30   December 31   June 30   December 31   June 30 
DEFERRED TAX ASSET  2014   2014   2014   2014   2014   2014 
   Australia   United States   Total 
Tax losses carried forward  $993,899   $1,303,475   $-   $-   $993,899   $1,303,475 
Doubtful debts reserve   198,782    211,021    -    -    198,782    211,021 
Accruals   54,820    56,991    -    -    54,820    56,991 
   $1,247,501   $1,571,487   $-   $-   $1,247,501   $1,571,487 
                               
Deferred tax assets - current  $246,060   $282,600   $-   $-   $246,060   $282,600 
Deferred tax assets - non current   1,001,441    1,288,887    -    -    1,001,441    1,288,887 
   $1,247,501   $1,571,487   $-   $-   $1,247,501   $1,571,487 

 

Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating the ability to recover the deferred tax assets within the jurisdiction from which they arise, the Company considered all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In projecting future taxable income, the Company began with historical results adjusted for changes in accounting policies and incorporates assumptions including the amount of future pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimate the Company are using to manage the underlying businesses. In evaluating the objective evidence that historical results provide, the Company consider three years of cumulative operating income (loss).

 

20
 

 

As of December 31, 2014, Moneytech had approximately $3,313,197 in net operating loss (“NOL”) carry forward available to offset future taxable income in Australia. The NOLs can be carried forward without expiration in Australia. Management believes that all NOLs will be utilized in the near future and therefore no allowance was made.

 

As of December 31, 2014, Source had NOL’s of approximately $13 million dollars to offset future taxable income in the US. Federal NOLs can generally be carried forward 20 years. However, under Internal Revenue Code section 382 due to the change in ownership there are certain limitations placed on the NOL carryover and Source may only use approximately $161,500 per year of the available NOL. The deferred tax assets of the US entities at December 31, 2014 were fully reserved. Management believes it is more likely than not that these assets will not be realized in the near future.

  

Note 16 – GEOGRAPHIC SEGMENT INFORMATION

 

As a result of the reverse merger on June 30, 2013 the Company operates in two regions: Australia and the United States of America. All inter-company transactions are eliminated in consolidation.

 

For the three months ended December 31, 2014 and 2013, geographic segment information is as follows:

 

   Three Months Ended December 31, 2014   Three Months Ended December 31, 2013 
   Australia   USA   Elimination   Consolidated   Australia   USA   Elimination   Consolidated 
Revenue  $1,135,870   $-   $-   $1,135,870   $1,519,644   $2,174   $-   $1,521,818 
Cost of Revenue   675,154    -    -    675,154    721,304    2,204    -    723,508 
Total Expenses   411,133    213,936    -    625,069    569,898    362,913    -    932,811 
Other Income (Expense)   150,156    -    -    150,156    138,425    -    -    138,425 
Net Income (Loss) before tax from continuing operations   199,739    (213,936)   -    (14,197)   366,867    (362,943)   -    3,924 
Discontinued operations   -    -    -    -    -    (126,376)   -    (126,376)
Assets   33,554,443    -    (561,073)   32,993,370    40,972,637    529,616    (331,206)   41,171,047 
Debt   27,728,082    561,073    (561,073)   27,728,082    33,544,633    553,117    (331,206)   33,766,544 

 

For the six months ended December 31, 2014 and 2013, geographic segment information is as follows:

 

   Six Months Ended December 31, 2014   Six Months Ended December 31, 2013 
   Australia   USA   Elimination   Consolidated   Australia   USA   Elimination   Consolidated 
Revenue  $2,279,040   $-   $-   $2,279,040   $2,712,039   $2,174   $-   $2,714,213 
Cost of Revenue   1,491,972    -    -    1,491,972    1,495,511    2,204    -    1,497,715 
Total Expenses   1,027,130    426,464    -    1,453,594    1,141,343    509,532    -    1,650,875 
Other Income (Expense)   330,360         -    330,360    345,495    -    -    345,495 
Net Income (Loss) before tax from continuing operations   90,298    (426,464)   -    (336,166)   420,680    (509,562)   -    (88,882)
Discontinued operations   -    -    -    -    -    (297,530)   -    (297,530)
Assets   33,554,443    -    (561,073)   32,993,370    40,972,637    529,616    (331,206)   41,171,047 
Debt   27,728,082    561,073    (561,073)   27,728,082    33,544,633    553,117    (331,206)   33,766,544 

 

Note 17 – EQUITY INVESTMENT

 

On January 16, 2013 the Company entered into an agreement whereby it received a 37.5% equity interest in 360 Market Pty. Limited (“360”) in exchange for allowing 360 to utilize certain license rights. There was no exchange of cash or debt for the transaction and it was accounted for at its fair value of $0. The investment is accounted for by the equity method since the Company obtained a 37.5% equity interest.  Due to the continuous loss from inception through December 31, 2014 incurred by 360, the Company did not recognize any income or return from the investment as doing so would have created a negative carrying value in the investment account. The Company discontinued using the equity method rather than establish a negative balance. The investment retains a zero balance until subsequent investee profits eliminate all unrealized losses. 360 Market Pty Ltd incurred a profit of $ 25,714 in the six months ended December 31, 2014 and losses of $15,642, $40,365 and $7,077 in the fiscal years ended 2014, 2013 and 2012 respectively, resulting in an accumulated loss of $37,371 to be recovered before any income is recorded. In addition, 360 has had a negative equity position since inception of the investment thereby precluding any other disclosure regarding our underlying position in the net equity of 360.

 

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Note 18 – COMMITMENTS

 

The Company leases two offices in Australia under renewable operating leases expiring on August 31, 2015 and July 31, 2015.

 

Our corporate Australian headquarters are located at Level6/97 Pacific Highway, North Sydney NSW 2060 Australia, where we lease approximately 270 square meters of office and operations space pursuant to a lease agreement expiring in August 2015 subject to our right to renew for an additional year.  The annual rent for the premises is AUD $130,510.  In addition we occupy an office on Albany Highway, Victoria Park, Western Australia.  The initial term of the lease for this space expires July 31, 2015, at which time we can renew the lease for an additional 2 years.  The annual rent for the premises is AUD $17,043, subject to reset to market rate if we elect to renew the lease in August 2015.

 

For the three and six months ended December 31, 2014 and 2013, the aggregate rental expense was USD $31,514 and USD $34,099 (three months), respectively and USD $69,072 and USD $69,747 (six months), respectively.

 

Future minimum rental payments required under operating leases as of December 31, 2014 are as follows:

 

      USD $ 
Fiscal  2015   $60,512 
   2016   $19,006 
       $79,517 

 

Note 19 – SUBSEQUENT EVENTS

 

Management has evaluated events subsequent through February 11, 2015 for transactions and other events that may require adjustment of and/or disclosure in such financial statements. We have nothing to report in this regard.

 

22
 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of our Company’s financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and the related notes included elsewhere in this report and with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Forms 10-K and 10-K/A for the year ended June 30, 2014. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements.

 

Overview 

 

We provide commercial asset based lending including accounts receivable and trade financing and other financial services to small to medium sized businesses and individuals in Australia through Moneytech and its subsidiaries, with a focus on utilizing leading edge technology to deliver these services.

 

On June 30, 2013, we acquired Moneytech in exchange for 5,300,000 shares of our common stock (the “Share Exchange”). As a result of the Share Exchange, Moneytech has become our wholly-owned subsidiary, and the former shareholders of Moneytech own in excess of 50% of our outstanding shares of common stock on a fully diluted basis. In connection with acquisition of Moneytech, we issued 5,000 shares of our Series B Preferred Stock to Hugh Evans, the Chairman and Managing Director of Moneytech. The Series B Shares enable Mr. Evans, until June 30, 2018, to (A) elect the majority of our Board of Directors and (B) vote on all other matters presented to the holders of our common stock (the “Common Shareholders”), with each vote per Series B Share equal to 1,000 shares of common stock. After June 30, 2018, the Series B Shares will have no voting rights and may be redeemed by us for a per share price one tenth of a cent ($0.001).

 

The Share Exchange was accounted for as a recapitalization of Moneytech effected by a share exchange, where Moneytech is considered the acquirer for accounting and financial reporting purposes. Our net assets and liabilities as of the date of the consummation of the Share Exchange were brought forward at their book value and no goodwill was recognized.  Consequently, the historical consolidated financial statements of Moneytech are now the historical financial statements of Source Financial, Inc.

 

Moneytech commenced operations in 2003 as an Australian based, technology driven, commercial finance company. Moneytech has an AUD$50 million securitized wholesale debt facility (the “Wholesale Facility,” “Receivables Purchase Agreement” or “RPA”) with Westpac. Moneytech uses the Wholesale Facility to offer asset based, trade finance or accounts receivable finance and working capital solutions to small and medium enterprises (“SME’s”) throughout Australia. Moneytech has been in operation for over ten years and has operated profitably in five of the last six years.

 

To distinguish itself from traditional asset based lenders, and to manage and facilitate the advance of money to its customers, Moneytech has developed, operates and maintains its own real time core money transfer platform called The Moneytech Exchange.  The Moneytech Exchange stores and tracks every invoice and payment entered into the system and automatically communicates with the major Australian transactional banks to settle thousands of transactions per day, in real time. The Moneytech Exchange is fully automated, real time and online. Human intervention only occurs to manage exceptions and provide necessary transaction approvals or authorizations.

 

A reorganization of the company structure was effected following the acquisition of Moneytech on June 30, 2013.  The following chart reflects our organizational structure.

 

 

 

23
 

 

Our objective is to become a leading provider of commercial lines of credit and financial services, in particular money transfer services, to small and medium businesses in Australia and the United States.  We seek to differentiate our services by developing and utilizing leading edge technologies to deliver our services.  Moneytech currently provides asset based lines of credit in Australia using funds made available under its RPA with Westpac. We also provide payment processing (money transfer) solutions in Australia.   We are seeking financing to expand Moneytech’s asset based credit solutions operations in Australia through a combination of organic growth and strategic acquisitions and we are considering introducing those operations in the United States, most likely through a strategic acquisition. We do not have any understandings, commitments or understandings with respect to any acquisitions.

 

Discontinued operations

 

In February 2014, management returned WikiTechnologies, Inc. (“WikiTechnologies” or ”WTI”), to Edward DeFeudis and Marco Garibaldi as per the terms of the Share Exchange Agreement dated May 30, 2013 and the Settlement Agreement dated February 11, 2014.  Our Board of Directors authorized the Settlement Agreement based upon an evaluation of the operations of WTI during which it became apparent that without significant additional financing WTI would not be able to generate significant revenues and become profitable, and thus was unlikely to satisfy the financial benchmarks specified in the Share Exchange Agreement by June 30, 2014.  Accordingly, our Board of Directors determined that relinquishing our equity interest in WTI on the terms and subject to the conditions set forth in the Settlement Agreement was in the best interests of our company and its stockholders.

 

Net income attributable to our shareholders, and the associated return on equity, are the primary metrics by which we judge the performance of our business. Accordingly, we closely monitor the primary drivers of net income:

 

  · Net financing income - We track the split between the interest income, finance charges and fee income earned on the funds we lend and the interest, finance charges and fees incurred on our Wholesale Facility, and continually monitor the components of our yield and our cost of funds.  In addition, we monitor external rate trends, including the Reserve Bank of Australia cash rate.

 

  · Net bad debt losses - Other than our cost of funds- interest expense and related fees- the largest driver of business profitability is the minimization of bad debts.  Each asset based line of credit is priced based on an industry and individual customer risk profile developed by us. Delinquencies negatively impact our business performance.  Our profitability is directly connected to our net credit losses; therefore, we closely analyze credit performance and seek to limit our exposure when feasible through the purchase of credit insurance. Our target customer is a business that has financing requirements (in terms of size and time to funding) that make them poor candidates for loans from larger Australian commercial banks. Our lending criteria have, to date, resulted in a relatively low level of overdue and delinquent balances and correspondingly low levels of bad debt.  We extend Credit for a maximum of 122 days.  Amounts outstanding beyond their due date are considered overdue and amount overdue for more than 30 days are considered delinquent.  We monitor credit quality within our portfolio by observing trends in “average collection periods” “Days Sales Outstanding,” delinquent balances as a percentage of our portfolio and single obligor concentration limits and expect our bad debt to be approximately 0.15% of amounts funded. We assess the recoverability of each delinquent balance when determining the required amount of bad debt reserve.

 

  · Costs and expenses - We assess our operational efficiency using our cost-to-income ratio.  We perform extensive analysis to determine whether observed fluctuations in cost and expense levels indicate a trend or are the nonrecurring impact of large projects.  Our cost and expense analysis also includes a loan- and portfolio-level review of origination and servicing costs to assist us in assessing profitability by pool and vintage.  Portfolio volume and rate of turnover determine the magnitude of the impact of each of the above factors on our earnings, we also closely monitor new business volume and business growth.

 

The accounts of Moneytech and its wholly owned subsidiaries are maintained, and its consolidated financial statements are expressed, in Australian dollars.  Such financial statements were translated into United States Dollars to prepare the consolidated financial statements included in this Report. All assets and liabilities were translated at the exchange rate at the date of each balance sheet, stockholder’s equity is translated at the historical rates as of the date of each balance sheet and income statement items are translated at the average exchange rate for the period. Transactions in foreign currencies are initially recorded at the functional currency rate ruling at the date of transaction. Any differences between the initially recorded amount and the settlement amount are recorded as a gain or loss on foreign currency transaction in the consolidated statements of operations. The resulting translation adjustments are reported under other comprehensive income as a component of shareholders’ equity.

 

24
 

 

Results of Operations

 

Second quarter fiscal 2015 v second quarter fiscal 2014

 

The following discussion of our results of operations constitutes management’s review of the factors that affected our financial and operating performance for the three months ended December 31, 2014 (“Q2 2015”) and 2013 (“Q2 2014”).  This discussion should be read in conjunction with the consolidated financial statements and notes thereto contained elsewhere in this report.

 

Set forth below are certain items from our operating statements for the three months ended December 31, 2014 and 2013:

 

   For the three months ended   $   % 
   December 31   Increase   Increase 
   2014   2013   (Decrease)   (Decrease) 
   USD   USD   USD     
                 
Revenue  1,135,870   1,521,818   (385,948)   (25)%
Confirmed capital and credit express   1,038,012    1,339,497    (301,485)   (23)%
Interest revenue   691,266    948,979    (257,713)   (27)%
Fees   344,596    384,316    (39,720)   (10)%
Other revenue   2,150    6,203    (4,053)   (65)%
Payment services   70,741    109,848    (39,107)   (36)%
Giftcard program revenue   21,711    31,617    (9,906)   (31)%
Other revenue   49,030    78,231    (29,201)   (37)%
Other revenue   27,117    72,472    (45,355)   (63)%
360FX customer referral   26,918    24,741    2,177    9%
Foreign exchange   199    47,745    (47,546)   (100)%
Other revenue   -    (14)   14    (100)%
Cost of revenue   675,154    723,508    (48,354)   (7)%
Confirmed capital and credit express   479,922    525,953    (46,031)   (9)%
Interest expense   405,397    419,168    (13,771)   (3)%
Account Issuing Expenses   40,979    38,570    2,409    6%
Insurance   32,045    51,009    (18,964)   (37)%
Other   1,501    17,206    (15,705)   (91)%
Payment services   23,803    34,067    (10,264)   (30)%
Gift card expenses   4,989    4,120    869    21%
Other   18,814    29,947    (11,133)   (37)%
Depreciation and amortization   171,429    163,488    7,941    5%
Other cost of revenue   -    -    -    - 
Gross profit   460,716    798,310    (337,594)   (42)%
Operating expenses   625,069    932,811    (307,742)     
Compensation expenses   279,662    289,144    (9,482)   (3)%
Research and development expense   200,851    109,397    91,454    84%
Bad debt expenses   (21,955)   30,420    (52,375)   (172)%
Bad debts recovered   (127,539)   (161)   (127,378)   79,117%
Professional expenses   141,252    190,647    (49,395)   (26)%
Occupancy expenses   52,960    70,104    (17,144)   (24)%
Depreciation expense   15,891    16,833    (942)   (6)%
General and administration expenses   83,947    226,427    (142,480)   (63)%
                     
(Loss) income from operations   (164,353)   (134,501)   (29,852)   22%
Other income   150,156    138,425    11,731    8%
(Loss) income before income tax   (14,197)   3,924    (18,121)   (462)%
Income tax expense   125,392    128,220    (2,828)   (2)%
Net (loss) income from continuing operations   (139,589)   (124,296)   (15,293)   12%
Net result from discontinued operations   -    (126,376)   126,376     NA  
Net (loss) income   (139,589)   (250,672)   111,083    (44)%
Other comprehensive loss                    
Foreign currency translation   (403,911)   (297,550)   (106,361)   36%
Comprehensive loss   (543,500)   (548,222)   4,722    (1)%

 

25
 

 

The following table reflects the movements in our revenues and cost of revenues in our functional currency; Australian Dollars, for the three months ended December 31, 2014 and 2013.

 

            % 
   For the three months ended
December 31
   $
Increase
   %
Increase
   Revenue / Cost of revenue 
   2014   2013   (Decrease)   (Decrease)   move 
   AUD   AUD   AUD         
                     
Revenue   1,320,954    1,641,022    (320,068)   (20)%   (20)%
Confirmed capital and credit express   1,207,137    1,444,321    (237,184)   (16)%   (14)%
Interest revenue   803,851    1,023,967    (220,116)   (21)%   (13)%
Fees   400,786    414,040    (13,254)   (3)%   (1)%
Other revenue   2,500    6,314    (3,814)   (60)%   (0)%
Payment services   82,277    118,340    (36,063)   (30)%   (2)%
Giftcard program revenue   25,252    34,112    (8,860)   (26)%   (1)%
Other revenue   57,025    84,228    (27,203)   (32)%   (2)%
Other revenue   31,540    78,361    (46,821)   (60)%   (3)%
360FX customer referral   31,308    26,624    4,684    18%   0%
Foreign exchange   232    51,748    (51,516)   (100)%   (3)%
Other revenue   -    (11)   11    (100)%   0%
Cost of revenue   790,793    776,433    14,360    2%   2%
Confirmed capital and credit express   563,727    565,461    (1,734)   (0)%   (0)%
Interest expense   477,050    450,881    26,169    6%   3%
Account Issuing Expenses   47,661    54,822    (7,161)   (13)%   (1)%
Insurance   37,270    41,540    (4,270)   (10)%   (1)%
Other   1,746    18,218    (16,472)   (90)%   (2)%
Payment services   27,684    34,865    (7,181)   (21)%   (1)%
Gift card expenses   5,803    2,472    3,331    135%   0%
Other   21,881    32,393    (10,512)   (32)%   (1)%
Depreciation and amortization   199,382    176,107    23,275    13%   3%
Other cost of revenue   -         -    -    - 
Gross profit   530,161    864,589    (334,428)   (39)%     

 

Revenue

 

 Consolidated revenue from continuing operations for Q2 2015 was approximately $1,135,870, a decrease of $385,948 or 25% from our consolidated revenue from continuing operations for Q2 2014 of $1,521,818.  Excluding differences attributable to changes in foreign exchange rates, revenue decreased 20%, primarily as a result of a 16% decrease in Confirmed Capital and Credit Express revenues which accounted for nearly all of the 20% decrease. Excluding differences attributable to changes in foreign exchange rates, the Confirmed Capital and Credit Express revenue decrease is mainly attributable to a decrease in interest revenue of 21%. The lines of credit we funded were approximately AUD$49 million during the three months ended December 31, 2014 and AUD$52 million during the three months ended December 31, 2013.  Other revenue also decreased and this is primarily attributable to a decrease in foreign exchange services for customers. There was also a decrease in payment services revenue and this is mainly attributable to a decrease in terminal equipment revenues at mPay.  mPay is a subsidiary of Moneytech that provides money transfer services in Australia.

 

26
 

 

Cost of Revenue; Gross Profit

 

Cost of revenue from continuing operations, which is composed principally of the interest, fees and insurance we pay related to our RPA and the amortization expense of capitalized research and development costs was $675,154 in the three months ended December 31, 2014, a decrease of $48,354 or 7% from our cost of revenue of $723,508 for the three months ended December 31, 2013.  Excluding differences attributable to changes in foreign exchange rates, costs of revenue increased 2% primarily as a result of increases in depreciation and amortization costs which accounted for 3 percentage points of the 2% increase, decreases in payment services costs of 21% which accounted for a decrease of approximately 1 percentage point of the 2% increase and a negligible decrease in Confirmed Capital and Credit Express costs accounts for the remainder.  Excluding differences attributable to changes in foreign exchange rates, the slight decrease in Confirmed Capital and Credit Express costs is mainly attributable to a 90% decrease in other expenses as well as decreases of 13% in account issuing expenses and 10% in insurance costs, offset by an increase of 6% in interest expense.  Our interest expense increased slightly year over year as growth in the volume of credit lines funded in the second quarter of fiscal 2014 was offset by decreases in the amounts funded in the second quarter of fiscal 2015 as a result of the default of Confirmed Capital customers. The payment services cost increase is mainly attributable to an increase in costs at Mpos and mPay and the increase in amortization is attributable to increased investment in intangibles.

 

Our gross profit from continuing operations, decreased $337,594 from $798,310 in the quarter ended December 31, 2013 to $460,716 in the quarter ended December 31, 2014.  This was primarily attributable to net interest and fee revenue decreases at Confirmed Capital and Credit Express. Decline in performance in the payments services business also contributed to the decrease. Net interest and fee revenues decreased primarily because of the loss of confirmed capital customers in the second half of fiscal 2014. The decrease in net interest and fee revenues was primarily due to a decrease in net interest margin because of an increase in fees charged on the portion of the wholesale facility that was not advanced as a result of the loss of these customers. The payments services business was impacted by lower revenue from terminal sales during the quarter.

 

Operating Expenses; Bad Debt Expense; Income from Operations

 

Apart from the costs under our RPA, the other significant factor in determining our overall profitability is our operating expenses, in particular our bad debt expenses and recoveries.  Our bad debt expenses for Q2 2015 were negative $21,955, representing a decrease of $52,375 from bad debt expense of $30,420 for Q2 2014. We regularly evaluate the credit quality of our customers and this increase is attributable to changes in the specific assessment of several customer balances in line with our credit and collections policy. Our bad debt recovery for Q2 2015 was $127,539, representing an increase of $127,378 from bad debt recovery of $161 for Q2 2013. This is primarily attributable to a recovery, through a security interest held over real property, on an individual debt.

 

The percentage of delinquent balances in our portfolio was 2.02% and 2.02% as of December 31, 2014 and 2013 respectively.  The percentage of delinquent balances in our portfolio averaged 1.96% and 1.96% in the three months ended December 31, 2014 and 2013 respectively.  The average collection period in our portfolio increased from 47 days to 46 days during the three months ended December 31, 2014 and increased from 41 to 55 days during the three months ended December 31, 2013. Bad debts as a percentage of amount funded was 0.03% and 0.06% in the three months ended December 31, 2014 and 2013 respectively.

 

Our total operating expenses from continuing operations (other than bad debt) decreased by $127,989 or 14% from $902,552 in the second quarter 2014 to $774,563 in the second quarter 2015. This decrease is primarily attributed to general and administration costs ($142,480 or 63%), compensation costs ($9,482 or 3%) and professional expenses ($49,395 or 26%) offset by a research and development expenses increase ($91,454 or 84%).  The general and administration expenses decrease primarily reflects a decrease in stock compensation connected with investor relations services. The professional expenses decrease primarily reflects a decrease in legal fees ($58,602).  The research and development expense increase reflects increased expenditure on items that are not capitalized. Management anticipates these expenses will continue in the short term but be reduced significantly in total in fiscal 2015.

 

Other Income; Provision for income taxes; net (loss) income

 

To date, our other expense (income) has consisted of financing costs other than those incurred under the RPA, offset by interest income on the cash reserves we are required to maintain under the RPA, and research and development grants received from the Australian government. In Q2 2015 we accrued AUD $150,000 for research grants we expect to receive later this year from the Australian government.

 

The research and development grant payment is determined according to criteria set by the Australian government. Grant processing and payment takes place annually and requires the filing of the Australian tax return prior to finalization and payment. It is not a return of tax. The company prepares the claim and the expected payment is accrued as income when the grant criteria are met.

 

Our net loss from continuing operations before tax for Q2 2015 was $14,197, as opposed to a net profit of $3,924 for Q2 2014.  As a result of $125,392 in deferred taxes incurred in Q2 2015, we incurred a net loss after tax for Q2 2015 of $139,589, as compared to a net loss after tax for Q2 2014 of $124,296.  No tax benefit has been recognized for the losses incurred in the United States because management believes it more likely than not that these assets will not be realized in the near future.  Operations in Australia were not profitable during the quarter, primarily because Confirmed Capital customers lost on their default have not yet been replaced. Expenses of being a public company in the United States continues to effect overall profitability.

 

27
 

 

Net loss from discontinued operations.

 

In January 2014, management decided to return the ‘Wiki Technologies’ entity to Edward DeFeudis and Marco Garibaldi in accordance with the terms set forth in the terms of the Share Exchange Agreement.  Revenue and expenses, and gains and losses relating to the discontinued business have been reclassified from the results of continuing operations and are reflected as net loss from discontinued operations.

 

Other comprehensive income.

 

Our other comprehensive income consists of gains and losses in net asset value that occurs when movements in foreign exchange rates occur.  These gains or losses are primarily as a result of changes in the AUD/USD exchange rate.  We cannot and do not attempt to predict movements in these exchange rates.  The changes in net asset value occur because our net assets and operational activity are principally in Australian Dollars.  We do not hedge the foreign exchange rate exposure.  If we initiate operations in the United States, the impact of foreign exchange rates on our results of operations will decrease.

 

The average AUD/USD exchange rates were 1 to 0.9225 and 1 to 0.8915 in Q2 2014 and Q2 2015, respectively. The AUD/USD exchange rates were 1 to 0.9420 and 1 to 0.8202 at June 30, 2014 and December 31, 2014, respectively.

 

Year to date fiscal 2015 v fiscal 2014

 

The following discussion of our results of operations constitutes management’s review of the factors that affected our financial and operating performance for the six months ended December 31, 2014 (“First half 2015”) and 2013 (“First half 2014”).  This discussion should be read in conjunction with the consolidated financial statements and notes thereto contained elsewhere in this report.

 

28
 

 

Set forth below are certain items from our operating statements for the six months ended December 31, 2014 and 2013:

 

   For the six months ended   $   % 
   December 31   Increase   Increase 
   2014   2013   (Decrease)   (Decrease) 
   USD   USD   USD     
                 
Revenue   2,279,040    2,714,213    (435,173)   (16)%
Confirmed capital and credit express   2,066,037    2,399,866    (333,829)   (14)%
Interest revenue   1,330,187    1,616,378    (286,191)   (18)%
Fees   731,838    719,585    12,253    2%
Other revenue   4,012    63,903    (59,891)   (94)%
Payment services   165,958    213,608    (47,650)   (22)%
Giftcard program revenue   42,238    54,315    (12,077)   (22)%
Other revenue   123,720    159,293    (35,573)   (22)%
Other revenue   47,045    100,739    (53,694)   (53)%
360FX customer referral   46,068    52,355    (6,287)   (12)%
Foreign exchange   717    48,895    (48,178)   (99)%
Other revenue   260    (511)   771    (151)%
Cost of revenue   1,491,972    1,497,715    (5,743)   (0)%
Confirmed capital and credit express   1,086,243    1,126,804    (40,561)   (4)%
Interest expense   866,326    884,770    (18,444)   (2)%
Account Issuing Expenses   104,064    87,158    16,906    19%
Insurance   100,810    76,641    24,169    32%
Other   15,043    78,235    (63,192)   (81)%
Payment services   55,092    50,131    4,961    10%
Gift card expenses   11,095    10,280    815    8%
Other   43,997    39,851    4,146    10%
Depreciation and amortization   350,637    320,780    29,857    9%
Other cost of revenue   -    -    -    - 
Gross profit   787,068    1,216,498    (429,430)   (35)%
Operating expenses   1,453,594    1,650,875    (197,281)     
Compensation expenses   616,786    444,320    172,466    39%
Research and development expense   331,390    218,795    112,595    51%
Bad debt expenses   63,670    254,355    (190,685)   (75)%
Bad debts recovered   (145,211)   (3,103)   (142,108)   4,580%
Professional expenses   226,256    218,021    8,235    4%
Occupancy expenses   115,483    129,176    (13,693)   (11)%
Depreciation expense   34,321    36,907    (2,586)   (7)%
General and administration expenses   210,899    352,404    (141,505)   (40)%
                     
(Loss) income from operations   (666,526)   (434,377)   (232,149)   53%
Other income   330,360    345,495    (15,135)   (4)%
(Loss) income before income tax   (336,166)   (88,882)   (247,284)   278%
Income tax expense   131,229    177,372    (46,143)   (26)%
Net (loss) income from continuing operations   (467,395)   (266,254)   (201,141)   76%
Net result from discontinued operations   -    (297,530)   297,530     NA  
Net (loss) income   (467,395)   (563,784)   96,389    (17)%
Other comprehensive loss                    
Foreign currency translation   (898,713)   (156,257)   (742,456)   475%
Comprehensive loss   (1,366,108)   (720,041)   (646,067)   90%

 

29
 

 

The following table reflects the movements in our revenues and cost of revenues in our functional currency; Australian Dollars, for the six months ended December 31, 2014 and 2013.

 

 
 
 
 
For the six months ended
December 31
 
 
 
 
$
Increase
 
 
 
 
%
Increase
 
 
 
 
%
Revenue / Cost of revenue
 
 
   2014   2013   (Decrease)   (Decrease)   move 
   AUD   AUD   AUD         
                     
Revenue   2,556,412    2,942,052    (385,640)   (13)%   (13)%
Confirmed capital and credit express   2,317,484    2,601,296    (283,812)   (11)%   (10)%
Interest revenue   1,492,077    1,752,170    (260,093)   (15)%   (9)%
Fees   820,907    779,855    41,052    5%   1%
Other revenue   4,500    69,271    (64,771)   (94)%   (2)%
Payment services   186,157    231,553    (45,396)   (20)%   (2)%
Giftcard program revenue   47,379    58,878    (11,499)   (20)%   (0)%
Other revenue   138,778    172,675    (33,897)   (20)%   (1)%
Other revenue   52,771    109,203    (56,432)   (52)%   (2)%
360FX customer referral   51,675    56,754    (5,079)   (9)%   (0)%
Foreign exchange   805    53,003    (52,198)   (98)%   (2)%
Other revenue   291    (554)   845    (153)%   0%
Cost of revenue   1,673,553    1,623,324    50,229    3%   3%
Confirmed capital and credit express   1,218,445    1,221,252    (2,807)   (0)%   (0)%
Interest expense   971,761    959,100    12,661    1%   1%
Account Issuing Expenses   116,730    94,265    22,465    24%   1%
Insurance   113,080    83,080    30,000    36%   2%
Other   16,874    84,807    (67,933)   (80)%   (4)%
Payment services   61,797    54,343    7,454    14%   0%
Gift card expenses   12,445    11,144    1,301    12%   0%
Other   49,352    43,199    6,153    14%   0%
Depreciation and amortization   393,311    347,729    45,582    13%   3%
Other cost of revenue   -         -    -    - 
Gross profit   882,859    1,318,728    (435,869)   (33)%     

 

Revenue

 

Consolidated revenue from continuing operations for YTD 2015 was approximately $2,279,040, a decrease of $435,173 or 16% from our consolidated revenue from continuing operations for YTD 2014 of $2,714,213.  Excluding differences attributable to changes in foreign exchange rates, revenue decreased 13%, primarily as a result of an 11% decrease in Confirmed Capital and Credit Express revenues which accounted for nearly all of the 13% decrease. Excluding differences attributable to changes in foreign exchange rates, the Confirmed Capital and Credit Express revenue decrease is mainly attributable to a decrease in interest revenue of 15%. A 94% decrease in fees charged to new customers to set up their accounts offset by a 5% increase in fees for the remainder.  The lines of credit we funded were approximately AUD$110 million during the six months ended December 31, 2014 and AUD$119 million during the six months ended December 31, 2013.  The decrease in payment services revenue is mainly attributable to a decrease in terminal equipment revenues at mPay.  mPay is a subsidiary of Moneytech that provides money transfer services in Australia. Other revenue also decreased and this is primarily attributable to a decrease in foreign exchange services for customers.

 

Cost of Revenue; Gross Profit

 

Cost of revenue from continuing operations, which is composed principally of the interest, fees and insurance we pay related to our RPA and the amortization expense of capitalized research and development costs was $1,491,972 in the six months ended December 31, 2014, a decrease of $5,473 or 0% from our cost of revenue of $1,497,715 for the six months ended December 31, 2013.  Excluding differences attributable to changes in foreign exchange rates, costs of revenue increased 3% primarily as a result of increases in depreciation and amortization costs which accounted for 3 percentage points of the 3% increase, increases in payment services costs of 14% which accounted for approximately 0 percentage points of the 3% increase and increases in Confirmed Capital and Credit Express costs for the remainder.  Excluding differences attributable to changes in foreign exchange rates, the slight decrease in Confirmed Capital and Credit Express costs is mainly attributable to a 24% increase in account issuing expenses, a slight increase of 1% in interest expense, an increase of 36% in insurance costs and a decrease in fees associated with existing accounts of 80%.  Our interest expense decreased slightly year over year as growth in the volume of credit lines funded in the first half of fiscal 2014 was offset by decreases in the amounts funded in the first half of fiscal 2015 as a result of the default off Confirmed Capital customers.  The payment services cost increase is mainly attributable to an increase in costs at Mpos and mPay and the increase in amortization is attributable to increased investment in intangibles.

 

30
 

 

Our gross profit from continuing operations, decreased $429,430 from $1,216,498 in the six months ended December 31, 2013 to $787,068 in the six months ended December 31, 2014.  This was primarily attributable to net interest and fee revenue decreases at Confirmed Capital and Credit Express. Decline in performance in the payments services business also contributed to the decrease. Net interest and fee revenues decreased primarily because of the loss of confirmed capital customers in the second half of fiscal 2014. The decrease in net interest and fee revenues was primarily due to a decrease in net interest margin because of an increase in fees charged on the portion of the wholesale facility that was not advanced as a result of the loss of these customers. The payments services business was impacted by increased costs of licenses used in the business.

 

Operating Expenses; Bad Debt Expense; Income from Operations

 

Apart from the costs under our RPA, the other significant factor in determining our overall profitability is our operating expenses, in particular our bad debt expense.  Our bad debt expenses for YTD 2015 were $63,670, representing a decrease of $190,685 from bad debt expenses of $254,355 for YTD 2014. We regularly evaluate the credit quality of our customers and this increase is attributable to changes in the specific assessment of several customer balances in line with our credit and collections policy. Our bad debt recovery for YTD 2015 was $145,211, representing an increase of $142,108 from bad debt recovery of $3,103 for YTD 2014. This is primarily attributable to a recovery, through a security interest held over real property, on an individual debt.

 

The percentage of delinquent balances in our portfolio was 2.02% and 2.02% as of December 31, 2014 and 2013 respectively.  The percentage of delinquent balances in our portfolio averaged 1.81% and 1.98% in the six months ended December 31, 2014 and 2013 respectively.  The average collection period in our portfolio increased from 45 days to 46 days during the six months ended December 31, 2014 and increased from 45 to 55 days during the six months ended December 31, 2013. Bad debts as a percentage of amount funded was 0.07% and 0.23% in the six months ended December 31, 2014 and 2013 respectively.

 

Our total operating expenses from continuing operations (other than bad debt) increased by $135,512 or 10% from $1,399,623 in the first half 2014 to $1,535,135 in the first half 2015. This increase is primarily attributed to compensation costs ($172,466 or 39%), research and development expense ($112,595 or 51%), professional expenses ($8,235 or 4%) offset by a decrease in general and administration expenses ($141,505 or 40%).  The compensation costs increase reflects costs of our CFO, Business Development Officer, other staff and non-executive directors that were not yet incurred in the first half 2014. These costs are expected to remain in fiscal 2015.  The research and development expense increase reflects increased expenditure on items that are not capitalized. The professional expenses increase primarily reflects increases in accounting fees ($18,204) and stock broking and advisory fees ($4,860), offset by a decrease in legal fees ($14,828).  Management anticipates these expenses will continue in the short term but be reduced significantly in total in fiscal 2015. The general and administration expenses decrease primarily reflects a decrease in stock compensation connected with investor relations services.

 

Other Income; Provision for income taxes; net (loss) income

 

To date, our other expense (income) has consisted of financing costs other than those incurred under the RPA, offset by interest income on the cash reserves we are required to maintain under the RPA, and research and development grants received from the Australian government. YTD 2015 we have accrued AUD $315,000 for research grants we expect to receive later this year from the Australian government.

 

The research and development grant payment is determined according to criteria set by the Australian government. Grant processing and payment takes place annually and requires the filing of the Australian tax return prior to finalization and payment. It is not a return of tax. The company prepares the claim and the expected payment is accrued as income when the grant criteria are met.

 

Our net loss from continuing operations before tax YTD 2015 was $336,166, as opposed to a net loss of $88,882 YTD 2014.  As a result of $131,229 in deferred taxes incurred YTD 2015, we incurred a net loss after tax YTD 2015 of $467,395, as compared to a net loss after tax YTD 2014 of $266,254.  No tax benefit has been recognized for the losses incurred in the United States because management believes it more likely than not that these assets will not be realized in the near future.  Operations in Australia are not profitable YTD 2015, primarily because Confirmed Capital customers lost on their default have not yet been replaced. Expenses of being a public company in the United States continues to weigh on overall profitability.

 

31
 

 

Net loss from discontinued operations.

 

In January 2014, management decided to return the ‘Wiki Technologies’ entity to Edward DeFeudis and Marco Garibaldi in accordance with the terms set forth in the terms of the Share Exchange Agreement.  Revenue and expenses, and gains and losses relating to the discontinued business have been reclassified from the results of continuing operations and are reflected as net loss from discontinued operations.

 

Other comprehensive income.

 

Our other comprehensive income consists of gains and losses in net asset value that occurs when movements in foreign exchange rates occur.  These gains or losses are primarily as a result of changes in the AUD/USD exchange rate.  We cannot and do not attempt to predict movements in these exchange rates.  The changes in net asset value occur because our net assets and operational activity are principally in Australian Dollars.  We do not hedge the foreign exchange rate exposure.  If we initiate operations in the United States, the impact of foreign exchange rates on our results of operations will decrease.

 

The average AUD/USD exchange rates were 1 to 0.9225 and 1 to 0.8915 YTD 2014 and YTD 2015, respectively. The AUD/USD exchange rates were 1 to 0.9420 and 1 to 0.8202 at June 30, 2014 and December 31, 2014, respectively.

 

Comparison of Balance Sheet Data as at December 31, 2014 and June 30, 2014

 

Set forth below are certain items from our Consolidated Balance Sheet at December 31, 2014 and June 30, 2014:

 

   December 31   June 30 
   2014   2014 
         
Cash and cash equivalents  $7,999,111   $10,730,743 
Trade receivables, net   19,120,955    24,870,297 
Total Assets  $32,993,370   $42,251,766 
           
Wholesale Loan Facility  $21,265,457   $27,746,303 
Total Liabilities  $27,728,082   $35,696,108 
           
Total Stockholder's Equity  $5,265,288   $6,555,658 

 

Trade receivables, Total Assets, Wholesale Loan Facility and Total Liabilities have decreased primarily as a result of the loss, as a result of their default, of a Confirmed Capital customer at June 30, 2014 and the deterioration of the AUD/USD exchange rate from 1 to 0.9420 to 1 to 0.8202 at December 31, 2014 and June 30, 2014 respectively.

 

Liquidity and Capital Resources

 

Our ability to offer asset backed credit lines is determined by the amount of funds we can borrow which is influenced by the amount of our capital.  We require a significant amount of liquidity to offer our asset backed credit lines and our rate of growth and profitability will, for the foreseeable future, largely be determined by our ability to raise equity or borrow funds to make available to our clients and the effective cost of such funds.

 

Credit Facility

 

In 2005 we entered into a Receivables Purchase Agreement (the “Wholesale Facility” or the “RPA”) with one of the “Big Four” Australian Banks which has been renewed annually each year thereafter.  Pursuant to this Agreement we electronically offer eligible receivables to our lender for purchase on a nightly basis.  These offerings are then settled by the lender on a daily basis.  The funds we receive upon settlement are automatically and electronically delivered to our customers.  Our gross profit is represented by the difference between what we charge our customers in interest, finance charges and fees and what we pay to our lender. Our borrowing limit under the RPA is AUD$50 million, subject to interim agreed upon limits determined by various tests and covenants.  As at December 31, 2014 our borrowing capacity was limited to AUD $40 million and the total amount drawn against the facility was $21,265,457.  The agreement is renewed annually on an agreed anniversary date, the latest of which was December 15, 2014. The facility has been renewed until December 31, 2015.

 

32
 

 

We pay an interest rate on all borrowed monies under the RPA which is directly linked to the Reserve Bank of Australia cash-rate, a utilization fee charged on monies available to be borrowed but not utilized, an annual line fee and fees for electronically accessing the facility.  The Facility contains a number of covenants relating to our financial performance and performance of our receivables portfolio including but not limited to net profit targets, maximum dilution ratios, concentration limits, maximum delinquency ratios and cash reserve requirements.  As of the date hereof we are in compliance with all covenants imposed by the RPA.

 

We, in turn, provide our customers with funds provided by the RPA.  We charge each of our clients, interest at a rate above that charged by our lender and seek to have our clients pay a fee corresponding to each of the fees charged to us in respect of their loans.  To the extent that the RPA requires that we deposit monies into an account to partially secure repayment of our loans, we seek to have those funds advanced by our customers as a condition of their credit lines.  The cash reserve we are required to maintain pursuant to the RPA is included under Cash and cash equivalents on our balance sheet.

 

Set forth below are certain items from our Statement of Cash Flows for the six months ended December 31, 2014 and 2013:

 

   For the six months ended 
   December 31 
   2014   2013 
Net cash provided by (used in) operating activities   $1,613,246   $(132,257)
Net cash (used in) investing activities        (321,405)   (395,928)
Net cash (used in) provided by financing activities    (2,752,833)   429,299 
Net cash (used in) discontinued operations        -    (65,287)
Effect of exchange rate changes on cash and cash equivalents    (1,270,640)   (141,916)
Net cash outflow       $(2,731,632)  $(306,089)

 

33
 

 

Net cash provided by (used in) operating activities

 

During the six months ended December 31, 2014, we generated approximately $1,613,246 of net cash in our operating activities. This reflects our net loss from continuing operations of $467,395 plus $2,080,641 generated by changes in operating assets and liabilities and adjustments for non-cash items. Cash provided by working capital items was primarily impacted by a decrease in trade receivables of $2,753,876 and a decrease in trade payables of $985,816. Trade receivables decreased due to a decrease in credit lines provided as a result of the default of a Confirmed Capital customer. Trade payables decreased as monies received on behalf of customers were paid to our customers. Adjustments for non-cash items consisted of depreciation and amortization in the amount of $384,958 and stock options and shares issued for compensation of $75,738.

 

During the six months ended December 31, 2013, we used approximately $132,257 of net cash in our operating activities.  This reflects our net loss from continuing operations of $266,254 plus $133,997 cash generated by changes in operating assets and liabilities and adjustments for non-cash items.   Cash generated by working capital items and other activities was primarily impacted by an increase in trade receivables of $316,347, an increase in other assets of $460,935 and an increase in buyer payments and sellers’ liabilities and other items generating $187,821. Adjustments for non-cash items consisted of depreciation and amortization $357,687 and stock options and shares issued for compensation of $178,356.

  

Net cash (used in) investing activities

 

During the six months ended December 31, 2014, net cash used in investing activities of $321,405 was primarily impacted by $309,762 in capitalized costs incurred on the development of intangible assets, principally software related to The Moneytech Exchange and mPay.

 

During the six months ended December 31, 2013, net cash used in investing activities of $395,928 primarily reflects capitalized costs incurred on the development of intangible assets, principally software related incurred in the development of The Moneytech Exchange.

  

Net cash (used in) provided by financing activities

 

During the six months ended December 31, 2014, net cash used in financing activities of $2,752,833 primarily reflects a decrease in our borrowings under the Wholesale Loan Facility of $3,144,779.  Additions to our capital reserve accounts by our customers of $391,946 account for the difference.

 

During the six months ended December 31, 2013 net cash provided by financing activities of $429,299 primarily reflects an increase in our borrowings under the Wholesale Loan Facility of $457,395.  Repayments of capital reserve accounts to our customers of $28,096 account for the difference.

 

Net cash provided by discontinued operations

 

During the six months ended December 31, 2013, net cash used by discontinued operations of $65,287 primarily reflects the losses made by the Wiki business of $297,530 offset by adjustments for non-cash items and changes in operating assets and liabilities providing $88,149.  Net cash used by investing activities of $5,906 and provided by financing activities of 150,000 accounts for the difference.

 

Net cash inflow

 

During the six months ended December 31, 2014, net cash decreased by $2,731,632 as compared to the six months ended December 31, 2013, where net cash decreased by $306,089

 

Our ability to offer asset based credit lines is determined by the amount of our capital and the amount of funds we can borrow.  We require a significant amount of liquidity to offer our asset based credit lines and our rate of growth and profitability will, for the foreseeable future, largely be determined by our ability to raise equity or borrow funds with which to purchase receivables and the effective cost of such funds.

 

Insurance

 

As a condition of the RPA, the receivables due Moneytech from its customers or their counterparties are insured pursuant to a policy issued by Euler Hermes, a Standard & Poor’s rated trade credit insurance provider.  Pursuant to this policy, Moneytech would bear the first $500,000 of losses incurred in any calendar year, after which any bad debt losses are borne by Euler Hermes.  This policy is renewed annually.

 

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The following tables show, since claim year 2010 (each claim year ends on December 31) the amount of claims submitted to Euler Hermes for reimbursement, the amounts recognized or denied, the payments received to date and amounts remaining to be paid.

 

   Fiscal year   Fiscal year   Fiscal year   Fiscal year   6 months to 
   Jun 30, 2011   Jun 30, 2012   Jun 30, 2013   Jun 30, 2014   Dec 31, 2014 
   AUD   AUD   AUD   AUD   AUD 
Opening balance  $-   $-   $520,012   $295,145   $34,061 
Claims recognised   -    520,012    18,344    37,432    - 
Claims paid   -    -    (224,866)   (139,717)   (11,593)
Claims denied   -    -    (18,344)   (158,800)   - 
Closing balance  $-   $520,012   $295,145   $34,061   $22,468 

 

   Claim year 2010   Claim year 2011   Claim year 2012   Claim year 2013   Claim year 2014   Claim year 2015 
   AUD   AUD   AUD   AUD   AUD   AUD 
Claims submitted  $960,068   $615,720                     
Policy excess   (500,000)   (500,000)   No claim submitted as credit losses   
Claims denied   (158,800)   (18,344)   do not exceed the policy excess of $500,000    
Claims paid   (278,800)   (97,376)                    
Claims in progress  $22,468   $-   $-   $-   $-   $- 
                               
Progression toward the deductible   N/A    N/A    $146,221   $80,674   $373,202   $- 

 

  1 Claim amounts for claim years 2010 and 2011 were recognised in the 2012 fiscal year.  In fiscal year 2011, there was no expectation of a claim for claim year 2010.  In fiscal 2012, there was a change in circumstances relating to a debt attributable to claim year 2010 which resulted in a claim becoming possible.
  2 Claim years run January 1 to December 31 each year.
  3 Claims are not submitted until the policy excess is reached

 

Commitments for Capital Expenditures

 

We do not have any commitments for capital expenditures.

 

The design and technical development of The Moneytech Exchange is completed and it is operational. Although we will continue to upgrade and add additional functionality to The Moneytech Exchange and will need to add additional personnel as we grow, the rate of growth of these expenses should be less than the rate of growth of our revenue. Further, we anticipate that as we expand our portfolio and increase the number of services we offer, the rate of growth in the lines of credit we service and in our revenues will exceed the rate of growth in our operating expenses.  There are a number of reasons for this, the most significant being that most of the expense involved with any debtor/obligor is incurred when the relationship is established.  In the absence of a default or other triggering event, so long as a debtor/obligor is online, it generates revenue for us with little impact on our operating expenses.

 

In addition to the upgrade and addition of functionality to The Moneytech Exchange, we will also incur expenditure on research and development of our payments services platform and functionality.

 

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Off Balance Sheet Items

 

We do not have any off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose entities” (SPEs).

 

Critical Accounting Policies

 

Use of Estimates

 

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our estimates, including those related to bad debts, recovery of long-lived assets, income taxes, and the impact of changes in currency exchange rates. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Any future changes to these estimates and assumptions could cause a material change to our reported amounts of revenues, expenses, assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in Note 3 to our consolidated financial statements, we believe the following accounting policies are the most critical to aid you in fully understanding and evaluating our financial statements and our management’s discussion and analysis.

  

The preparation of financial statements in conformity with US GAAP requires management to make certain estimates and assumptions 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. Significant estimates include collectability of accounts receivable and recoverability of long-term assets.

 

Allowance for Doubtful Accounts

 

The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves.

 

Revenue Recognition

 

Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable. Revenue generally is recognized net of allowances for returns and any taxes collected from customers and subsequently remitted to governmental authorities.

 

Concentration of Credit Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk are cash, accounts receivable and other receivables arising from its normal business activities. The Company places its cash in what it believes to be credit-worthy financial institutions. The Company has a diversified customer base, most of which are in Australia. The Company controls credit risk related to accounts receivable through credit approvals, credit limits and monitoring procedures. The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is limited.

 

Cost of Revenue

 

Cost of revenue includes; programs licensed; operating costs including costs of funds and related product support service centers to drive traffic to our websites, costs incurred to support and maintain products and services, including inventory valuation adjustments; costs associated with the delivery of consulting services; and the amortization of capitalized intangible software costs. Capitalized intangible software costs are amortized over the estimated lives of the products.

 

Exchange (Loss) Gain

 

During the three months and six months ended December 31, 2014 and 2013, the transactions of Moneytech and its wholly owned subsidiaries were denominated in foreign currency and were recorded in Australian dollar (AUD) at the rates of exchange in effect when the transactions occurred. Exchange gains and losses are recognized for the different foreign exchange rates applied when the foreign currency assets and liabilities are settled.

 

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Foreign Currency Translation and Comprehensive (Loss) Income

 

The accounts of Moneytech and its wholly owned subsidiaries were maintained, and its financial statements were expressed, in AUD. Such financial statements were translated into USD with the AUD as the functional currency. All assets and liabilities were translated at the exchange rate at the balance sheet date, stockholder’s equity is translated at the historical rates and income statement items are translated at the average exchange rate for the period. Transactions in foreign currencies are initially recorded at the functional currency rate ruling at the date of transaction. Any differences between the initially recorded amount and the settlement amount are recorded as a gain or loss on foreign currency transaction in the consolidated statements of operations. The resulting translation adjustments are reported under other comprehensive income as a component of shareholders’ equity.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not applicable as the Company is a smaller reporting company

 

Item 4. Controls and Procedures

 

a) Disclosure Controls and Procedures

 

Our disclosure controls and procedures are designed to ensure that information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the United States Securities and Exchange Commission. Our Chief Executive Officer and Chief Financial Officer have reviewed the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-15(f) and 15d-15(f) as of the end of the period covered by this report and have concluded that the disclosure controls and procedures are effective.

 

b) Changes in Internal Control over Financial Reporting

 

There have been no changes in the Company’s internal control over financial reporting during the last quarterly period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II     OTHER INFORMATION

 

Item 1A. Risk Factors

 

Our business is subject to numerous risks and uncertainties including but not limited to those discussed in "Risk Factors" in our Annual Report on Forms 10-K and 10-K/A for fiscal year ended June 30, 2014, filed with the Securities and Exchange Commission on October 14, 2014 and January 13, 2015 which are incorporated by reference into this report.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

The following exhibits are filed herewith:

 

Exhibit

Number

 

Document

   
31.1   Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2   Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1   Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
32.2   Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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SIGNATURES

 

In accordance with the requirements of the Exchange Act, the Company caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  SOURCE FINANCIAL, INC.   
     
February 11, 2014 By: /s/ Hugh Evans
    Hugh Evans Chief Executive Officer (Principal Executive Officer)
     
February 11, 2014 By: /s/ Brian M. Pullar
    Brian M. Pullar Chief Financial Officer (Principal Financial and Accounting Officer)

 

 

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