UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

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

 

For the quarterly period ended March 31, 2015

 

☐  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  ☒   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  ☒   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	☒

  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐   No  ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.  As of May 1, 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		ii
PART I FINANCIAL INFORMATION		1
Item 1.	Financial statements	1
	Condensed consolidated balance sheet	1
	Condensed consolidated statement of operations and comprehensive loss	2
	Condensed consolidated statement of stockholder’s equity	3
	Condensed consolidated statement of cash flows	4
	Notes to condensed consolidated financial statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
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

 

 

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.

 

 

PART I     FINANCIAL INFORMATION

 

Item 1. Financial statements

 

SOURCE FINANCIAL, INC.  AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		March 31, 2015				June 30, 2014
		(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	5,060,745			$	10,730,743
Trade receivables, net			18,515,769				24,870,297
Short-term financing receivables, net			66,892				-
Inventories			246,915				18,450
Deferred tax asset			229,020				282,600
Other current assets			577,315				837,705
TOTAL CURRENT ASSETS			24,696,656				36,739,795
NON-CURRENT ASSETS
Intangible assets, net			2,934,961				3,632,536
Deferred tax asset			939,808				1,288,887
Property, plant and equipment, net			349,237				519,321
Short-term financing receivables, net			116,324				-
Investment in equity affiliates			11,024				-
Goodwill			57,723				71,227
TOTAL NON-CURRENT ASSETS			4,409,077				5,511,971
TOTAL ASSETS		$	29,105,733			$	42,251,766
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Trade and other payables		$	2,736,753			$	7,023,958
Wholesale loan facility			20,526,402				27,746,303
Cash reserve			1,184,415				878,747
TOTAL CURRENT LIABILITIES			24,447,570				35,649,008
NON-CURRENT LIABILITIES
Shareholder's loan			38,162				47,100
TOTAL NON-CURRENT LIABILITIES			38,162				47,100
TOTAL LIABILITIES			24,485,732				35,696,108
STOCKHOLDER'S EQUITY
Preferred stock, $0.01 par value, 1,000,000 shares authorized, none issued and outstanding net			-				-
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 par value, 50,000,000 shares authorized, 7,671,632 issued and outstanding at March 31, 2015 and June 30, 2014, respectively			7,672				7,672
Additional paid-in capital			15,141,522				15,027,915
Other accumulated comprehensive loss			(2,150,485	)			(864,766	)
Accumulated deficit			(8,378,758	)			(7,615,213	)
TOTAL STOCKHOLDER'S EQUITY			4,620,001				6,555,658
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY		$	29,105,733			$	42,251,766

 

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

 

 

SOURCE FINANCIAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

(UNAUDITED)

 

		Three months ended								Nine months ended
		March 31, 2015				March 31, 2014				March 31, 2015				March 31, 2014
Revenue		$	1,145,224			$	1,448,936			$	3,424,264			$	4,163,149
Cost of revenue			814,451				689,164				2,306,423				2,186,879
Gross profit			330,773				759,772				1,117,841				1,976,270
Operating Expenses
Compensation expenses			396,799				403,456				1,013,585				847,776
Research and development expense			192,028				77,861				523,418				296,656
Bad debt expenses			7,762				291,720				71,432				546,075
Bad debts recovered			854				(82	)			(144,357	)			(3,185	)
Professional expenses			(6,159	)			225,363				220,097				443,384
Occupancy expenses			52,870				56,934				168,353				186,110
Depreciation expense			13,148				12,957				47,469				49,864
General and administration expenses			153,519				121,372				364,418				473,776
Total operating expenses			810,821				1,189,581				2,264,415				2,840,456
Loss from operations			(480,048	)			(429,809	)			(1,146,574	)			(864,186	)
Other Income (Expense)
Research and development grant			143,188				109,385				424,011				404,585
Interest income			20,321				27,407				74,229				80,629
Gain on equity method investment			12,380				-				12,380				-
Other income (expense)			(5,693	)			(4,982	)			(10,064	)			(7,909	)
Total Other Income			170,196				131,810				500,556				477,305
Loss from continuing operations before income taxes			(309,852	)			(297,999	)			(646,018	)			(386,881	)
Provision for income taxes			(13,702	)			25,814				117,527				203,186
Net loss from continuing operations			(296,150	)			(323,813	)			(763,545	)			(590,067	)
Net loss from discontinued operations			-				(3,750	)			-				(301,280	)
Net loss			(296,150	)			(327,563	)			(763,545	)			(891,347	)
Other comprehensive (loss) income
Foreign currency translation			(387,006	)			228,820				(1,285,719	)			72,563
Comprehensive loss		$	(683,156	)		$	(98,743	)		$	(2,049,264	)		$	(818,784	)
Net loss per share
Basic and Diluted:
Continuing operations		$	(0.039	)		$	(0.036	)		$	(0.100	)		$	(0.060	)
Discontinued			-				-				-				(0.031	)
Total		$	(0.039	)		$	(0.036	)		$	(0.100	)		$	(0.091	)
Weighted average number of shares used in computing basic and diluted net (loss) per share:
Basic			7,671,632				9,080,000				7,671,632				9,864,781
Diluted			7,671,632				9,080,000				7,671,632				9,864,781

 

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

 

 

SOURCE FINANCIAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (UNAUDITED)

 

		Common Stock								Preferred Stock								Additional Paid in				Comprehensive				Accumulated				Stockholder's
		Shares				Amount				Shares				Amount				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			-				-				-				-				113,607				-				-				113,607
Net loss for the nine months ended March 31, 2015			-				-				-				-				-				(1,285,719	)			(763,545	)			(2,049,264	)
Balance March 31, 2015			7,671,632			$	7,672				5,000			$	50			$	15,141,522			$	(2,150,485	)		$	(8,378,758	)		$	4,620,001

 

 

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

 

 

SOURCE FINANCIAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

 

		Nine months ended
		March 31, 2015				March 31, 2014
Net loss		$	(763,545	)		$	(891,347	)
Net loss from discontinued operations			-				(301,280	)
Net loss from continuing operations			(763,545	)			(590,067	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization			559,091				527,835
Stock options issued for compensation			113,607				287,701
Gain on equity method investment			(12,380	)			-
(Increase) decrease in assets:
Trade receivables, net			1,840,830				7,038,408
Inventories			(260,495	)			11,550
Deferred tax asset			117,590				203,202
Financing receivables			(205,752	)			-
Other assets			114,892				225,954
(Decrease) increase in current liabilities:
Trade payables			(3,447,850	)			(123,435	)
Net cash (used in) provided by operating activities			(1,944,012	)			7,581,148
Cash flows from investing activities
Purchase of property, plant and equipment			(46,719	)			(82,532	)
Development of intangible assets			(421,991	)			(517,746	)
Net cash used in investing activities			(468,710	)			(600,278	)
Cash flows from financing activities
Wholesale loan facility, net			(2,200,295	)			(4,725,867	)
Capital Reserve			530,367				(1,920,403	)
Net cash used in financing activities			(1,669,928	)			(6,646,270	)
Net cash (used in) provided by continuing operations			(4,082,650	)			334,600
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			(1,587,348	)			71,730
Net (decrease) increase in cash and cash equivalents			(5,669,998	)			341,043
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		$	5,060,745			$	7,546,870
Supplemental disclosures
Cash paid during the period for:
Income tax payments		$	-			$	-
Interest payments		$	1,225,492			$	1,268,668
Supplemental schedule of non-cash financing activities:
Issuance of stock options		$	113,607			$	157,111

 

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

 

 

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 year 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. 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 nine months ended March 31, 2015 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, 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 no gain or loss on disposal has been reported.

 

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 nine months ended
		March 31								March 31
		2015				2014				2015				2014
Revenue		$	-			$	-			$	-			$	2,647
Cost of Revenue			-				-				-				70,460
Gross Loss			-				-				-				(67,813	)
Operating Expenses			-				3,750				-				234,027
Loss from operations			-				(3,750	)			-				(301,840	)
Other income			-				-				-				560
Loss before tax			-				(3,750	)			-				(301,280	)
Tax			-				-				-				-
Loss after tax		$	-			$	(3,750	)		$	-			$	(301,280	)

 

 

The discontinued operations of Wiki Technologies, Inc. were reported in the United States of America segment in our geographic segment information as per Note 18.

 

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 nine months ended March 31, 2015 and 2014, 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.

 

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.

 

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 March 31, 2015 and June 30, 2014, the Company had $5,060,745 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 11), 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 March 31, 2015 and June 30, 2014, the Company had insurance claims receivables of $17,152 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 March 31, 2015 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 March 31, 2015 and June 30, 2014, Property, Plant & Equipment consisted of the following:

 

		March 31				June 30
		2015				2014
Office equipment		$	30,049			$	37,079
Furniture and fixtures			192,661				237,734
Terminals			45,211				87,319
Computers and software			1,190,431				1,365,207
Accumulated Depreciation			(1,109,115	)			(1,208,018	)
		$	349,237			$	519,321

 

For the three and nine months ended March 31, 2015 and 2014, depreciation expense consisted of the following:

 

		Three months ended								Nine months ended
		March 31								March 31
		2015				2014				2015				2014
Depreciation, cost of revenue		$	24,221			$	28,697			$	79,684			$	85,273
Depreciation, operating			13,148				12,957				47,469				49,864
Total depreciation expense		$	37,369			$	41,654			$	127,153			$	135,137

 

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 March 31, 2015 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).

 

The following table sets forth the computation of basic and diluted earnings per share for the three and nine months ended March 31, 2015 and 2014:

 

		Three months ended								Nine months ended
		March 31								March 31
		2015				2014				2015				2014
Net loss from continuing operations		$	(296,150	)		$	(323,813	)		$	(763,545	)		$	(590,067	)
Net loss from discontinued operations			-				(3,750	)			-				(301,280	)
Net loss		$	(296,150	)		$	(327,563	)		$	(763,545	)		$	(891,347	)

 

Weighted average number of shares used in computing basic and diluted net loss per share:

 

Basic			7,671,632				9,080,000				7,671,632				9,864,781
Dilutive effect of stock options			-				-				-				-
Diluted			7,671,632				9,080,000				7,671,632				9,864,781

		Three months ended								Nine months ended
		March 31								March 31
		2015				2014				2015				2014
Net loss per share
Basic and diluted:
Continuing operations		$	(0.039	)		$	(0.036	)		$	(0.100	)		$	(0.060	)
Discontinued		$	-			$	-			$	-			$	(0.031	)
Total		$	(0.039	)		$	(0.036	)		$	(0.100	)		$	(0.091	)

 

Options to purchase up to 158,231 and 83,243 shares of common stock were anti-dilutive during the three and nine months ended March 31, 2015 and 2014 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 March 31, 2015, 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 March 31, 2015.

 

 

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.

 

Recently Issued Accounting Pronouncements

There have been no new accounting pronouncements during the nine months ended March 31, 2015 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 March 31, 2015 and June 30, 2014, trade receivables consist of the following:

 

		March 31				June 30
		2015				2014
Trade receivables		$	19,123,498			$	25,573,699
Allowance for bad debt			(607,729	)			(703,402	)
Total trade receivables, net		$	18,515,769			$	24,870,297

 

 

AGE ANALYSIS OF PAST DUE TRADE RECEIVABLES		March 31				June 30
		2015				2014
1 - 30 Days Past Due		$	298,308			$	695,116
31 - 60 Days Past Due			177,169				59,212
Greater than 60 Days Past Due			778,726				890,205
Total Past Due			1,254,203				1,644,533
Current			17,869,295				23,929,166
Total Trade Receivables		$	19,123,498			$	25,573,699
Recorded Investment  > 60 Days and accruing		$	399,448			$	23,007

  

ALLOWANCE FOR DOUBTFUL DEBTS		Nine months ended				Nine months ended
		March 31				March 31
		2015				2014
Allowance for doubtful debts
Beginning balance		$	703,402				731,475
Charge-offs			(23,721	)			(354,886	)
Recoveries			-				-
Provision			66,046				583,981
Other comprehensive income (fx differences)			(137,998	)			9,053
Ending balance		$	607,729			$	969,623
Ending balance - individually evaluated for impairment		$	581,349			$	933,729
Ending balance - collectively evaluated for impairment		$	26,380			$	35,894

 

Reconciliation to bad debts expense in the Statement of Operations

 

Provision		$	66,046			$	583,981
Other bad debt expenses / credits not reflected in provision			5,386				(37,906	)
Bad debts expense per Statement of Operations		$	71,432			$	546,075

 

Bad debt expenses not reflected in the provision include direct costs associated with pursuing an overdue receivable. If these costs are recovered they result in a credit.

 

TRADE RECEIVABLE BALANCES ASSESSED FOR IMPAIRMENT		March 31				June 30
		2015				2014
Ending balance		$	19,123,498			$	25,573,699
Ending balance - individually evaluated for impairment		$	606,870			$	1,079,337
Ending balance - collectively evaluated for impairment		$	18,516,628			$	24,494,362

 

TRADE RECEIVABLES ON A NON ACCRUAL BASIS		March 31				June 30
		2015				2014
Trade receivables		$	606,870			$	1,079,337
Total Financing Receivables		$	606,870			$	1,079,337

 

 

IMPAIRED LOANS		March 31, 2015
		Recorded Investment				Unpaid principal balance				Related allowance				Average recorded investment				Interest income recognized
With no allowance recorded
Trade receivables		$	-			$	-			$	-			$	-			$	-
		$	-			$	-			$	-			$	-			$	-
With an allowance recorded
Trade receivables		$	606,870			$	439,656			$	581,349			$	866,815			$	10,701
		$	606,870			$	536,367			$	581,349			$	912,386			$	5,999
Total
Trade receivables		$	606,870			$	536,367			$	581,349			$	912,386			$	5,999
		$	606,870			$	536,367			$	581,349			$	912,386			$	5,999

 

		June 30, 2014
		Recorded Investment				Unpaid principal balance				Related allowance				Average recorded investment				Interest income recognized
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

 

Note 5 – SHORT-TERM FINANCING RECEIVABLES, NET

 

The Company entered into terminal lease agreements, which were recorded as sales type leases, during the quarter ended March 31, 2015. The following are balances as of March 31, 2015 and June 30, 2014. The leases have monthly payments, a term of 30 months and bear interest at an effective rate of 12.49% per annum.

 

		March 31				June 30
		2015				2014
Current		$	66,892			$	-
Non Current			116,324				-
		$	183,216			$	-

  

Short term financing receivables repayments schedule.
12 months ended:		USD $
March 31, 2016		$	66,892
March 31, 2017			75,247
March 31, 2018			41,078
		$	183,216

 

 

Note 6 – INVENTORY

 

Inventory consists of the following as of March 31, 2015 and June 30, 2014:

 

		March 31				June 30
		2015				2014
Terminals		$	232,074			$	-
Prepaid gift cards or other			14,841				18,450
		$	246,915			$	18,450

  

Note 7 – OTHER ASSETS

 

Other assets consist of the following as of March 31, 2015 and June 30, 2014:

 

Other current assets		March 31				June 30
		2015				2014
Research & development grant receivable		$	354,981			$	555,780
Insurance claim receivable			17,152				32,085
Prepayment			55,873				43,697
Other assets			149,309				206,143
		$	577,315			$	837,705

 

Note 8 – INTANGIBLE ASSETS

 

Intangible assets consist of the following as of March 31, 2015 and June 30, 2014:

 

		March 31				June 30
		2015				2014
Moneytech and mPayments software		$	5,740,045			$	6,608,596
Accumulated amortization			(2,805,084	)			(2,976,060	)
		$	2,934,961			$	3,632,536

 

The intangible assets are amortized over 10-12 years. Amortization expense of $136,766 and $128,493 was included in cost of revenues for the three months ended March 31, 2015 and 2014, respectively and amortization expense of $431,938 and $392,698 was included in cost of revenues for the nine months ended March 31, 2015 and 2014, respectively.

 

Amortization for the Company’s intangible assets over the next five fiscal years from March 31, 2015 is estimated to be:

 

Years ending March 31,
2016		$	531,026
2017			531,026
2018			531,026
2019			531,026
2020			531,026
Thereafter			279,831
Total		$	2,934,961

 

Note 9 – GOODWILL

 

As of March 31, 2015 and June 30, 2014, the Goodwill was comprised of the following:

 

		March 31				June 30
		2015				2014
Acquisition cost of Moneytech POS Pty Ltd.		$	82,066			$	101,265
Fixed assets received			(45,718	)			(56,414	)
Liability assumed			21,375				26,376
Acquisition cost assigned to goodwill		$	57,723			$	71,227

 

Note 10 – TRADE AND OTHER PAYABLES

 

As of March 31, 2015 and June 30, 2014, trade and other payables consist of the following:

 

		March 31				June 30
		2015				2014
Trade payables		$	1,902,081			$	6,195,424
Accrued consulting costs			561,073				561,073
Employee benefits			220,776				161,906
Other liabilities			52,823				105,555
Total payables		$	2,736,753			$	7,023,958

 

Note 11 – LINE OF CREDIT AND CASH RESERVE LIABILITIES

 

		March 31				June 30
		2015				2014
Wholesale loan facility		$	20,526,402			$	27,746,303
Cash reserve liabilities			1,184,415				878,747
		$	21,710,817			$	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 March 31, 2015 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 nine months ended March 31, 2015 and 2014 was approximately USD $1,225,492 and USD $1,268,668 respectively.

 

Subsequent to reporting date, as further disclosed in Note 21 – Subsequent Events, the Company issued AUD $25 million of Debt Securities. Subsequent to the issue of the debt securities, as of April 16, 2015, the RPA interim, agreed upon, facility limit was decreased from AUD $40 million to AUD $25 million.

 

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 12 – SHAREHOLDER’S LOAN

 

		March 31				June 30
		2015				2014
Shareholder's loan		$	38,162			$	47,100
		$	38,162			$	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 13 – 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 March 31, 2015 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 March 31, 2015 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 March 31, 2015 and June 30, 2014 after giving effect to the authorized shares discussed below. There were 7,671,632 shares issued and outstanding as of March 31, 2015 and June 30, 2014.

 

On October 3, 2013, the Company amended and restated its 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.

 

Note 14 – 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
		March 31				June 30
		2015				2014
Granted but not issued at July 1			-				338,368
Issued during nine months ended March 31			-				-
Granted during nine months ended March 31			-				170,632
Cancelled during nine months ended March 31			-				(150,000	)
Granted but not issued at March 31			-				359,000

 

 

The Company believes the shares granted but not issued at July 1 were cancelled due to non-performance as of June 30, 2014.

 

Note 15 – 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 became exercisable immediately upon grant with a 3 year life. As of March 31, 2015, 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 $41,619 option expense in the three months ended March 31, 2015 and 2014, respectively and $113,607 and $157,110 option expense in the nine months ended March 31, 2015 and 2014, respectively.

 

The following is a summary of the activity and position as of the nine months ended March 31, 2015 and 2014.

 

		Number of Stock Options
		Nine months ended
		March 31
		2015				2014
Outstanding at July 1			350,000				100,000
Granted			-				250,000
Exercised			-				-
Expired			-				-
Outstanding at March 31			350,000				350,000
Exercisable at March 31			158,231				83,243

 

Options outstanding at March 31, 2015 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

4.66

$

1.96

158,231

$

1.94

 

 

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 16 – RELATED PARTY TRANSACTIONS

 

During the three and nine months ended March 31, 2015 and 2014, the Company paid a company controlled by the President of Moneytech for consulting services $22,037 and $76,422 (three months ended), respectively, and $131,310 and $198,871 (nine months ended), respectively. This arrangement was terminated as of January 31, 2015.

 

Note 17 – INCOME TAX

 

The following is the income tax expense reflected in the Statement of Operations for the three and nine months ended March 31, 2015 and 2014:

 

INCOME TAX EXPENSE		Three months ended								Three months ended								Three months ended
		March 31								March 31								March 31
		2015				2014				2015				2014				2015				2014
		Australia								United States								Total
Income tax expense - current		$	-			$	-			$	-			$	-			$	-			$	-
Income tax expense - deferred			(13,702	)			25,814				-				-				(13,702	)			25,814
Total		$	(13,702	)		$	25,814			$	-			$	-			$	(13,702	)		$	25,814

 

INCOME TAX EXPENSE		Nine months ended								Nine months ended								Nine months ended
		March 31								March 31								March 31
		2015				2014				2015				2014				2015				2014
		Australia								United States								Total
Income tax expense - current		$	-			$	-			$	-			$	-			$	-			$	-
Income tax expense - deferred			117,527				203,186				-				-				117,527				203,186
Total		$	117,527			$	203,186			$	-			$	-			$	117,527			$	203,186

  

The following are the components of income before income tax reflected in the Statement of Operations for the three and nine months ended March 31, 2015 and 2014:

 

COMPONENTS OF INCOME BEFORE		Three months ended								Three months ended								Three months ended
INCOME TAX		March 31								March 31								March 31
		2015				2014				2015				2014				2015				2014
		Australia								United States								Total
Loss from continuing operations		$	(219,871	)		$	(30,529	)		$	(89,981	)		$	(267,470	)		$	(309,852	)		$	(297,999	)
Net loss from discontinued operations			-				-				-				(3,750	)			-				(3,750	)
Loss before Income tax		$	(219,871	)		$	(30,529	)		$	(89,981	)		$	(271,220	)		$	(309,852	)		$	(301,749	)
Income tax		$	(13,702	)		$	25,814			$	-			$	-			$	(13,702	)		$	25,814
Effective tax rate			6	%			(85	)%			-	%			-	%			4	%			(9	)%

  

COMPONENTS OF INCOME BEFORE		Nine months ended								Nine months ended								Nine months ended
INCOME TAX		March 31								March 31								March 31
		2015				2014				2015				2014				2015				2014
		Australia								United States								Total
(Loss) income from continuing operations		$	(129,573	)		$	390,151			$	(516,445	)		$	(777,032	)		$	(646,018	)		$	(386,881	)
Net loss from discontinued operations			-				-				-				(301,280	)			-				(301,280	)
(Loss) income before Income tax		$	(129,573	)		$	390,151			$	(516,445	)		$	(1,078,312	)		$	(646,018	)		$	(688,161	)
Income tax		$	117,527			$	203,186			$	-			$	-			$	117,527			$	203,186
Effective tax rate			(91	)%			52	%			-	%			-	%			(18	)%			(30	)%

 

The Company did not have a United States tax paying entity during the three and nine months ended March 31, 2015.

 

 

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 nine months ended March 31, 2015 and 2014:

 

INCOME TAX RATE		Three months ended								Three months ended								Three months ended
RECONCILIATION		March 31								March 31								March 31
		2015				2014				2015				2014				2015				2014
		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			21	%			101	%			-	%			-	%			15	%			9	%
Research and development grant eligible expenditure			(28	)%			(93	)%			-	%			-	%			(20	)%			(9	)%
Research and development grant eligible amortisation			(19	)%			(123	)%			-	%			-	%			(12	)%			(12	)%
USA losses			-	%			-	%			(30	)%			(30	)%			(9	)%			(27	)%
Other			2	%			-	%			-	%			-	%			-	%			-	%
Tax expenses at actual rate			6	%			(85	)%			-	%			-	%			4	%			(9	)%

  

INCOME TAX RATE		Nine months ended								Nine months ended								Nine months ended
RECONCILIATION		March 31								March 31								March 31
		2015				2014				2015				2014				2015				2014
		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			98	%			(28	)%			-	%			-	%			20	%			17	%
Research and development grant eligible expenditure			(121	)%			22	%			-	%			-	%			(24	)%			(12	)%
Research and development grant eligible amortisation			(100	)%			28	%			-	%			-	%			(20	)%			(16	)%
USA losses			-	%			-	%			(30	)%			(30	)%			(24	)%			(49	)%
Other			2	%			-	%			-	%			-	%			-	%			-	%
Tax expenses at actual rate			(91	)%			52	%			-	%			-	%			(18	)%			(30	)%

  

The following are the components of deferred tax reflected in the Statement of Operations for the three and nine months ended March 31, 2015 and 2014:

 

COMPONENTS OF DEFERRED		Three months ended								Three months ended								Three months ended
TAX EXPENSE		March 31								March 31								March 31
		2015				2014				2015				2014				2015				2014
		Australia								United States								Total
Tax losses carried forward		$	10,400			$	62,176			$	-			$	-			$	10,400			$	62,176
Doubtful debts reserve			3,656				(32,596	)			-				-				3,656				(32,596	)
Accruals			(27,758	)			(3,766	)			-				-				(27,758	)			(3,766	)
		$	(13,702	)		$	25,814			$	-			$	-			$	(13,702	)		$	25,814

  

COMPONENTS OF DEFERRED		Nine months ended								Nine months ended								Nine months ended
TAX EXPENSE		March 31								March 31								March 31
		2015				2014				2015				2014				2015				2014
		Australia								United States								Total
Tax losses carried forward		$	163,633			$	279,351			$	-			$	-			$	163,633			$	279,351
Doubtful debts reserve			(12,698	)			(68,729	)			-				-				(12,698	)			(68,729	)
Accruals			(33,408	)			(7,436	)			-				-				(33,408	)			(7,436	)
		$	117,527			$	203,186			$	-			$	-			$	117,527			$	203,186

 

 

The following are the components of deferred tax reflected in the Balance Sheet as of March 31, 2015 and June 30, 2014: 

 

COMPONENTS OF DEFERRED		March 31				June 30				March 31				June 30				March 31				June 30
TAX ASSET		2015				2014				2015				2014				2015				2014
		Australia								United States								Total
Tax losses carried forward		$	910,630			$	1,303,475			$	-			$	-			$	910,630			$	1,303,475
Doubtful debts reserve			182,263				211,021				-				-				182,263				211,021
Accruals			75,935				56,991				-				-				75,935				56,991
		$	1,168,828			$	1,571,487			$	-			$	-			$	1,168,828			$	1,571,487
Deferred tax assets - current		$	229,020			$	282,600			$	-			$	-			$	229,020			$	282,600
Deferred tax assets - non current			939,808				1,288,887				-				-				939,808				1,288,887
		$	1,168,828			$	1,571,487			$	-			$	-			$	1,168,828			$	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).

 

As of March 31, 2015, Moneytech had approximately $3,035,435 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 March 31, 2015, 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 March 31, 2015 were fully reserved. Management believes it is more likely than not that these assets will not be realized in the near future.

 

Note 18 – GEOGRAPHIC SEGMENT INFORMATION

 

As a result of the reverse merger on June 30, 2013 the Company operated in two regions: Australia and the United States of America. As a result of the Separation Agreement, see Note 2, the Company now operates only in Australia. All inter-company transactions are eliminated in consolidation.

  

For the three months ended March 31, 2015 and 2014, geographic segment information is as follows:

 

		Three Months Ended March 31, 2015																Three Months Ended March 31, 2014
		Australia				USA				Elimination				Consolidated				Australia				USA				Elimination				Consolidated
Revenue		$	1,145,224			$	-			$	-			$	1,145,224			$	1,448,936			$	-			$	-			$	1,448,936
Cost of Revenue			814,451				-				-				814,451				689,164				-				-				689,164
Total Expenses			810,821				-				-				810,821				922,111				267,470				-				1,189,581
Other Income (Expense)			170,196				-				-				170,196				131,810				-				-				131,810
Net Income (Loss) before tax from continuing operations			(309,852	)			-				-				(309,852	)			(30,529	)			(267,470	)			-				(297,999	)
Discontinued operations			-				-				-				-				-				(3,750	)			-				(3,750	)
Assets			29,105,733				-				-				29,105,733				33,510,306				-				-				33,510,306
Debt			24,485,732				-				-				24,485,732				26,185,072				-				-				26,185,072

  

 

For the nine months ended March 31, 2015 and 2014, geographic segment information is as follows:

 

		Nine Months Ended March 31, 2015																Nine Months Ended March 31, 2014
		Australia				USA				Elimination				Consolidated				Australia				USA				Elimination				Consolidated
Revenue		$	3,424,264			$	-			$	-			$	3,424,264			$	4,160,975			$	2,174			$	-			$	4,163,149
Cost of Revenue			2,306,423				-				-				2,306,423				2,184,675				2,204				-				2,186,879
Total Expenses			2,264,415				-				-				2,264,415				2,063,454				777,002				-				2,840,456
Other Income (Expense)			500,556				-				-				500,556				477,305				-				-				477,305
Net Income (Loss) before tax from continuing operations			(646,018	)			-				-				(646,018	)			390,151				(777,032	)			-				(386,881	)
Discontinued operations			-				-				-				-				-				(301,280	)			-				(301,280	)
Assets			29,105,733				-				-				29,105,733				33,510,306				-				-				33,510,306
Debt			24,485,732				-				-				24,485,732				26,185,072				-				-				26,185,072

  

Note 19 – 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.

 

360 incurred continuous losses from inception through December 31, 2014, and as a result the Company did not recognize any income or return from the investment for the periods ended December 31, 2014 and earlier 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 for periods through December 31, 2014.

 

During the nine months ended March 31, 2015 360 was profitable and absorbed its accumulated losses through December 31, 2014.

 

The Company expects this performance to continue and as a result the Company has commenced recording 37.5% of the accumulated profits to date as income in the three and nine months ended March 31, 2015. A gain on equity method investment of $12,380 has been reported in the Statement of Operations and Comprehensive Loss for the three and nine months ended March 31, 2015. As a result of the current period 360 profits the Company has recorded an Investment in equity affiliate of $11,024 in the Balance Sheet as at March 31, 2015.

 

Note 20 – 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 nine months ended March 31, 2015 and 2014, the aggregate rental expense was USD $28,975 and USD $34,217 (three months), respectively and USD $98,047 and USD $103,964 (nine months), respectively.

 

Future minimum rental payments required under operating leases as of March 31, 2015 are as follows:

 

		USD $
2016		$	45,850

 

 

Note 21 – SUBSEQUENT EVENTS

 

Management has evaluated events subsequent through May 14, 2015 for transactions and other events that may require adjustment of and/or disclosure in such financial statements.

 

Subsequent to reporting date, Moneytech Finance Pty Ltd, a wholly owned subsidiary of the Company, entered into an agreement to issue and issued AUD $25 million of debt securities. The debt securities mature in 7 years and have similar conditions, including financial covenants and use of proceeds, to the wholesale facility and are subordinate to that facility. The Subordinated Notes, bear interest at a rate of 4.65% per annum plus the Australian Bank Bill Swap (“BBSW”) rate, payable quarterly in arrears. The BBSW rate as of the date of settlement, April 10, 2015, was 2.26% per annum. The Subordinated Notes are payable in full on April 17, 2022, subject to earlier redemption at the request of the holder in the event of a Change of Control (as defined in the Trust Deed), or at the option of the Company on certain prescribed dates. Repayment of the Subordinated Notes has been guaranteed by Moneytech Limited, the corporate parent of Moneytech Finance Pty Ltd, and Moneytech Services Pty Ltd (collectively with Moneytech Limited, the “Guarantors”), all of which are wholly-owned Australian subsidiaries of Source.

 

The costs of the Subordinated Note issuance was approximately AUD $1 million and the proceeds to the company are approximately AUD $24 million. The Company intends to use the proceeds to increase its ability to finance its commercial asset based lending activity.

 

The RPA interim agreed upon facility limit was decreased from AUD $40 million to AUD $25 million as of April 16, 2015.

 

 

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 Form 10-K for the year ended June 30, 2014, as amended on January 13, 2015. 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. Since 2005 Moneytech has had a securitized wholesale debt facility (the “Wholesale Facility,” “Receivables Purchase Agreement” or “RPA”) with Westpac, which had an AUD $40 million interim agreed upon limit but which was reduced to AUD $25 million in conjunction with the issuance by the Company of AUD $25 million of its debt securities. 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.

 

The Company recently issued AUD $25 million of debt securities in a private placement completed in Australia. The notes mature in 7 years and have similar conditions, including financial covenants and use of proceeds, to the wholesale facility and are sub-ordinate to that facility. The costs of the Subordinated Note issuance were approximately AUD $1 million and the proceeds to the company are approximately AUD $24 million. The Subordinated Notes bear interest at a rate of 4.65% per annum above the Australian BBSW rate. The BBSW rate as of the date of settlement, April 10, 2015, was 2.26% per annum. The Notes can be redeemed early at increased cost to the Company or at the request of the holder in the event of a change in control.

 

 

The advantages to the Company include removing reliance on a single source of funding with the uncertainly of an annual renewal event and the removal of delays associated with wholesale facility approval requirements for new customers. Credit insurance will be required and obtained on the same terms as the existing wholesale facility.

 

The funding provides the Company with the ability to identify and underwrite new customers according to the Companies’ existing policies. The proceeds will assist in the Company expanding its commercial asset based lending activities.

 

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.

 

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.

 

Principal factors affecting result of continuing operations

 

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.

 

·

We have commenced to distribute new point off sale terminals and replacing older terminals. The terminals are recorded as either direct sales to the user or sales type leases.

 

·

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 ineligible 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 corresponding minimizing 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 and overall customer balances 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.

 

 

Results of Operations

 

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 and nine months ended March 31, 2015 (“Q3 2015” and “Year to date 2015”) and 2014 (“Q3 2014” and “Year to date 2014”) respectively.  This discussion should be read in conjunction with the consolidated financial statements and notes thereto contained elsewhere in this report.

 

Third quarter fiscal 2015 v third quarter fiscal 2014

 

Set forth below are certain items from our operating statements for the three months ended March 31, 2015 and 2014:

 

		For the three months ended March 31								$ Increase				% Increase
		2015				2014				(Decrease)				(Decrease)
		USD				USD				USD
Revenue			1,145,224				1,448,936				(303,712	)			(21	)%
Confirmed capital and credit express			828,977				1,310,784				(481,807	)			(37	)%
Interest revenue			473,959				986,182				(512,223	)			(52	)%
Fees			354,152				293,384				60,768				21	%
Other revenue			866				31,218				(30,352	)			(97	)%
Payment services			289,253				125,789				163,464				130	%
Giftcard program revenue			13,350				51,462				(38,112	)			(74	)%
Terminal sales			229,756				-				229,756				-
Other revenue			46,147				74,327				(28,180	)			(38	)%
Other revenue			26,994				12,363				14,631				118	%
360FX customer referral			26,744				17,139				9,605				56	%
Foreign exchange			241				(4,934	)			5,175				(105	)%
Other revenue			9				158				(149	)			(94	)%
Cost of revenue			814,451				689,164				125,287				18	%
Confirmed capital and credit express			470,548				486,721				(16,173	)			(3	)%
Interest expense			365,146				383,899				(18,753	)			(5	)%
Account Issuing Expenses			37,086				46,797				(9,711	)			(21	)%
Insurance			67,406				48,285				19,121				40	%
Other			910				7,740				(6,830	)			(88	)%
Payment services			174,112				45,253				128,859				285	%
Gift card expenses			3,402				16,532				(13,130	)			(79	)%
Terminal sales			146,598				-				146,598				-
Other			24,112				28,721				(4,609	)			(16	)%
Depreciation and amortization			162,605				157,190				5,415				3	%
Other cost of revenue			7,186				-				7,186				-
Gross profit			330,773				759,772				(428,999	)			(56	)%
Operating expenses			810,821				1,189,581				(378,760	)
Compensation expenses			396,799				403,456				(6,657	)			(2	)%
Research and development expense			192,028				77,861				114,167				147	%
Bad debt expenses			7,762				291,720				(283,958	)			(97	)%
Bad debts recovered			854				(82	)			936				(1,141	)%
Professional expenses			(6,159	)			225,363				(231,522	)			(103	)%
Occupancy expenses			52,870				56,934				(4,064	)			(7	)%
Depreciation expense			13,148				12,957				191				1	%
General and administration expenses			153,519				121,372				32,147				26	%
(Loss) income from operations			(480,048	)			(429,809	)			(50,239	)			12	%
Other income			170,196				131,810				38,386				29	%
(Loss) income before income tax			(309,852	)			(297,999	)			(11,853	)			4	%
Income tax expense			(13,702	)			25,814				(39,516	)			(153	)%
Net (loss) income from continuing operations			(296,150	)			(323,813	)			27,663				(9	)%
Net result from discontinued operations			-				(3,750	)			3,750				NA
Net (loss) income			(296,150	)			(327,563	)			31,413				(10	)%
Other comprehensive loss
Foreign currency translation			(387,006	)			228,820				(615,826	)			(269	)%
Comprehensive loss			(683,156	)			(98,743	)			(584,413	)			592	%

 

 

The following table reflects the movements in our revenues and cost of revenues in our functional currency; Australian Dollars, for the three months ended March 31, 2015 and 2014.

 

		For the three months ended								$				%				% Revenue / Cost of
		March 31								Increase				Increase				revenue
		2015				2014				(Decrease)				(Decrease)				move
		AUD				AUD				AUD
Revenue			1,437,830				1,612,112				(174,282	)			(11	)%			(11	)%
Confirmed capital and credit express			1,042,309				1,457,846				(415,537	)			(29	)%			(26	)%
Interest revenue			596,716				1,094,957				(498,241	)			(46	)%			(31	)%
Fees			444,493				328,101				116,392				35	%			7	%
Other revenue			1,100				34,789				(33,689	)			(97	)%			(2	)%
Payment services			361,340				139,738				221,602				159	%			14	%
Giftcard program revenue			16,795				56,840				(40,045	)			(70	)%			(2	)%
Terminal sales			268,000				-				268,000				-				17	%
Other revenue			76,545				82,899				(6,354	)			(8	)%			(0	)%
Other revenue			34,181				14,527				19,654				135	%			1	%
360FX customer referral			33,895				19,271				14,624				76	%			1	%
Foreign exchange			286				(4,911	)			5,197				(106	)%			0	%
Other revenue			-				168				(168	)			(100	)%			(0	)%
Cost of revenue			1,016,780				768,855				247,925				32	%			32	%
Confirmed capital and credit express			586,463				543,692				42,771				8	%			6	%
Interest expense			457,717				428,788				28,929				7	%			4	%
Account Issuing Expenses			45,441				52,279				(6,838	)			(13	)%			(1	)%
Insurance			82,737				53,378				29,359				55	%			4	%
Other			568				9,247				(8,679	)			(94	)%			(1	)%
Payment services			217,840				50,005				167,835				336	%			22	%
Gift card expenses			4,212				18,188				(13,976	)			(77	)%			(2	)%
Terminal sales			171,000				-				171,000				-				22	%
Other			42,628				31,817				10,811				34	%			1	%
Depreciation and amortization			203,472				175,157				28,315				16	%			4	%
Other cost of revenue			9,005				0				9,005				-				1	%
Gross profit			421,050				843,257				(422,207	)			(50	)%

 

Revenue

 

Consolidated revenue from continuing operations for Q3 2015 was approximately $1,145,224, a decrease of $303,712 or 21% from our consolidated revenue from continuing operations for Q3 2014 of $1,448,936.  Excluding differences attributable to changes in foreign exchange rates, revenue decreased 11%. The decrease in our revenues was entirely the result of a decrease in Confirmed Capital and Credit Express revenues of 29% which accounted for 26 percentage points of the 11% decrease. Excluding differences attributable to changes in foreign exchange rates, the Confirmed Capital and Credit Express revenue decrease is mainly attributable to the fact that revenues received as a result of a customer default in Q3 2014 were not repeated in the current quarter. The non-recurring income in Q3 2014 was AUD$494,635 or 31 percentage points of the 26 percentage point decrease. The lines of credit we funded were approximately AUD$47 million during the three months ended March 31, 2015 and AUD$49 million during the three months ended March 31, 2014.

 

Excluding differences attributable to changes in foreign exchange rates, Payments Services revenues increased 159% and Other revenue increased 135% reflecting the growth in our payment services and foreign exchange businesses. The increase in payment services revenue is primarily attributable to an expansion of the number of terminals operated by Mpos, our subsidiary that provides point of sale terminals for customers in Australia. In the current quarter we commenced the sale and leasing deployment of new terminals and sold or leased 360 of the terminals following agreements with a new terminal supplier and a new merchant acquiring service provider. We generated an additional AUD$268,000 in revenue from these activities.

 

 

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 the funds we borrow and the amortization expense of capitalized research and development costs was $814,451 in the three months ended March 31, 2015, an increase of $125,287 or 18% from our cost of revenue of $689,164 for the three months ended March 31, 2014.  Excluding differences attributable to changes in foreign exchange rates, costs of revenue increased 32% primarily as a result of increases in Payments Services costs of 336% which accounted for 22 percentage points of the 32% increase. Increases in Confirmed Capital and Credit Express costs of 8% which accounted for 6 percentage points of the 32%, increases in Depreciation and Amortization Costs of 16% which accounted for 4 percentage points of the 32% increase and a negligible increase in Other Costs accounts for the remainder.  Excluding differences attributable to changes in foreign exchange rates, the increase in Payments Services costs is mainly attributable to an increase in costs at Mpos attributable to costs connected with new terminals put into service. The increase in Confirmed Capital and Credit Express costs is primarily attributable to increases in interest and insurance expenses which each accounted for 4 percentage points of the 6 percentage point increase.  Notwithstanding a reduction in the lines of credit we funded, interest expense increased as a result of an increase in fees charged on the portion of the wholesale facility that was not utilized. The amount of the facility that was not utilized increased as a result of the increase in the facility limit at the end of the third quarter 2014 and this accounted for approximately AUD$49,315 or 6 percentage points of the 6 percentage point increase as well as the loss of defaulting confirmed capital customers subsequent to the third quarter 2014. The increase in amortization is attributable to increased investment in intangibles.

 

Our gross profit from continuing operations, decreased $428,999 from $759,772 in the quarter ended March 31, 2014 to $330,773 in the quarter ended March 31, 2015.  This was primarily attributable to net interest and fee revenue decreases at Confirmed Capital and Credit Express and was partially offset by increases in gross profit in the Payments Services business as described above.

 

Operating Expenses; Bad Debt Expense; Income from Operations

 

Apart from the costs for borrowed funds, the other significant factor in determining our profitability is our operating expenses, in particular our bad debt expenses and recoveries.  Our bad debt expenses for Q3 2015 were $7,762, representing a decrease of $283,958 from bad debt expense of $291,720 for Q3 2014. We regularly evaluate the credit quality of our customers and this decrease is attributable to changes made in the prior quarter as a result of the assessment of several customer balances in line with our credit and collections policy. Bad debt recoveries were negligible quarter on quarter.

 

The percentage of delinquent balances in our portfolio was 1.66% and 1.78% as of March 31, 2015 and 2014 respectively.  The percentage of delinquent balances in our portfolio averaged 1.59% and 1.60% in the three months ended March 31, 2015 and 2014 respectively.  The average collection period in our portfolio decreased from 46 days to 41 days during the three months ended March 31, 2015 and decreased from 55 to 50 days during the three months ended March 31, 2014. Bad debts as a percentage of amount funded was 0.02% and 0.65% in the three months ended March 31, 2015 and 2014 respectively. This was due to losses from 39 customers.

 

Our total operating expenses from continuing operations (other than bad debt) decreased by $95,738 or 11% from $897,943 in the third quarter 2014 to $802,205 in the third quarter 2015. This decrease is primarily attributed to a decrease in professional expenses ($231,522 or 103%) and is partially offset by an increase in research and development expenses ($114,167 or 147%).  The professional expenses decrease primarily reflects a decrease in legal fees ($236,191). We renegotiated and were able to reduce previously recorded legal fees following our decision to withdraw our registration statement filed with the SEC. The research and development expense increase reflects increased expenditure that is not capitalized. Management anticipates legal expenses will 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 Q3 2015 we accrued AUD $179,588 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. The awarded grant 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 Q3 2015 was $309,852, as compared to a net loss of $297,999 for Q3 2014.  As a result of negative $13,702 in deferred taxes incurred in Q3 2015, we incurred a net loss after tax for Q3 2015 of $296,150, as compared to a net loss after tax for Q3 2014 of $323,813.  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.

 

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 0.8967 and 1 to 0.7866 in Q3 2014 and Q3 2015, respectively. The AUD/USD exchange rates were 1 to 0.9420 and 1 to 0.7634 at June 30, 2014 and March 31, 2015, respectively.

 

 

Year to date fiscal 2015 v fiscal 2014

 

Set forth below are certain items from our operating statements for the nine months ended March 31, 2015 and 2014:

 

		For the nine months ended								$				%
		March 31								Increase				Increase
		2015				2014				(Decrease)				(Decrease)
		USD				USD				USD
Revenue			3,424,264				4,163,149				(738,885	)			(18	)%
Confirmed capital and credit express			2,895,014				3,710,650				(815,636	)			(22	)%
Interest revenue			1,804,146				2,602,560				(798,414	)			(31	)%
Fees			1,085,990				1,012,969				73,021				7	%
Other revenue			4,878				95,121				(90,243	)			(95	)%
Payment services			455,211				339,397				115,814				34	%
Giftcard program revenue			55,588				105,777				(50,189	)			(47	)%
Terminal sales			229,756				-				229,756				-
Other revenue			169,867				233,620				(63,753	)			(27	)%
Other revenue			74,039				113,102				(39,063	)			(35	)%
360FX customer referral			72,812				69,494				3,318				5	%
Foreign exchange			958				43,961				(43,003	)			(98	)%
Other revenue			269				(353	)			622				(176	)%
Cost of revenue			2,306,423				2,186,879				119,544				5	%
Confirmed capital and credit express			1,556,791				1,613,525				(56,734	)			(4	)%
Interest expense			1,231,472				1,268,669				(37,197	)			(3	)%
Account Issuing Expenses			141,150				133,955				7,195				5	%
Insurance			168,216				124,926				43,290				35	%
Other			15,953				85,975				(70,022	)			(81	)%
Payment services			229,204				95,384				133,820				140	%
Gift card expenses			14,497				26,812				(12,315	)			(46	)%
Terminal sales			146,598				-				146,598				-
Other			68,109				68,572				(463	)			(1	)%
Depreciation and amortization			513,242				477,970				35,272				7	%
Other cost of revenue			7,186				-				7,186				-
Gross profit			1,117,841				1,976,270				(858,429	)			(43	)%
Operating expenses			2,264,415				2,840,456				(576,041	)
Compensation expenses			1,013,585				847,776				165,809				20	%
Research and development expense			523,418				296,656				226,762				76	%
Bad debt expenses			71,432				546,075				(474,643	)			(87	)%
Bad debts recovered			(144,357	)			(3,185	)			(141,172	)			4,432	%
Professional expenses			220,097				443,384				(223,287	)			(50	)%
Occupancy expenses			168,353				186,110				(17,757	)			(10	)%
Depreciation expense			47,469				49,864				(2,395	)			(5	)%
General and administration expenses			364,418				473,776				(109,358	)			(23	)%
(Loss) income from operations			(1,146,574	)			(864,186	)			(282,388	)			33	%
Other income			500,556				477,305				23,251				5	%
(Loss) income before income tax			(646,018	)			(386,881	)			(259,137	)			67	%
Income tax expense			117,527				203,186				(85,659	)			(42	)%
Net (loss) income from continuing operations			(763,545	)			(590,067	)			(173,478	)			29	%
Net result from discontinued operations			-				(301,280	)			301,280				NA
Net (loss) income			(763,545	)			(891,347	)			127,802				(14	)%
Other comprehensive loss
Foreign currency translation			(1,285,719	)			72,563				(1,358,282	)			(1872	)%
Comprehensive loss			(2,049,264	)			(818,784	)			(1,230,480	)			150	%

 

 

The following table reflects the movements in our revenues and cost of revenues in our functional currency; Australian Dollars, for the nine months ended March 31, 2015 and 2014.

 

		For the nine months ended								$				%				% Revenue / Cost of
		March 31								Increase				Increase				revenue
		2015				2015				(Decrease)				(Decrease)				move
		AUD				AUD				AUD
Revenue			3,994,242				4,554,164				(559,922	)			(12	)%			(12	)%
Confirmed capital and credit express			3,359,793				4,059,142				(699,349	)			(17	)%			(15	)%
Interest revenue			2,088,793				2,847,127				(758,334	)			(27	)%			(17	)%
Fees			1,265,400				1,107,956				157,444				14	%			3	%
Other revenue			5,600				104,060				(98,460	)			(95	)%			(2	)%
Payment services			547,497				371,291				176,206				47	%			4	%
Giftcard program revenue			64,174				115,718				(51,544	)			(45	)%			(1	)%
Terminal sales			268,000				-				268,000				-				6	%
Other revenue			215,323				255,574				(40,251	)			(16	)%			(1	)%
Other revenue			86,952				123,730				(36,778	)			(30	)%			(1	)%
360FX customer referral			85,570				76,025				9,545				13	%			0	%
Foreign exchange			1,091				48,092				(47,001	)			(98	)%			(1	)%
Other revenue			291				(386	)			677				(175	)%			0	%
Cost of revenue			2,690,333				2,392,179				298,154				12	%			12	%
Confirmed capital and credit express			1,804,908				1,764,944				39,964				2	%			2	%
Interest expense			1,429,478				1,387,888				41,590				3	%			2	%
Account Issuing Expenses			162,171				146,544				15,627				11	%			1	%
Insurance			195,817				136,458				59,359				43	%			2	%
Other			17,442				94,054				(76,612	)			(81	)%			(3	)%
Payment services			279,637				104,348				175,289				168	%			7	%
Gift card expenses			16,657				29,332				(12,675	)			(43	)%			(0	)
Terminal sales			171,000				-				171,000				-				0
Other			91,980				75,016				16,964				23	%			0
Depreciation and amortization			596,783				522,886				73,897				14	%			3	%
Other cost of revenue			9,005				0				9,005				-				0	%
Gross profit			1,303,909				2,161,985				(858,076	)			(40	)%

 

Revenue

 

Consolidated revenue from continuing operations for the first nine months of the 2015 fiscal year (“YTD 2015”) was approximately $3,424,264, a decrease of $738,885 or 18% from our consolidated revenue from continuing operations for the first nine months of the 2014 fiscal year (“YTD 2014”) of $4,163,149.  Excluding differences attributable to changes in foreign exchange rates, revenue decreased 12%, primarily as a result of a decrease in Confirmed Capital and Credit Express revenues of 17% which exceeded the 12% decrease, and were partially offset by an increase in Payment Services revenues of 47%. Excluding differences attributable to changes in foreign exchange rates, the Confirmed Capital and Credit Express revenue decrease is primarily attributable to a decrease in interest revenue of 27% and a 95% decrease in fees charged to new customers to set up their accounts offset by a 14% increase in fees. Excluding differences attributable to changes in foreign exchange rates, the decrease in interest revenue is mainly attributable to the fact that revenues received as a result of a customer default in the prior year were not repeated in the current year. The non-recurring income in the nine months ended March 31, 2014 was AUD$494,635 or 11 percentage points of the 12 percentage point decrease in revenue. The lines of credit we funded were approximately AUD$157 million during the nine months ended March 31, 2015 and AUD$169 million during the nine months ended March 31, 2014. The lines of credit we funded are lower because customers whose lines were terminated as a result of their default in YTD 2014 have not yet been replaced.

  

The increase in payment services revenue is primarily attributable to an increase in terminal related revenues in Mpos which provides point of sale terminals for customers in Australia. In Q3 2015 we commenced the sale and leasing deployment of new terminals and sold or leased 360 terminals following agreements with a new terminal supplier and a new merchant acquiring service provider. We generated an additional AUD$268,000 in revenue from these activities. Other revenue decreased slightly 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 funds borrowed and the amortization expense of capitalized research and development costs was $2,306,423 in the nine months ended March 31, 2015, an increase of $119,544 or 5% from our cost of revenue of $2,186,879 for the nine months ended March 31, 2014.  Excluding differences attributable to changes in foreign exchange rates, costs of revenue increased 12% primarily as a result of increases in Payment Services of 168% which accounted for 7 percentage points of the 12% increase, increases in depreciation and amortization costs of 14% which accounted for 3 percentage points of the 12% increase and increases in Confirmed Capital and Credit Express costs of 2% which accounted for the remaining 2 percentage points.  Excluding differences attributable to changes in foreign exchange rates, the Payment Services cost increase is primarily attributable to an increase in costs at Mpos attributable to costs connected with the deployment of new terminals. The increase in amortization is attributable to increased investment in intangibles. The increase in Confirmed Capital and Credit Express costs is mainly attributable to an 11% increase in account issuing expenses, an increase of 3% in interest expense, an increase of 43% in insurance costs and a decrease in fees associated with existing accounts of 81%.  Our interest expense increased slightly year over year as a slight decrease in the volume of credit lines funded year to date was more than offset by increases attributable to the amount of the facility that was not advanced as a result of increases in the facility limit and loss of defaulting Confirmed Capital customers. The amount of the facility that was not advanced accounted for approximately AUD$49,315 or 2 percentage points of the12 percentage point increase.

 

Our gross profit from continuing operations, decreased $858,429 from $1,976,270 in the nine months ended March 31, 2014 to $1,117,841 in the nine months ended March 31, 2015.  This was primarily attributable to net interest and fee revenue decreases at Confirmed Capital and Credit Express as described above and a decline in performance in the payments services business.

 

Operating Expenses; Bad Debt Expense; Income from Operations

 

Apart from the costs for funds borrowed, 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 $71,432, representing a decrease of $474,643 from bad debt expenses of $546,075 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 $144,357, representing an increase of $141,172 from bad debt recovery of $3,185 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 1.66% and 1.78% as of March 31, 2015 and 2014 respectively.  The percentage of delinquent balances in our portfolio averaged 1.68% and 1.90% in the nine months ended March 31, 2015 and 2014 respectively.  The average collection period in our portfolio decreased from 45 days to 41 days during the nine months ended March 31, 2015 and increased from 45 to 50 days during the nine months ended March 31, 2014. Bad debts as a percentage of amount funded was 0.05% and 0.35% in the nine months ended March 31, 2015 and 2014 respectively.

 

Our total operating expenses from continuing operations (other than bad debt) increased by $39,774 or 2% from $2,297,566 year to date 2014, to $2,337,340 year to date 2015. This increase is primarily attributed to compensation costs ($165,809 or 20%), research and development expense ($226,762 or 76%), offset by a decrease in professional expenses ($223,287 or 50%) and general and administration expenses ($109,358 or 23%).  The compensation costs increase reflects costs of adding our Management, Business Development officer, other staff and non-executive directors that were not employed prior to March 31, 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 decrease primarily reflects a decrease in legal fees ($233,549).  Legal fees have decreased because activity associated with the Company’s registration statement stopped following the withdrawal of our registration statement in the third quarter 2015 and a renegotiation of previously recorded legal fees. The general and administration expenses decrease primarily reflects a decrease in stock compensation connected with investor relations services. Management anticipates operating expenses will 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. YTD 2015 we have accrued AUD $494,588 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. The awarded grant 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 $646,018, as compared to a net loss of $386,881 YTD 2014.  As a result of $117,527 in deferred taxes incurred YTD 2015, we incurred a net loss after tax YTD 2015 of $763,545, as compared to a net loss after tax YTD 2014 of $590,067.  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 net interest margins have decreased. Net interest margins have decreased primarily because revenues associated with defaulting Confirmed Capital customers have not yet been replaced and interest costs attributable to the amount of the facility that has not been advanced have increased. Expenses of being a public company in the United States continues to weigh on overall profitability.

 

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 0.9141 and 1 to 0.8573 YTD 2014 and YTD 2015, respectively. The AUD/USD exchange rates were 1 to 0.9420 and 1 to 0.7634 at June 30, 2014 and March 31, 2015, respectively.

 

 

Comparison of Balance Sheet Data as at March 31, 2015 and June 30, 2014

 

Set forth below are certain items from our Consolidated Balance Sheet at March 31, 2015 and June 30, 2014:

 

		March 31				June 30
		2015				2014
Cash and cash equivalents		$	5,060,745			$	10,730,743
Trade receivables, net			18,515,769				24,870,297
Total Assets		$	29,105,733			$	42,251,766
Wholesale Loan Facility		$	20,526,402			$	27,746,303
Total Liabilities		$	24,485,732			$	35,696,108
Total Stockholder's Equity		$	4,620,001			$	6,555,658

 

Trade receivables, Total Assets, Wholesale Loan Facility and Total Liabilities have decreased primarily due to the default of a Confirmed Capital Customer which has been terminated. In addition, the deterioration of the AUD/USD exchange rate from 1 to 0.9420 to 1 to 0.7634 at June 30, 2014 and March 31, 2015 respectively effected the balance sheet values of these assets.

  

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 March 31, 2015 our borrowing capacity was limited to AUD $40 million but has subsequently been reduced and the total amount drawn against the facility was $20,526,402.  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.

 

 

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.

 

We recently issued AUD $25 million of debt securities. The notes mature in 7 years and have similar conditions, including financial covenants and restrictions as to use of proceeds, to the wholesale facility and are sub-ordinate to that facility. The costs of the Subordinated Note issuance were approximately AUD $1 million and the proceeds to the company are approximately AUD $24 million. The Subordinated Notes bear interest at a rate of 4.65% per annum above the Australian BBSW rate. The BBSW rate as of the date of settlement, April 10, 2015, was 2.26% per annum. The Notes can be redeemed early at increased cost to the Company or at the request of the holder in the event of a change in control.

 

In conjunction with the note issuance, the RPA interim agreed upon facility limit was decreased from AUD $40 million to AUD $25 million as of April 16, 2015.

 

Set forth below are certain items from our Statement of Cash Flows for the nine months ended March 31, 2015 and 2014:

 

		For the nine months ended March 31
		2015				2014
Net cash (used in) provided by operating activities		$	(1,944,012	)		$	7,581,148
Net cash (used in) investing activities			(468,710	)			(600,278	)
Net cash (used in) financing activities			(1,669,928	)			(6,646,270	)
Net cash (used in) discontinued operations			-				(65,287	)
Effect of exchange rate changes on cash and cash equivalents			(1,587,348	)			71,730
Net cash outflow		$	(5,669,998	)		$	341,043

 

Net cash provided by (used in) operating activities

 

During the nine months ended March 31, 2015, we used approximately $1,944,012 of net cash in our operating activities. This reflects our net loss from continuing operations of $763,545 plus $1,180,467 used 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 $1,840,830 and a decrease in trade payables of $3,447,850. Trade receivables decreased due to a decrease in credit lines provided as a result of a Confirmed Capital customer default. 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 $559,091, stock options and shares issued for compensation of $113,607 and Gains on Equity method investments ($12,380).

 

During the nine months ended March 31, 2014, we generated approximately $7,581,147 of net cash in our operating activities.  This reflects our net loss from continuing operations of $590,067 plus $8,171,215 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 a decrease in trade receivables of $7,038,408, a decrease in other assets of $225,954 and a decrease in buyer payments and sellers’ liabilities and other items using $123,435. Adjustments for non-cash items consisted of depreciation and amortization $527,835 and stock options and shares issued for compensation of $287,701.

 

  

Net cash (used in) investing activities

 

During the nine months ended March 31, 2015, net cash used in investing activities of $468,710 was caused by $421,991 in capitalized costs incurred on the development of intangible assets, principally software related to The Moneytech Exchange and mPay.

 

During the nine months ended March 31, 2014, net cash used in investing activities of $600,278 primarily reflects capitalized costs incurred on the development of intangible assets, principally the development of The Moneytech Exchange software.

  

Net cash (used in) provided by financing activities

 

During the nine months ended March 31, 2015, net cash used in financing activities of $1,669,928 resulted from reduced borrowings under the Wholesale Loan Facility of $2,200,295.  Additions to our capital reserve accounts by our customers of $530,367 account for the difference.

 

During the nine months ended March 31, 2014 net cash used in financing activities of $6,646,270 resulted from reduced borrowings under the Wholesale Loan Facility of $4,725,867.  Repayments of capital reserve accounts to our customers of $1,920,403 account for the difference.

 

Net cash provided by discontinued operations

 

During the nine months ended March 31, 2014, net cash used by discontinued operations was $65,287 from losses made by the Wiki business of $301,280 offset by adjustments for non-cash items and changes in operating assets and liabilities providing $91,899.  Net cash used by investing activities of $5,906 and cash provided by financing activities of $150,000 accounts for the difference.

 

Net cash inflow

 

During the nine months ended March 31, 2015, net cash decreased by $5,669,998 as compared to the nine months ended March 31, 2014, where net cash increased by $341,043.

  

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 bears the first $500,000 of losses in any calendar year, after which any bad debt losses are borne by Euler Hermes.  This policy is renewed annually. 

 

 

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 Jun 30, 2011				Fiscal year Jun 30, 2012				Fiscal year Jun 30, 2013				Fiscal year Jun 30, 2014				9 months to Mar 31, 2015
		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	)
Claims denied			(158,800	)			(18,344	)		No claim submitted as credit losses 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 excepting 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 functionality to The Moneytech Exchange we 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.

 

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 nine months ended March 31, 2015 and 2014, 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 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.

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 Form 10-K for fiscal year ended June 30, 2014, filed with the Securities and Exchange Commission on October 14, 2014, as amended on 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.

    

 

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.
May 14, 2015	By:	/s/ Hugh Evans
		Hugh Evans Chief Executive Officer (Principal Executive Officer)
May 14, 2015	By:	/s/ Brian M. Pullar
		Brian M. Pullar Chief Financial Officer (Principal Financial and Accounting Officer)

 

 

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