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 September 30, 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 |
☐ |
Smaller reporting company |
☒ |
(Do not check if a 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 Nov 14, 2015, the Registrant had outstanding 8,791,632 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 stockholders’
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 |
19 |
Item 3. |
Quantitative and Qualitative Disclosures about Market Risk |
30 |
Item 4. |
Controls and Procedures |
30 |
PART II OTHER INFORMATION |
31 |
Item 1A. |
Risk Factors |
31 |
Item 5. |
Other Information |
31 |
Item 6. |
Exhibits |
31 |
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 Form 10-K
for the fiscal year ended June 30, 2015 filed on September 17, 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
CONSOLIDATED
BALANCE SHEET
| |
September 30,
2015 | | |
June 30,
2015 | |
| |
(Unaudited) | | |
| |
| |
| | |
| |
ASSETS | |
| | | |
| | |
CURRENT
ASSETS | |
| | | |
| | |
Cash
and cash equivalents | |
$ | 7,204,670 | | |
$ | 8,075,078 | |
Trade
receivables, net | |
| 24,404,534 | | |
| 19,651,268 | |
Terminal
financing receivables, current, net | |
| 123,778 | | |
| 111,364 | |
Inventories | |
| 109,776 | | |
| 157,144 | |
Deferred
tax asset | |
| 210,300 | | |
| 230,400 | |
Other
current assets | |
| 782,076 | | |
| 779,851 | |
TOTAL
CURRENT ASSETS | |
| 32,835,134 | | |
| 29,005,105 | |
| |
| | | |
| | |
NON-CURRENT
ASSETS | |
| | | |
| | |
Intangible
assets, net | |
| 2,623,438 | | |
| 2,914,253 | |
Deferred
tax asset | |
| 790,309 | | |
| 885,383 | |
Property,
plant and equipment, net | |
| 282,427 | | |
| 326,899 | |
Terminal
financing receivables, non-current, net | |
| 164,002 | | |
| 172,068 | |
Investment
in equity affiliates | |
| 35,854 | | |
| 681 | |
Goodwill | |
| 53,005 | | |
| 58,071 | |
TOTAL
NON-CURRENT ASSETS | |
| 3,949,035 | | |
| 4,357,355 | |
| |
| | | |
| | |
TOTAL
ASSETS | |
$ | 36,784,169 | | |
$ | 33,362,460 | |
| |
| | | |
| | |
LIABILITIES
AND STOCKHOLDERS' EQUITY | |
| | | |
| | |
| |
| | | |
| | |
CURRENT
LIABILITIES | |
| | | |
| | |
Trade
and other payables | |
$ | 1,955,549 | | |
$ | 3,114,185 | |
Wholesale
loan facility | |
| 12,667,828 | | |
| 6,052,789 | |
Cash
reserve | |
| 1,400,598 | | |
| 1,257,984 | |
TOTAL
CURRENT LIABILITIES | |
| 16,023,975 | | |
| 10,424,958 | |
| |
| | | |
| | |
NON-CURRENT
LIABILITIES | |
| | | |
| | |
Subordinated
notes, net | |
| 16,895,026 | | |
| 18,471,471 | |
Shareholder's
loan | |
| 35,043 | | |
| 38,392 | |
TOTAL
NON-CURRENT LIABILITIES | |
| 16,930,069 | | |
| 18,509,863 | |
| |
| | | |
| | |
TOTAL
LIABILITIES | |
| 32,954,044 | | |
| 28,934,821 | |
| |
| | | |
| | |
STOCKHOLDERS'
EQUITY | |
| | | |
| | |
Preferred
stock, $0.01 par value, 10,000 shares authorized, designated as Series B Preferred stock, 5,000 issued and outstanding at
September 30, 2015 and June 30, 2015. | |
| 50 | | |
| 50 | |
Common
Stock, $0.001 par value, 12,000,000 shares authorized, 8,791,632 and 7,671,632 issued and outstanding at September 30, 2015
and June 30, 2015, respectively | |
| 8,792 | | |
| 7,672 | |
Additional
paid-in capital | |
| 15,643,102 | | |
| 15,170,976 | |
Other
accumulated comprehensive loss | |
| (2,545,508 | ) | |
| (2,115,049 | ) |
Accumulated
deficit | |
| (9,276,311 | ) | |
| (8,636,010 | ) |
TOTAL
STOCKHOLDERS' EQUITY | |
| 3,830,125 | | |
| 4,427,639 | |
| |
| | | |
| | |
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY | |
$ | 36,784,169 | | |
$ | 33,362,460 | |
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements
SOURCE
FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
FOR
THE THREE MONTHS ENDED SEPTEMBER, 2015 AND 2014
(UNAUDITED)
| |
Three months ended | |
| |
September 30,
2015 | | |
September 30,
2014 | |
| |
| | |
| |
Revenue | |
$ | 1,249,573 | | |
$ | 1,143,170 | |
Cost of revenue | |
| 933,315 | | |
| 816,818 | |
Gross profit | |
| 316,258 | | |
| 326,352 | |
| |
| | | |
| | |
Operating Expenses | |
| | | |
| | |
Compensation expenses | |
| 747,304 | | |
| 337,124 | |
Research and development expense | |
| 174,217 | | |
| 130,539 | |
Bad debt expenses | |
| 10,244 | | |
| 85,625 | |
Bad debts recovered | |
| - | | |
| (17,672 | ) |
Professional expenses | |
| 67,702 | | |
| 85,004 | |
Occupancy expenses | |
| 66,663 | | |
| 62,523 | |
Depreciation expense | |
| 8,055 | | |
| 18,430 | |
General and administration expenses | |
| 52,829 | | |
| 126,952 | |
Total operating expenses | |
| 1,127,014 | | |
| 828,525 | |
Loss from operations | |
| (810,756 | ) | |
| (502,173 | ) |
| |
| | | |
| | |
Other Income (Expense) | |
| | | |
| | |
Research and development grant | |
| 119,757 | | |
| 152,675 | |
Interest income | |
| 37,649 | | |
| 29,992 | |
Gain on equity method investment | |
| 36,479 | | |
| - | |
Other income (expense) | |
| (4,965 | ) | |
| (2,463 | ) |
Total Other Income | |
| 188,920 | | |
| 180,204 | |
| |
| | | |
| | |
Loss from operations before income taxes | |
| (621,836 | ) | |
| (321,969 | ) |
| |
| | | |
| | |
Provision for income taxes | |
| 18,465 | | |
| 5,837 | |
| |
| | | |
| | |
Net loss | |
| (640,301 | ) | |
| (327,806 | ) |
| |
| | | |
| | |
Other comprehensive loss | |
| | | |
| | |
Foreign currency translation | |
| (430,459 | ) | |
| (494,802 | ) |
| |
| | | |
| | |
Comprehensive loss | |
$ | (1,070,760 | ) | |
$ | (822,608 | ) |
| |
| | | |
| | |
Net loss per share | |
| | | |
| | |
Basic and Diluted: | |
$ | (0.081 | ) | |
$ | (0.043 | ) |
| |
| | | |
| | |
Weighted average number of shares
used in computing basic and diluted net (loss) per share: | |
| | | |
| | |
| |
| | | |
| | |
Basic | |
| 7,927,284 | | |
| 7,671,632 | |
Diluted | |
| 7,927,284 | | |
| 7,671,632 | |
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements
SOURCE
FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
| |
Common Stock | | |
Preferred Stock | | |
Additional | | |
Comprehensive | | |
Accumulated | | |
Stockholders' | |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Paid in Capital | | |
Loss | | |
Deficit | | |
Equity | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Balance June 30, 2015 | |
| 7,671,632 | | |
| 7,672 | | |
| 5,000 | | |
| 50 | | |
| 15,170,976 | | |
| (2,115,049 | ) | |
| (8,636,010 | ) | |
| 4,427,639 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance of stock options | |
| - | | |
| - | | |
| - | | |
| - | | |
| 25,246 | | |
| - | | |
| - | | |
| 25,246 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock-based compensation | |
| 1,120,000 | | |
| 1,120 | | |
| - | | |
| - | | |
| 446,880 | | |
| - | | |
| - | | |
| 448,000 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss for the three months ended September 30,
2015 | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (430,459 | ) | |
| (640,301 | ) | |
| (1,070,760 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance September 30, 2015 | |
| 8,791,632 | | |
$ | 8,792 | | |
| 5,000 | | |
$ | 50 | | |
$ | 15,643,102 | | |
$ | (2,545,508 | ) | |
$ | (9,276,311 | ) | |
$ | 3,830,125 | |
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)
| |
Three months ended | |
| |
September 30, 2015 | | |
September 30, 2014 | |
| |
| | |
| |
| |
| | |
| |
Net loss | |
$ | (640,301 | ) | |
$ | (327,806 | ) |
| |
| | | |
| | |
Adjustments to reconcile net loss to net cash (used in) operating activities | |
| | | |
| | |
Depreciation and amortization | |
| 160,593 | | |
| 197,872 | |
Subordinated notes costs amortization | |
| 36,237 | | |
| - | |
Stock options issued for compensation | |
| 25,246 | | |
| 37,869 | |
Stock-based compensation | |
| 448,000 | | |
| - | |
Gain on equity method investment | |
| (36,479 | ) | |
| - | |
| |
| | | |
| | |
(Increase) decrease in assets: | |
| | | |
| | |
Trade receivables, net | |
| (6,696,447 | ) | |
| 2,150,114 | |
Inventories | |
| 34,849 | | |
| (3,857 | ) |
Deferred tax asset | |
| 18,464 | | |
| 5,906 | |
Financing receivables | |
| (30,104 | ) | |
| - | |
Other assets | |
| (67,477 | ) | |
| (116,014 | ) |
(Decrease) increase in current liabilities: | |
| | | |
| | |
Trade payables | |
| (975,258 | ) | |
| (2,774,288 | ) |
Net cash used in operating activities | |
| (7,722,677 | ) | |
| (830,204 | ) |
| |
| | | |
| | |
Cash flows from investing activities | |
| | | |
| | |
Purchase of property, plant and equipment | |
| (11,284 | ) | |
| (1,497 | ) |
Development of intangible assets | |
| (94,921 | ) | |
| (183,553 | ) |
Net cash used in investing activities | |
| (106,205 | ) | |
| (185,050 | ) |
| |
| | | |
| | |
Cash flows from financing activities | |
| | | |
| | |
Wholesale loan facility, net | |
| 7,395,791 | | |
| (2,645,463 | ) |
Capital Reserve | |
| 261,288 | | |
| 501,649 | |
Net cash provided by (used in) financing activities | |
| 7,657,079 | | |
| (2,143,814 | ) |
| |
| | | |
| | |
Effect of exchange rate changes on cash and cash equivalents | |
| (698,605 | ) | |
| (589,911 | ) |
Net decrease in cash and cash equivalents | |
| (870,408 | ) | |
| (3,748,979 | ) |
Cash and cash equivalents at beginning of period | |
| 8,075,078 | | |
| 10,730,743 | |
Cash and cash equivalents at the end of the period | |
$ | 7,204,670 | | |
$ | 6,981,764 | |
| |
| | | |
| | |
Supplemental disclosures | |
| | | |
| | |
Cash paid during the period for: | |
| | | |
| | |
Income tax payments | |
$ | - | | |
$ | - | |
Interest payments | |
$ | 538,371 | | |
$ | 457,756 | |
| |
| | | |
| | |
Supplemental schedule of non-cash financing activities: | |
| | | |
| | |
Issuance of stock-based compensation | |
$ | 448,000 | | |
$ | - | |
Issuance of stock options | |
$ | 25,246 | | |
$ | 37,869 | |
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 Form 10-K for the fiscal year ended June 30, 2015. 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, 2015 included in the Company’s Annual Report on Form 10-K 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 months ended September 30, 2015 are not
necessarily indicative of the results that may be expected for the year ending June 30, 2016.
When
used in these notes, the terms "Company," "we," "our," or "us" mean Source Financial,
Inc. and its subsidiaries.
Note
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
The
consolidated financial statements include the accounts of Source Financial, Inc. (“Source”) and its wholly owned subsidiaries
Moneytech Limited (“Moneytech”), Moneytech Finance Pty Ltd, mPayments Pty Ltd., Moneytech POS Pty Ltd., Moneytech
Services Pty Ltd and Moneytech USA, 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 months ended September 30, 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, stockholders’ 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 uses the asset and liability method to account for income taxes as prescribed by Accounting Standards Codification (“ASC”)
740, Income Taxes. Deferred tax assets and liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences
reverse. Deferred tax expense (benefit) is the result of changes in deferred tax assets and liabilities. Deferred
income tax assets and liabilities are adjusted to recognize the effects of changes in tax laws or enacted tax rates in the period
during which they are signed into law.
The
Company may recognize the tax benefit from an uncertain tax position claimed on a tax return only if it is more likely than not
that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.
The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that
has a greater than 50% likelihood of being realized upon ultimate settlement. The authoritative standards issued by the
Financial Accounting Standards Board (“FASB”) also provide guidance on de-recognition, classification, interest and
penalties on income taxes, accounting in interim periods and requires increased disclosures. The factors used to assess
the likelihood of realization are the Company’s forecast of future taxable income and available tax planning strategies
that could be implemented to realize the net deferred tax assets. Under ASC 740, Income Taxes, a valuation allowance
is required when it is more likely than not that all or some portion of the deferred tax assets will not be realized through generating
sufficient future taxable income. Failure to achieve forecasted taxable income in applicable tax jurisdictions could affect
the ultimate realization of deferred tax assets and could result in an increase in the Company’s effective tax rate on future
earnings.
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
Loss
contingencies, including litigation related contingencies, are included in the Consolidated Statements of Operations when the
Company concludes that a loss is both probable and reasonably estimable. Legal fees related to litigation-related matters
are expensed as incurred and included in the Consolidated Statements of Operations under the Selling, general and administrative
line item. No amount for loss was recorded as of September 30, 2015 and 2014.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with original maturities less than or equal to three months at the date of purchase
to be cash and cash equivalents. Cash and cash equivalents are stated at cost, which approximates fair value, and consist
of bank deposits and certificates of deposit that are readily convertible into cash. The Company maintains its cash deposits
and cash equivalents at well-known, stable financial institutions in Australia and not covered by insurance.
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 10) and Subordinated Notes (see Note 12), 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 September 30, 2015 and June 30, 2015 the Company had no insurance claim
receivables.
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 September 30, 2015 and
June 30, 2015, 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 September 30, 2015 and June 30, 2015, Property, Plant & Equipment consisted of the following:
| |
September 30 | | |
June 30 | |
| |
2015 | | |
2015 | |
Office equipment | |
$ | 27,593 | | |
$ | 30,230 | |
Furniture and fixtures | |
| 176,913 | | |
| 193,822 | |
Terminals | |
| 41,515 | | |
| 45,483 | |
Computers and software | |
| 1,085,448 | | |
| 1,177,253 | |
Accumulated Depreciation | |
| (1,049,042 | ) | |
| (1,119,889 | ) |
| |
$ | 282,427 | | |
$ | 326,899 | |
For
the three months ended September 30, 2015 and 2014, depreciation expense consisted of the following:
| |
Three months ended | |
| |
September 30 | |
| |
2015 | | |
2014 | |
Depreciation, cost of revenue | |
$ | 22,305 | | |
$ | 29,130 | |
Depreciation, operating | |
| 8,055 | | |
| 18,430 | |
Total depreciation expense | |
$ | 30,360 | | |
$ | 47,560 | |
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 September 30, 2015 and June 30, 2015, 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 months ended September 30, 2015
and 2014:
| |
Three months ended | |
| |
September 30 | | |
September 30 | |
| |
2015 | | |
2014 | |
| |
| | |
| |
Net loss | |
$ | (640,301 | ) | |
$ | (327,806 | ) |
| |
| | | |
| | |
Weighted average number of shares used in computing basic and diluted net loss per share: | |
| | | |
| | |
Basic | |
| 7,927,284 | | |
| 7,671,632 | |
Dilutive effect of stock options | |
| - | | |
| - | |
Diluted | |
| 7,927,284 | | |
| 7,671,632 | |
| |
| | | |
| | |
Net loss per share | |
| | | |
| | |
Basic and diluted: | |
$ | (0.081 | ) | |
$ | (0.043 | ) |
Options
to purchase up to 143,650 and 120,737 shares of common stock were anti-dilutive during the three months ended September 30, 2015
and 2014 respectively.
Goodwill
Goodwill,
which represents the excess of purchase price over the fair value of net assets acquired, is carried at cost. Goodwill is tested
for impairment on an annual basis during the fourth quarter of each fiscal year or more frequently if events or changes in circumstances
indicate that the asset might be impaired. The Company first performs a qualitative assessment to determine if the quantitative
impairment test is required. If changes in circumstances indicate an asset may be impaired, the Company performs the quantitative
impairment test. In accordance with accounting standards, a two-step quantitative method is used for determining goodwill
impairment. In the first step, we determine the fair value of our reporting unit (generic pharmaceuticals). If the
net book value of our reporting unit exceeds its fair value, we would then perform the second step of the impairment test which
requires allocation of our reporting unit’s fair value to all of its assets and liabilities using the acquisition method
prescribed under authoritative guidance for business combinations. Any residual fair value is allocated to goodwill. An impairment
charge is recognized only if the implied fair value of our reporting unit’s goodwill is less than its carrying amount.
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 September 30, 2015.
Stock-Based
Compensation
Stock-based
compensation costs are recognized over the vesting period, using a straight-line method, based on the fair value of the instrument
on the date of grant less an estimate for expected forfeitures. The Company uses the Black-Scholes valuation model to determine
the fair value of stock options and the stock price on the grant date to value restricted stock. The Black-Scholes valuation
model includes various assumptions, including the expected volatility, the expected life of the award, dividend yield, and the
risk-free interest rate. These assumptions involve inherent uncertainties based on market conditions which are generally
outside the Company’s control. Changes in these assumptions could have a material impact on share-based compensation
costs recognized in the financial statements.
Recently
Issued Accounting Pronouncements
There
have been no new accounting pronouncements during the three months ended September 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
3 – 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 September 30, 2015 and June 30, 2015, trade receivables consist of the following:
| |
September 30 | | |
June 30 | |
| |
2015 | | |
2015 | |
Trade receivables | |
$ | 24,927,321 | | |
$ | 20,231,293 | |
Allowance for bad debt | |
| (522,787 | ) | |
| (580,025 | ) |
Total trade receivables, net | |
$ | 24,404,534 | | |
$ | 19,651,268 | |
AGE ANALYSIS OF PAST DUE TRADE RECEIVABLES | |
September 30 | | |
June 30 | |
| |
2015 | | |
2015 | |
| |
| | |
| |
1 - 30 Days Past Due | |
$ | 708,025 | | |
$ | 665,728 | |
31 - 60 Days Past Due | |
| 424,681 | | |
| 86,328 | |
Greater than 60 Days Past Due | |
| 1,360,039 | | |
| 916,106 | |
Total Past Due | |
| 2,492,745 | | |
| 1,668,162 | |
Current | |
| 22,434,576 | | |
| 18,563,131 | |
Total Trade Receivables | |
$ | 24,927,321 | | |
$ | 20,231,293 | |
Recorded Investment > 60 Days and accruing | |
$ | 703,960 | | |
$ | 268,375 | |
ALLOWANCE FOR DOUBTFUL DEBTS | |
Three months
ended | | |
Three months ended | |
| |
September 30
| | |
September 30
| |
| |
2015 | | |
2014 | |
| |
| | |
| |
Allowance for doubtful debts | |
| | |
| |
Beginning balance | |
$ | 580,025 | | |
| 711,437 | |
Charge-offs | |
| (14,213 | ) | |
| (4,571 | ) |
Recoveries | |
| - | | |
| - | |
Provision | |
| 7,341 | | |
| 87,355 | |
Other comprehensive income (fx differences) | |
| (50,366 | ) | |
| (54,932 | ) |
Ending balance | |
$ | 522,787 | | |
$ | 739,289 | |
| |
| | | |
| | |
Ending balance - individually evaluated for impairment | |
$ | 489,135 | | |
$ | 710,109 | |
Ending balance - collectively evaluated for impairment | |
$ | 33,652 | | |
$ | 29,180 | |
Reconciliation
to bad debts expense in the Statement of Operations
Provision | |
$ | 7,341 | | |
$ | 87,355 | |
Other bad debt expenses / credits not reflected in provision | |
| 2,903 | | |
| (1,730 | ) |
Bad debts expense per Statement of Operations | |
$ | 10,244 | | |
$ | 85,625 | |
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 | |
September 30 | | |
June 30 | |
| |
2015 | | |
2015 | |
| |
| | |
| |
Ending balance | |
$ | 24,927,321 | | |
$ | 20,231,293 | |
Ending balance -
individually evaluated for impairment | |
$ | 548,562 | | |
$ | 639,279 | |
Ending balance -
collectively evaluated for impairment | |
$ | 24,378,759 | | |
$ | 19,592,014 | |
TRADE RECEIVABLES ON A NON ACCRUAL BASIS | |
September 30 | | |
June 30 | |
| |
2015 | | |
2015 | |
| |
| | |
| |
Trade receivables | |
$ | 548,562 | | |
$ | 639,279 | |
Total Financing Receivables | |
$ | 548,562 | | |
$ | 639,279 | |
IMPAIRED LOANS | |
September 30, 2015 | |
| |
Recorded Investment | | |
Unpaid principal balance | | |
Related allowance | | |
Average recorded investment | | |
Interest
income recognised | |
| |
| | |
| | |
| | |
| | |
| |
With no allowance recorded | |
| | |
| | |
| | |
| | |
| |
Trade receivables | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
| |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
With an allowance recorded | |
| | | |
| | | |
| | | |
| | | |
| | |
Trade receivables | |
$ | 548,562 | | |
$ | 361,127 | | |
$ | 497,372 | | |
$ | 545,360 | | |
$ | - | |
| |
$ | 548,562 | | |
$ | 361,127 | | |
$ | 497,372 | | |
$ | 545,360 | | |
$ | - | |
Total | |
| | | |
| | | |
| | | |
| | | |
| | |
Trade receivables | |
$ | 548,562 | | |
$ | 361,127 | | |
$ | 497,372 | | |
$ | 545,360 | | |
$ | - | |
| |
$ | 548,562 | | |
$ | 361,127 | | |
$ | 497,372 | | |
$ | 545,360 | | |
$ | - | |
IMPAIRED LOANS | |
June 30, 2015 | |
| |
Recorded Investment | | |
Unpaid principal balance | | |
Related allowance | | |
Average recorded investment | | |
Interest income recognised | |
| |
| | |
| | |
| | |
| | |
| |
With no allowance recorded | |
| | |
| | |
| | |
| | |
| |
Trade receivables | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
| |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
With an allowance recorded | |
| | | |
| | | |
| | | |
| | | |
| | |
Trade receivables | |
$ | 639,279 | | |
$ | 441,661 | | |
$ | 552,180 | | |
$ | 756,900 | | |
$ | 8,478 | |
| |
$ | 879,969 | | |
$ | 441,661 | | |
$ | 552,180 | | |
$ | 756,900 | | |
$ | 8,478 | |
Total | |
| | | |
| | | |
| | | |
| | | |
| | |
Trade receivables | |
$ | 879,969 | | |
$ | 441,661 | | |
$ | 552,180 | | |
$ | 756,900 | | |
$ | 8,478 | |
| |
$ | 879,969 | | |
$ | 441,661 | | |
$ | 552,180 | | |
$ | 756,900 | | |
$ | 8,478 | |
Note
4 – TERMINAL FINANCING RECEIVABLES, NET
The
Company, as lessor, entered into terminal lease agreements, which were recorded as sales type leases, during the three months
ended September 30, 2015. The following are balances due as of September 30, 2015 and June 30, 2015. The leases require monthly
payments, have a term of 30 months and bear interest at an effective rate of 12.49% per annum.
| |
September 30 | | |
June 30 | |
| |
2015 | | |
2015 | |
Current | |
$ | 123,778 | | |
$ | 111,364 | |
Non-current | |
| 164,002 | | |
| 172,068 | |
| |
$ | 287,780 | | |
$ | 283,432 | |
Terminal financing receivables repayments schedule. | |
| |
| |
| |
Years ending: | |
| |
September 30, 2016 | |
$ | 123,778 | |
September 30, 2017 | |
| 139,238 | |
September 30, 2018 | |
| 24,764 | |
| |
$ | 287,780 | |
Note
5 – INVENTORY
Inventory
consists of the following as of September 30, 2015 and June 30, 2015:
| |
September 30 | | |
June 30 | |
| |
2015 | | |
2015 | |
Terminals | |
$ | 100,558 | | |
$ | 146,650 | |
Prepaid gift cards or other | |
| 9,218 | | |
| 10,494 | |
| |
$ | 109,776 | | |
$ | 157,144 | |
Note
6 – OTHER ASSETS
Other
assets consist of the following as of September 30, 2015 and June 30, 2015:
| |
September 30 | | |
June 30 | |
| |
2015 | | |
2015 | |
Research & development grant receivable | |
$ | 622,511 | | |
$ | 555,289 | |
Prepayment | |
| 32,711 | | |
| 53,561 | |
Other assets | |
| 126,854 | | |
| 171,001 | |
| |
$ | 782,076 | | |
$ | 779,851 | |
Note
7 – INTANGIBLE ASSETS
Intangible
assets consist of the following as of September 30, 2015 and June 30, 2015:
| |
September 30 | | |
June 30 | |
| |
2015 | | |
2015 | |
Moneytech and mPayments software | |
$ | 5,453,395 | | |
$ | 5,874,178 | |
Accumulated amortization | |
| (2,829,957 | ) | |
| (2,959,925 | ) |
| |
$ | 2,623,438 | | |
$ | 2,914,253 | |
The
intangible assets are amortized over 10-12 years. Amortization expense of $130,233 and $150,312 was included in cost of revenues
for the three months ended September 30, 2015 and 2014, respectively.
Amortization
for the Company’s intangible assets over the next five fiscal years from September 30, 2015 is estimated to be:
Years ending September 30, | |
| |
2016 | |
$ | 506,411 | |
2017 | |
| 506,411 | |
2018 | |
| 506,411 | |
2019 | |
| 506,411 | |
2020 | |
| 506,411 | |
Thereafter | |
| 91,383 | |
Total | |
$ | 2,623,438 | |
Note
8 – GOODWILL
As
of September 30, 2015 and June 30, 2015, the Goodwill was comprised of the following:
| |
September 30 | | |
June 30 | |
| |
2015 | | |
2015 | |
Acquisition cost of Moneytech POS Pty Ltd. | |
$ | 75,358 | | |
$ | 82,560 | |
Fixed assets received | |
| (41,982 | ) | |
| (45,994 | ) |
Liability assumed | |
| 19,629 | | |
| 21,505 | |
Acquisition cost assigned to goodwill | |
$ | 53,005 | | |
$ | 58,071 | |
Note
9 – TRADE AND OTHER PAYABLES
As
of September 30, 2015 and June 30, 2015, trade and other payables consist of the following:
| |
September 30 | | |
June 30 | |
| |
2015 | | |
2015 | |
Trade payables | |
$ | 767,387 | | |
$ | 1,923,404 | |
Accrued consulting costs | |
| 561,073 | | |
| 561,073 | |
Employee benefits | |
| 240,287 | | |
| 245,159 | |
Other liabilities | |
| 386,802 | | |
| 384,549 | |
Total payables | |
$ | 1,955,549 | | |
$ | 3,114,185 | |
Note
10 – LINE OF CREDIT AND CASH RESERVE LIABILITIES
| |
September 30 | | |
June 30 | |
| |
2015 | | |
2015 | |
Wholesale loan facility | |
$ | 12,667,828 | | |
$ | 6,052,789 | |
Cash reserve from customers | |
| 1,400,598 | | |
| 1,257,984 | |
| |
$ | 14,068,426 | | |
$ | 7,310,773 | |
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$25 million as of September 30, 2015 and June 30, 2015. 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 three months ended September 30, 2015 and 2014 was USD
$167,498 and USD $457,756 respectively.
On
April 10, 2015 the Company issued AUD $25 million of subordinated notes. Subsequent to the issue of the subordinated notes, as
of April 16, 2015, the RPA interim, agreed upon, facility limit was decreased from AUD $40 million to AUD $25 million.
Cash
reserve from customers
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
11 – SHAREHOLDER’S LOAN
| |
September 30 | | |
June 30 | |
| |
2015 | | |
2015 | |
Shareholder's loan | |
$ | 35,043 | | |
$ | 38,392 | |
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
12 – SUBORDINATED NOTES, NET
| |
September 30 | | |
June 30 | |
| |
2015 | | |
2015 | |
Subordinated notes issued | |
$ | 17,525,000 | | |
$ | 19,200,000 | |
Issuance costs | |
| (699,972 | ) | |
| (766,873 | ) |
Subordinated notes, net proceeds | |
$ | 16,825,028 | | |
$ | 18,433,127 | |
Issuance costs amortised | |
| 69,998 | | |
| 38,344 | |
Subordinated notes, net | |
$ | 16,895,026 | | |
$ | 18,471,471 | |
In
April 2015 the Company issued AUD $25 million of subordinated notes. 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 notes issuance were AUD $998,533 and the proceeds to the company were AUD $24,001,467. 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.
| |
Three months ended | |
| |
September 30 | |
| |
2015 | | |
2014 | |
Issuance costs amortized during the year | |
$ | 36,237 | | |
$ | - | |
Interest paid during the year | |
| 334,636 | | |
| - | |
Reported as Interest expense in cost of revenue | |
$ | 370,873 | | |
$ | - | |
Interest
expense charged to cost of revenue related to the notes for the three months ended September 30, 2015 was $370,873.
Note
13 – STOCKHOLDERS’ EQUITY
Preferred
Stock
The
Company has 10,000 shares of Preferred Stock authorized, each having a par value of $0.01. Of the 10,000 shares, 5,000 were designated
Series B Preferred Stock of which 5,000 shares were issued and outstanding as of September 30, 2015 and June 30, 2015 (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 had 12,000,000 shares and 50,000,000 shares of Common Stock authorized, each having a par value of $0.001, as of September
30, 2015 and June 30, 2015 after giving effect to the change in authorized shares discussed below. All authorized shares have
been retroactively restated for the reduction in both periods presented. There were 8,791,632 and 7,671,632 shares issued and
outstanding as of September 30, 2015 and June 30, 2015.
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 Separation agreement.
On
February 11, 2014, 100,000 of the shares returned in the Separation Agreement were issued to a note holder.
On
July 16, 2015 the number of authorized shares of common stock was reduced from 50,000,000 to 12,000,000 shares and the number
of authorized shares of preferred stock was reduced from 1,000,000 to 10,000 shares.
On
September 9, 2015 the Board of Directors awarded an Officer 960,000 and a Director 160,000 restricted shares at a fair value of
$0.40 per share.
Note
14 – STOCK COMPENSATION
Restricted
shares
On
September 9, 2015 the Board of Directors awarded an Officer 960,000 and a Director 160,000 restricted shares at a fair value of
$0.40 per share or $448,000. The restricted shares were awarded for services rendered.
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 June 30, 2015, 14,500 of the Performance Based Stock Options are
vested. 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. In May 2015, a non-employee director resigned.
At that time, 41,660 options were vested. The vested options were not exercised within the three month period of his resignation
and those options were forfeited.
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 became 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.
On
September 9, 2015, the Company granted 75,000 Stock Options to each of the two non-employee directors pursuant to the Omnibus
Incentive Plan. These Stock Options are exercisable at an exercise price of $0.40 per share. The options vest as to 6,250 shares
per non-employee director on October 31, 2015, and as to an additional 6,250 shares each on the last day of each calendar month
thereafter through and including September 30, 2016. The options become exercisable for the first time on March 9, 2016, to the
extent vested, and continue in force through September 9, 2025 (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 94%, risk free interest rate of 1.91%, dividend yield of 0% and forfeiture rate of 10%. The grant
date Fair Value of options was $38,892.
On
September 9, 2015, the Company granted 1,000,000 Stock Options to Hugh Evans pursuant to the Omnibus Incentive Plan. These Stock
Options are exercisable at an exercise price of $0.44 per share. The options vest as to 41,640 shares on October 31, 2015, and
as to an additional 41,640 shares each on the last day of each calendar month thereafter through and including May 31, 2016 and
as to an additional 41,680 shares on the last day of each calendar month thereafter through and including September 30, 2017.
The options become exercisable for the first time on March 9, 2016, to the extent vested, and continue in force through September
9, 2025 (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 94%, risk free interest rate
of 1.91%, dividend yield of 0% and forfeiture rate of 10%. The grant date Fair Value of options was $256,066.
On
September 9, 2015, the Company granted 1,075,000 Stock Options to employees pursuant to the Omnibus Incentive Plan. These Stock
Options are exercisable at an exercise price of $0.40 per share. The options vest as to 44,771 shares on October 31, 2015, and
as to an additional 44,771 shares each on the last day of each calendar month thereafter through and including May 31, 2016 and
as to an additional 44,802 shares on the last day of each calendar month thereafter through and including September 30, 2017.
The options become exercisable for the first time on March 9, 2016, to the extent vested, and continue in force through September
9, 2025 (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 94%, risk free interest rate
of 1.91%, dividend yield of 0% and forfeiture rate of 10%. The grant date Fair Value of options was $278,724.
The
Company recorded $25,246 and $37,869 option expense in the three months ended September 30, 2015 and 2014, respectively.
The
following is a summary of the activity in the three months ended September 30, 2015 and 2014.
| |
Three
months ended | |
| |
September 30 | | |
September 30 | |
| |
2015 | | |
2014 | |
Outstanding
at July 1 | |
| 350,000 | | |
| 100,000 | |
Granted | |
| 2,225,000 | | |
| 250,000 | |
Exercised | |
| - | | |
| - | |
Expired | |
| - | | |
| - | |
Forfeitures | |
| (75,000 | ) | |
| - | |
Outstanding
at September 30 | |
| 2,500,000 | | |
| 350,000 | |
Exercisable
at September 30 | |
| 143,650 | | |
| 120,737 | |
Options
outstanding at September 30, 2015 and June 30, 2015 are as follows:
| |
| | |
| | |
Weighted | | |
| | |
| | |
| |
| |
| | |
| | |
Average | | |
Weighted | | |
| | |
Weighted | |
| |
| | |
| | |
Remaining | | |
Average | | |
| | |
Average | |
| |
| | |
| | |
Life | | |
Exercise | | |
| | |
Exercise | |
| |
| | |
Options | | |
(Years) | | |
Price | | |
Options | | |
Price | |
As
of | |
Exercise Price | | |
(Outstanding) | | |
(Outstanding) | | |
(Outstanding) | | |
(Exercisable) | | |
(Exercisable) | |
| |
| | |
| | |
| | |
| | |
| | |
| |
September
30, 2015 | |
$ | 0.40 to $2.50 | | |
| 2,500,000 | | |
| 9.48 | | |
$ | 0.54 | | |
| 143,650 | | |
$ | 1.93 | |
June 30,
2015 | |
$ | 1.30 to $2.50
| | |
| 350,000 | | |
| 4.41 | | |
$ | 1.96 | | |
| 172,812 | | |
$ | 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 months ended September 30, 2015 and 2014, the Company paid a company controlled by the President of Moneytech for consulting
services $0 and $73,381, 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 months ended September 30, 2015 and
2014:
INCOME TAX EXPENSE | |
Three months ended | | |
Three months ended | | |
Three months ended | |
| |
September
30 | | |
September
30 | | |
September
30 | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | | |
2015 | | |
2014 | |
| |
Australia | | |
United States | | |
Total | |
Income tax expense
- current | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
Income
tax expense - deferred | |
| 18,465 | | |
| 5,837 | | |
| - | | |
| - | | |
| 18,465 | | |
| 5,837 | |
Total | |
$ | 18,465 | | |
$ | 5,837 | | |
$ | - | | |
$ | - | | |
$ | 18,465 | | |
$ | 5,837 | |
The
following are the components of income before income tax reflected in the Statement of Operations for the three months ended September
30, 2015 and 2014:
COMPONENTS OF INCOME BEFORE INCOME TAX | |
Three months ended | | |
Three months ended | | |
Three months ended | |
| |
September
30 | | |
September
30 | | |
September
30 | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | | |
2015 | | |
2014 | |
| |
Australia | | |
United
States | | |
Total | |
Loss
before Income tax | |
$ | (87,014 | ) | |
$ | (109,441 | ) | |
$ | (534,822 | ) | |
$ | (212,528 | ) | |
$ | (621,836 | ) | |
$ | (321,969 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Income tax | |
$ | 18,465 | | |
$ | 5,837 | | |
$ | - | | |
$ | - | | |
$ | 18,465 | | |
$ | 5,837 | |
Effective tax rate | |
| (21 | )% | |
| (5 | )% | |
| - | % | |
| - | % | |
| (3 | )% | |
| (2 | )% |
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 months ended September 30, 2015 and 2014:
INCOME TAX RATE RECONCILIATION | |
Three months ended | | |
Three months ended | | |
Three months ended | |
| |
September
30 | | |
September
30 | | |
September
30 | |
| |
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 | |
| 41 | % | |
| 42 | % | |
| - | % | |
| - | % | |
| 6 | % | |
| 14 | % |
Research and development
grant eligible expenditure | |
| (60 | )% | |
| (36 | )% | |
| - | % | |
| - | % | |
| (8 | )% | |
| (12 | )% |
Research and development
grant eligible amortisation | |
| (44 | )% | |
| (34 | )% | |
| - | % | |
| - | % | |
| (4 | )% | |
| (14 | )% |
USA losses | |
| - | % | |
| - | % | |
| (30 | )% | |
| (30 | )% | |
| (27 | )% | |
| (20 | )% |
Other | |
| 12 | % | |
| - | % | |
| - | % | |
| - | % | |
| - | % | |
| - | % |
Tax
expenses at actual rate | |
| (21 | )% | |
| 2 | % | |
| - | % | |
| - | % | |
| (3 | )% | |
| (2 | )% |
The
following are the components of deferred tax reflected in the Statement of Operations for the three months ended September 30,
2015 and 2014:
COMPONENTS OF DEFERRED TAX EXPENSE | |
Three months ended | | |
Three months ended | | |
Three months ended | |
| |
September
30 | | |
September
30 | | |
September
30 | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | | |
2015 | | |
2014 | |
| |
Australia | | |
United States | | |
Total | |
Tax
losses carried forward | |
$ | 19,328 | | |
$ | 37,702 | | |
$ | - | | |
$ | - | | |
$ | 19,328 | | |
$ | 37,702 | |
Doubtful debts
reserve | |
| 7,453 | | |
| (13,824 | ) | |
| - | | |
| - | | |
| 7,453 | | |
| (13,824 | ) |
Accruals | |
| (8,316 | ) | |
| (18,041 | ) | |
| - | | |
| - | | |
| (8,316 | ) | |
| (18,041 | ) |
| |
$ | 18,465 | | |
$ | 5,837 | | |
$ | - | | |
$ | - | | |
$ | 18,465 | | |
$ | 5,837 | |
The
following are the components of deferred tax reflected in the Balance Sheet As of September 30, 2015 and June 30, 2015:
COMPONENTS
OF DEFERRED TAX ASSET | |
September 30 | | |
June
30 | | |
September
30 | | |
June
30 | | |
September 30 | | |
June
30 | |
| |
2015 | | |
2015 | | |
2015 | | |
2015 | | |
2015 | | |
2015 | |
| |
Australia | | |
United States | | |
Total | |
Tax
losses carried forward | |
$ | 782,936 | | |
$ | 875,244 | | |
$ | - | | |
$ | - | | |
$ | 782,936 | | |
$ | 875,244 | |
Doubtful debts
reserve | |
| 151,877 | | |
| 174,008 | | |
| - | | |
| - | | |
| 151,877 | | |
| 174,008 | |
Accruals | |
| 65,797 | | |
| 66,587 | | |
| - | | |
| - | | |
| 65,797 | | |
| 66,587 | |
| |
$ | 1,000,609 | | |
$ | 1,115,839 | | |
$ | - | | |
$ | - | | |
$ | 1,000,609 | | |
$ | 1,115,839 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Deferred tax assets
- current | |
$ | 210,300 | | |
$ | 230,400 | | |
$ | - | | |
$ | - | | |
$ | 210,300 | | |
$ | 230,400 | |
Deferred
tax assets - non current | |
| 790,309 | | |
| 885,439 | | |
| - | | |
| - | | |
| 790,309 | | |
| 885,439 | |
| |
$ | 1,000,609 | | |
$ | 1,115,839 | | |
$ | - | | |
$ | - | | |
$ | 1,000,609 | | |
$ | 1,115,839 | |
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 estimates the
Company are using to manage the underlying businesses. In evaluating the objective evidence that historical results provide, the
Company considers three years of cumulative operating income (loss).
As
of September 30, 2015, Moneytech had approximately $2,609,785 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 September 30, 2015, Source had federal NOL’s of approximately $15.4 million dollars to offset future taxable income in
the US. Federal NOLs can generally be carried forward 20 years. However, for changes in ownership like the merger, Internal Revenue
Code section 382 places limitations on the utilization of federal NOL’s generated prior to the change in ownership. As of
September 30, 2015 Source had Federal NOL’s of approximately $13 million that were generated prior to the merger and Source
may only use approximately $161,500 per year of these NOL’s. As of September 30, 2015 Federal NOL’s of approximately
$2,381,237 had been generated subsequent to the merger and are not subject to the Internal Revenue Code section 382 limitation.
The deferred tax assets of the US entities at September 30, 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 – 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 year ended June 30, 2015, 360 was profitable and absorbed its accumulated losses.
The
Company expects this performance to continue and as a result the Company commenced recording 37.5% of the accumulated profits
to date as income in the year ended June 30, 2015. A gain on equity method investment of $36,479 has been reported in the Statement
of Operations and Comprehensive Loss for the three months ended September 30, 2015. As a result of the current period 360 profits
the Company has recorded an Investment in equity affiliate of $35,854 in the Balance Sheet as at September 30, 2015.
Note
19 – COMMITMENTS
The
Company leases two offices in Australia under renewable operating leases expiring on August 31, 2016 and October 31, 2015.
Our
corporate Australian headquarters are located at Level6/97 Pacific Highway, North Sydney NSW 2060 Australia, where we lease approximately
350 square meters of office and operations space pursuant to lease agreements expiring in August 2016. The annual rent
for the premises is AUD $168,725. During the three months ended we closed our office in on Albany Highway, Victoria
Park, Western Australia and have no lease commitments with regard to these premises as of September 30, 2015.
For
the three months ended September 30, 2015 and 2014, the aggregate rental expense was USD $32,496 and USD $37,558, respectively.
Future
minimum rental payments required under operating leases as of September 30, 2015 are as follows:
Year ended |
September 30, 2016 |
$107,256 |
|
Note
20 – SUBSEQUENT EVENTS
Management
has evaluated events subsequent through November 12, 2015 for transactions and other events that may require adjustment of and/or
disclosure in such financial statements. We have nothing to report in this regard.
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,
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 Limited and its subsidiaries, Moneytech POS Pty Ltd
and mPayments Pty Ltd with a focus on utilizing leading edge technology to deliver these services.
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 April, 2015 issuance by the Company of AUD $25 million of its subordinated debt securities. Moneytech Limited has been in
operation for over twelve years and has operated profitably in five of the last six years.
The
Company issued AUD $25 million of debt securities in a private placement completed in Australia in April 2015. The notes 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 costs of the Subordinated Note issuance were AUD $998,533 million and the proceeds to the company were AUD
$24,001,467 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.
Moneytech
uses the proceeds of the Wholesale Facility and the Subordinated Notes to offer asset based, trade finance or
accounts receivable finance and working capital solutions to small and medium enterprises (“SME’s”)
throughout Australia.
The
advantages to the Company of the issuance of the Subordinated Notes include removing reliance on a single source of funding with
the uncertainty of an annual renewal event and the removal of delays associated with wholesale facility approval requirements
for new customers. Credit insurance is required and obtained on the same terms as the existing wholesale facility.
The
funding provided by the Subordinated Notes provides the Company with the ability to identify and underwrite new customers according
to the Companies’ existing policies. The proceeds will allow the Company to expand 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, and individuals in Australia. 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 and from the issuance of its Subordinated Notes. 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.
Principal
factors affecting result of 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 Subordinated Notes, and continually monitor the
components of our yield and our cost of funds. In addition, we monitor external
rate trends, including the Reserve Bank of Australia cash rate. |
| ● | Net
bad debt losses - Other than our cost of funds- interest expense and related fees- the
largest driver of business profitability is the minimization of bad debts. Each
asset based line of credit is priced based on an industry and individual customer risk
profile developed by us. Delinquencies negatively impact our business performance. Our
profitability is directly connected to our net credit losses; therefore, we closely analyze
credit performance and seek to limit our exposure when feasible through the purchase
of credit insurance. Our target customer is a business that has financing requirements
(in terms of size and time to funding) that make them 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 amounts 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, stockholders’ 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 months ended September 30, 2015 (“Q1 2016”) and 2014 (“Q1 2015”)
respectively. This discussion should be read in conjunction with the consolidated financial statements and notes thereto
contained elsewhere in this report.
First
quarter fiscal 2016 v first quarter fiscal 2015
Set
forth below are certain items from our operating statements in our presentation currency, United Stated Dollars (“US$”),
for the three months ended September 30, 2015 and 2014:
| |
For the three months ended | | |
$ | | |
% | |
| |
September 30 | | |
Increase | | |
Increase | |
| |
2015 | | |
2014 | | |
(Decrease) | | |
(Decrease) | |
| |
USD | | |
USD | | |
USD | | |
| |
Revenue | |
$ | 1,249,573 | | |
$ | 1,143,170 | | |
$ | 106,403 | | |
| 9 | % |
Confirmed capital and credit express | |
| 1,050,267 | | |
| 1,027,405 | | |
| 22,862 | | |
| 2 | % |
Interest revenue | |
| 530,509 | | |
| 636,817 | | |
| (106,308 | ) | |
| (17 | )% |
Fees | |
| 501,976 | | |
| 388,737 | | |
| 113,239 | | |
| 29 | % |
Other revenue | |
| 17,782 | | |
| 1,851 | | |
| 15,931 | | |
| 861 | % |
Payment services | |
| 175,512 | | |
| 96,120 | | |
| 79,392 | | |
| 83 | % |
Terminal sales and transactions | |
| 135,114 | | |
| 19,195 | | |
| 115,919 | | |
| 604 | % |
Hubbed | |
| 31,773 | | |
| 56,451 | | |
| (24,678 | ) | |
| (44 | )% |
Giftcard program revenue | |
| 8,625 | | |
| 20,474 | | |
| (11,849 | ) | |
| (58 | )% |
Other revenue | |
| 23,794 | | |
| 19,645 | | |
| 4,149 | | |
| 21 | % |
360FX customer referral | |
| 23,269 | | |
| 18,846 | | |
| 4,423 | | |
| 23 | % |
Foreign exchange | |
| 525 | | |
| 530 | | |
| (5 | ) | |
| (1 | )% |
Other revenue | |
| - | | |
| 269 | | |
| (269 | ) | |
| (100 | )% |
Cost of revenue | |
| 933,315 | | |
| 816,818 | | |
| 116,497 | | |
| 14 | % |
Confirmed capital and credit express | |
| 683,081 | | |
| 605,810 | | |
| 77,271 | | |
| 13 | % |
Interest expense | |
| 538,370 | | |
| 457,756 | | |
| 80,614 | | |
| 18 | % |
Account Issuing Expenses | |
| 75,332 | | |
| 63,909 | | |
| 11,423 | | |
| 18 | % |
Insurance | |
| 58,818 | | |
| 70,147 | | |
| (11,329 | ) | |
| (16 | )% |
Other | |
| 10,561 | | |
| 13,998 | | |
| (3,437 | ) | |
| (25 | )% |
Payment services | |
| 96,511 | | |
| 31,565 | | |
| 64,946 | | |
| 206 | % |
Terminal sales and transactions | |
| 89,340 | | |
| 20,903 | | |
| 68,437 | | |
| 327 | % |
Hubbed | |
| 5,505 | | |
| 4,516 | | |
| 989 | | |
| 22 | % |
Gift card expenses | |
| 1,666 | | |
| 6,146 | | |
| (4,480 | ) | |
| (73 | )% |
Depreciation and amortization | |
| 152,539 | | |
| 179,443 | | |
| (26,904 | ) | |
| (15 | )% |
Other cost of revenue | |
| 1,184 | | |
| - | | |
| 1,184 | | |
| - | |
Gross profit | |
| 316,258 | | |
| 326,352 | | |
| (10,094 | ) | |
| (3 | )% |
Operating expenses | |
| 1,127,014 | | |
| 828,525 | | |
| 298,489 | | |
| | |
Compensation expenses | |
| 747,304 | | |
| 337,124 | | |
| 410,180 | | |
| 122 | % |
Research and development expense | |
| 174,217 | | |
| 130,539 | | |
| 43,678 | | |
| 33 | % |
Bad debt expenses | |
| 10,244 | | |
| 85,625 | | |
| (75,381 | ) | |
| (88 | )% |
Bad debts recovered | |
| - | | |
| (17,672 | ) | |
| 17,672 | | |
| (100 | )% |
Professional expenses | |
| 67,702 | | |
| 85,004 | | |
| (17,302 | ) | |
| (20 | )% |
Occupancy expenses | |
| 66,663 | | |
| 62,523 | | |
| 4,140 | | |
| 7 | % |
Depreciation expense | |
| 8,055 | | |
| 18,430 | | |
| (10,375 | ) | |
| (56 | )% |
General and administration expenses | |
| 52,829 | | |
| 126,952 | | |
| (74,123 | ) | |
| (58 | )% |
| |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Loss from operations | |
| (810,756 | ) | |
| (502,173 | ) | |
| (308,583 | ) | |
| 61 | % |
Other income | |
| 188,920 | | |
| 180,204 | | |
| 8,716 | | |
| 5 | % |
Loss before income tax | |
| (621,836 | ) | |
| (321,969 | ) | |
| (299,867 | ) | |
| 93 | % |
Income tax expense | |
| 18,465 | | |
| 5,837 | | |
| 12,628 | | |
| 216 | % |
Net Loss | |
| (640,301 | ) | |
| (327,806 | ) | |
| (312,495 | ) | |
| 95 | % |
Other comprehensive loss | |
| | | |
| | | |
| | | |
| | |
Foreign currency translation | |
| (430,459 | ) | |
| (494,802 | ) | |
| 64,343 | | |
| (13 | )% |
Comprehensive loss | |
$ | (1,070,760 | ) | |
$ | (822,608 | ) | |
$ | (248,152 | ) | |
| 30 | % |
Revenue
Consolidated
revenue from continuing operations for Q1 2016 was approximately $1,249,573, an increase of $106,403 or 9% from our consolidated
revenue from continuing operations for Q1 2015 of $1,143,170. Revenue increased primarily as a result of a $22,862
or 2% increase in Confirmed Capital and Credit Express revenues and an increase in Payment services revenues of $79,392 or 83%.
An increase in Other revenue of $4,149 or 21% accounts for the remainder.
The
increase in Confirmed Capital revenues was attributable to an increase of $113,239 or 29% in Fees and an increase of $15,931 or
861% in Other revenues and was offset by a reduction in interest revenue of $106,308 or 17%. The increase in fee revenue was mainly
attributable to an increase of $129,192 in account application fees as we sought to aggressively expand our client base. The decrease
in interest revenues was mainly attributed to the deterioration of foreign exchange rates and a reduction in the lines of credit
funded. The lines of credit we funded were approximately $42 million during Q1 2016 and $57 million during Q1 2015. The reduction
in lines of credit we funded in Q1 2016 was a direct result of the deterioration of foreign exchange rates and defaulted customers
which had not been replaced.
The
increase in payment services revenue is primarily attributable to an increase in terminal sales and transactions revenues. During
the Q1 2016 we sold or leased 100 new terminals to merchants using our new infrastructure. The terminal sales and transactions
revenue earned from the new infrastructure amounted to $135,114. We anticipate terminal sales will continue in fiscal 2016 as
a result of extending our customer base to a broader retail customer market and marketing the new terminals for the full 2016
fiscal year. This will result in both increased terminal and transaction revenue for Mpos and mPay. We also experienced a decrease
in Hubbed revenues of $24,678 or 44% and a decrease in Gift card revenues of $11,849 or 58%. The decrease in Hubbed revenues is
attributable to the absence of software development revenues of $32,497 following completion of software development activity
in fiscal 2015. The gift cards decrease is primarily attributable to lower card activity by our existing customers in Q1 2016.
Other
revenue increased $4,149 and this is primarily attributable to a 23% increase in foreign exchange customer referral revenues.
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
$933,315 in Q1 2016, an increase of $116,497 or 14% from our cost of revenue of $816,818 for Q1 2015. Costs of revenue
increased 14% primarily as a result of increases in Confirmed Capital and Credit Express costs of 13% or $77,271 and increases
in Payment Services of 206% or $64,946. A decrease of $26,904 in depreciation and amortization costs accounted for the remainder.
The
increase in Confirmed Capital and Credit Express costs is mainly attributable to an increase of 18% or $80,614 in interest expense.
Our interest expense increased year over year as a slight decrease in the volume of credit lines funded year to date
was offset by fee increases attributable to unused facility fees and the increased cost of funding related to the new Subordinated
Notes. The increase in unused facility fee accounted for approximately $11,033 or 14% of the $80,614 increase.
The
Payment Services cost increase of $64,946 is primarily attributable to an increase in costs of the new terminals deployed to Mpos
customers. A slight increase in Hubbed costs of $ $989 and a slight decrease in Gift cards costs of $4,480 was not significant.
Our
gross profit from operations, decreased $10,094 from $326,352 in Q1 2015 to $316,258 in Q1 2016. This was primarily
attributable to net interest margin decreases at Confirmed Capital and Credit Express more than offsetting fee revenue increases
at Confirmed Capital and Credit Express and terminal revenue increases at Payments Services as described above.
Operating
Expenses; Bad Debt Expense; Income from Operations
Apart from the costs under our RPA and Subordinated Notes, the other
significant factor in determining our overall profitability is our operating expenses, in particular our bad debt expense. Our
bad debt expense in Q1 2016 was $10,244, representing a decrease of $75,381 from bad debt expense of $85,625 in Q1 2015. We regularly
evaluate the credit quality of our customers and this decrease is attributable to changes in the assessment of several customer
balances in line with our credit and collections policy.
The
percentage of delinquent balances in our portfolio was 1.50% and 1.88% as of September 30, 2015 and 2014, respectively.
The percentage of delinquent balances in our portfolio averaged 1.87% and 1.65% in Q1 2016 and 2015, respectively. The average
collection period in our portfolio was 45 days at September 30, 2015, down from 47 days at September 30, 2014. Bad debts as a
percentage of amount funded was 0.02% and 0.10% in Q1 2016 and 2015, respectively.
Our
total operating expenses (other than bad debt) increased by $354,198 or 47% from $760,572 in Q1 2015 to $1,116,770 in Q1 2016. This
increase is primarily attributed to compensation costs ($410,180 or 122%) and research and development expense ($43,678 or 33%)
and is offset by a decrease in professional expenses ($17,302 or 20%) and a decrease in general and administration expenses of
($74,123 or 58%). The compensation costs increase reflects stock-based compensation awards amounting to $448,000 for services
rendered by a director and Chairman and our Chief Executive Officer. These costs are not expected to recur in subsequent quarters
of fiscal 2016. The decrease in general and administration expenses is primarily attributable to a decrease in insurance costs
in the quarter of $44,207.
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 and in connection with the
Subordinated Notes, offset by interest income on the cash reserves we are required to maintain under the RPA and the Subordinated
Notes, and research and development grants received from the Australian government. In Q1 2016 we accrued AUD $165,000 (USD $119,757)
for research grants we expect to receive later this year from the Australian government.
Under
the Australian grant program, we are eligible for government grants equal to 43% of the amounts spent on research and development.
Grant processing and payment takes place annually and payment of the grant is not discretionary if the applicable criteria are
met. The company prepares the claim and the expected payment is accrued as income when the grant criteria are met. Much of the
related expense is capitalized and amortized as a part of cost of revenues, generally over the following 10 years.
Our
net loss from operations before tax in Q1 2016 was $621,836, as opposed to a net loss of $321,969 in Q1 2015. As
a result of $18,465 in taxes incurred in Q1 2016, we incurred a net loss after tax in Q1 2016 of $640,301, as compared
to net loss after tax in Q1 2015 of $327,806. No tax benefit has been recognized for the losses incurred in the United
States because management believes it more likely than not that these assets will not be realized in the near future. Operations
in Australia were not profitable as a result of a decrease in net interest margin and the lines of credit funded as well as the
higher overhead associated with operating a listed company.
Other
comprehensive income.
Our
other comprehensive income consists of gains and losses in net asset value that occur when movements in foreign exchange rates
occur. These gains or losses are primarily as a result of changes in the AUD/USD exchange rate. We cannot
and do not attempt to predict movements in these exchange rates. The changes in net asset value occur because our net
assets and operational activity are principally in Australian Dollars. We do not hedge the foreign exchange rate exposure.
If we initiate operations in the United States, the impact of foreign exchange rates on our results of operations will decrease.
The
average AUD/USD exchange rates were 1 to 0.9253 and 1 to 0.7258 in Q1 2015 and Q1 2016, respectively.
The
following table reflects the movements in our revenues and cost of revenues in our functional currency, Australian Dollars (“A$”),
for the three months ended September 30, 2015 and 2014.
| |
For the three months ended | |
A$ | |
% | |
|
% Revenue /
Cost of |
|
| |
September 30 | |
Increase | |
Increase | |
|
revenue |
|
| |
2015 | |
2014 | |
(Decrease) | |
(Decrease) | |
|
move |
|
| |
AUD | |
AUD | |
AUD | |
| |
|
| |
| |
| |
| |
| |
|
Revenue | |
$ | 1,721,649 | | |
$ | 1,235,457 | | |
$ | 486,192 | | |
| 39 | % | |
| 39 | % |
Confirmed capital and credit express | |
| 1,447,047 | | |
| 1,110,346 | | |
| 336,701 | | |
| 30 | % | |
| 27 | % |
Interest revenue | |
| 730,930 | | |
| 688,226 | | |
| 42,704 | | |
| 6 | % | |
| 3 | % |
Fees | |
| 691,617 | | |
| 420,120 | | |
| 271,497 | | |
| 65 | % | |
| 22 | % |
Other revenue | |
| 24,500 | | |
| 2,000 | | |
| 22,500 | | |
| 1,125 | % | |
| 2 | % |
Payment services | |
| 241,819 | | |
| 103,880 | | |
| 137,939 | | |
| 133 | % | |
| 11 | % |
Terminal sales and transactions | |
| 186,159 | | |
| 20,744 | | |
| 165,415 | | |
| 797 | % | |
| 13 | % |
Hubbed | |
| 43,777 | | |
| 61,009 | | |
| (17,232 | ) | |
| (28 | )% | |
| (1 | )% |
Giftcard program revenue | |
| 11,883 | | |
| 22,127 | | |
| (10,244 | ) | |
| (46 | )% | |
| (1 | )% |
Other revenue | |
| 32,783 | | |
| 21,231 | | |
| 11,552 | | |
| 54 | % | |
| 1 | % |
360FX customer referral | |
| 32,060 | | |
| 20,367 | | |
| 11,693 | | |
| 57 | % | |
| 1 | % |
Foreign exchange | |
| 723 | | |
| 573 | | |
| 150 | | |
| 26 | % | |
| 0 | % |
Other revenue | |
| - | | |
| 291 | | |
| (291 | ) | |
| (100 | )% | |
| (0 | )% |
Cost of revenue | |
| 1,285,912 | | |
| 882,760 | | |
| 403,153 | | |
| 46 | % | |
| 46 | % |
Confirmed capital and credit express | |
| 941,144 | | |
| 654,717 | | |
| 286,427 | | |
| 44 | % | |
| 32 | % |
Interest expense | |
| 741,763 | | |
| 494,711 | | |
| 247,052 | | |
| 50 | % | |
| 28 | % |
Account Issuing Expenses | |
| 103,792 | | |
| 69,068 | | |
| 34,724 | | |
| 50 | % | |
| 4 | % |
Insurance | |
| 81,038 | | |
| 75,810 | | |
| 5,228 | | |
| 7 | % | |
| 1 | % |
Other | |
| 14,551 | | |
| 15,128 | | |
| (577 | ) | |
| (4 | )% | |
| (0 | )% |
Payment services | |
| 132,972 | | |
| 34,113 | | |
| 98,858 | | |
| 290 | % | |
| 11 | % |
Terminal sales and transactions | |
| 123,091 | | |
| 22,590 | | |
| 100,501 | | |
| 445 | % | |
| 11 | % |
Hubbed | |
| 7,585 | | |
| 4,881 | | |
| 2,704 | | |
| 55 | % | |
| 0 | % |
Gift card expenses | |
| 2,296 | | |
| 6,643 | | |
| (4,347 | ) | |
| (65 | )% | |
| (0 | )% |
Depreciation and amortization | |
| 210,166 | | |
| 193,929 | | |
| 16,237 | | |
| 8 | % | |
| 2 | % |
Other cost of revenue | |
| 1,631 | | |
| - | | |
| 1,631 | | |
| - | | |
| 0 | % |
Gross profit | |
$ | 435,737 | | |
$ | 352,697 | | |
$ | 83,039 | | |
| 24 | % | |
| | |
Revenue
Consolidated
revenue from continuing operations in Q1 2016 was approximately $1,721,649, an increase of $486,192 or 39% from our consolidated
revenue from continuing operations in Q1 2015 of $1,235,457. Revenue increased primarily as a result of a $336,701
or 30% increase in Confirmed Capital and Credit Express revenues and an increase in Payment services revenues of $137,939 or 133%.
An increase in Other revenue of $11,552 or 54% accounts for the remainder.
The
increase in Confirmed Capital revenues was attributable to an increase of $271,497 or 65% in Fees, an increase of $42,704 or
6% in interest revenues and an increase in Other revenues $22,500 or 1,125%. The increase in fee revenue was mainly
attributable to an increase of $178,000 in account application fees as we sought to aggressively expand our client base. The
increase in interest revenues was attributed to increases in interest rates, which more than offset reductions in the lines
of credit we funded. The lines of credit we funded were approximately $58 million during Q1 2016 and $61 million during Q1
2015. The reduction in lines of credit we funded in Q1 2016 was a direct result of defaulted customers which had not been
replaced.
The
increase in payment services revenue is primarily attributable to an increase in terminal sales and transactions revenues. During
Q1 2016 we sold or leased 100 new terminals to merchants using our new infrastructure. The terminal sales and transactions revenue
earned from the new infrastructure amounted to $186,159. We anticipate terminal sales will continue in fiscal 2016 as a result
of extending our customer base to a broader retail customer market and the marketing of our new terminals for the full fiscal
year. This will result in both increased terminal and transaction revenue for Mpos and mPay. We also experienced a decrease in
Hubbed revenues of $17,232 or 28% and a decrease in Gift card revenues of $10,244 or 46%. The decrease in Hubbed revenues is attributable
to the absence of software development revenues of $35,120 following completion of software development activity in fiscal 2015.
The gift cards decrease is primarily attributable to lower card activity by our existing customers in Q1 2016.
Other
revenue increased $11,552 and this is primarily attributable to a 57% increase in foreign exchange customer referral revenues.
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
$1,285,912 in Q1 2016, an increase of $403,153 or 46% from our cost of revenue of $882,760 in Q1 2015. Cost of revenue
increased 46% primarily as a result of increases in Confirmed Capital and Credit Express costs of 44% or $286,427 and increases
in Payment Services of 290% or $98,858. An increase of 8% or $16,237 in depreciation and amortization costs accounted for the
remainder.
The
increase in Confirmed Capital and Credit Express costs of $286,427 is mainly attributable to an increase of 50% or $247,052 in
interest expense, an increase of 50% or $34,724 in fees associated with new accounts costs, an increase in insurance costs of
7% or $5,228, partially offset by a 4% or $577 decrease in other expenses. Our interest expense increased quarter over
quarter as a slight decrease in the volume of credit lines funded year to date was offset by fee increases attributable to unused
facility fees and the increased cost of funding related to the Subordinated Notes. The increase in unused facility fee accounted
for approximately $15,202 or 6% of the $247,052 increase.
The
Payment Services cost increase of $98,858 is primarily attributable to an increase in costs of the new terminals deployed to Mpos
customers. A slight increase in Hubbed costs of $2,704 and a slight decrease in Gift cards costs of $4,347 was not significant.
Our
gross profit from operations, increased $83,039 from $352,697 in Q1 2015 to $435,737 in Q1 2016. This was primarily
attributable to fee revenue increases at Confirmed Capital and Credit Express more than offsetting net interest margin decreases
at Confirmed Capital and Credit Express and an increase in terminals deployed by Payments Services as described above.
Comparison
of Balance Sheet Data as at September 30, 2015 and June 30, 2015
Set
forth below are certain items from our Consolidated Balance Sheet at September 30, 2015 and June 30, 2015:
| |
September 30 | | |
June 30 | |
| |
2015 | | |
2015 | |
| |
| | | |
| | |
Cash and cash equivalents | |
$ | 7,204,670 | | |
$ | 8,075,078 | |
Trade receivables, net | |
$ | 24,404,534 | | |
$ | 19,651,268 | |
Total Assets | |
$ | 36,784,169 | | |
$ | 33,362,460 | |
| |
| | | |
| | |
Wholesale Loan Facility | |
$ | 12,667,828 | | |
$ | 6,052,789 | |
Subordinated notes, net | |
$ | 16,895,026 | | |
$ | 18,471,471 | |
Total Liabilities | |
$ | 32,954,044 | | |
$ | 28,934,821 | |
| |
| | | |
| | |
Total Stockholders’ Equity | |
$ | 3,830,125 | | |
$ | 4,427,639 | |
Trade
receivables, net has increased as new customers have utilized their facilities.
The
increase in the Wholesale Loan facility reflects increased customer lending.
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
Facilities
Receivable
Purchase Agreement
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 September 30, 2015
our borrowing capacity was limited to AUD $25 million and the total amount drawn against the facility was $6,052,789. The
agreement is renewed annually on an agreed anniversary date, the latest of which was December 31, 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.
Subordinated
Notes
In April 2015 we issued AUD $25 million of subordinated notes. 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
subordinate to that facility. The costs of the Subordinated Note issuance were AUD $998,533 and the proceeds to the company
were AUD $24,001,467. 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 in an effort to reduce our unused facility fees.
Comparison
of the Statement of Cash Flows for the three months Ended September 30, 2015 and 2014
Set
forth below are certain items from our Statement of Cash Flows for the three months ended September 30, 2015 and 2014:
| |
For the three months ended | |
| |
September 30 | |
| |
2015 | | |
2014 | |
Net cash (used in) provided by operating activities | |
$ | (7,722,677 | ) | |
$ | (830,204 | ) |
Net cash (used in) investing activities | |
| (106,205 | ) | |
| (185,050 | ) |
Net cash provided by (used in) financing activities | |
| 7,657,079 | | |
| (2,143,814 | ) |
Effect of exchange rate changes on cash and cash equivalents | |
| (698,605 | ) | |
| (589,911 | ) |
Net cash (outflow) inflow | |
$ | (870,408 | ) | |
$ | (3,748,979 | ) |
Net
cash (used in) operating activities
During the three months ended September 30, 2015, we used approximately
$7,722,677 of cash in our operating activities. This reflects our net loss from continuing operations of $640,301 plus
$7,082,376 used by changes in operating assets and liabilities and adjustments for non-cash items, principally the increase
in our trade receivables of $6,696,447. Cash provided by working capital items decreased primarily as a result of an increase
in trade receivables of $6,696,447 due to an increase in new customer funding. Adjustments for non-cash items consisted of
depreciation and amortization in the amount of $160,593, subordinated notes costs amortization of $36,237, stock options and
shares issued for compensation of $473,246 and gain on equity method investment of $36,479.
During
the three months ended September 30, 2014, we used approximately $830,204 of cash in our operating activities. This reflects our
net loss from continuing operations of $327,806 plus $502,398 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 $2,150,114
and decreases in trade payables of $2,774,288 due to a decrease in cash received on customer accounts that was not related to
amounts funded by the Company. Adjustments for non-cash items consisted of depreciation and amortization in the amount of $197,872
and stock options of $37,869.
Net
cash (used in) investing activities
During the three months ended September 30, 2015, net cash used in investing
activities of $106,205 was primarily impacted by $94,921 in capitalized costs incurred on the development of intangible
assets, principally software related to The Moneytech Exchange and mPay.
During
the three months ended September 30, 2014, net cash used in investing activities of $185,050 was primarily impacted by $183,553
in capitalized costs incurred on the development of intangible assets, principally software related to The Moneytech Exchange
and mPay.
Net
cash provided by (used in) financing activities
During the three months ended September 30, 2015, net cash provided
by financing activities of $7,657,079 primarily reflects an increase in our borrowings under the Wholesale Loan Facility of
$7,395,791. Additions to our capital reserve accounts by our customers of $261,288 account for the difference.
During
the three months ended September 30, 2014, net cash used in financing activities of $2,143,814 primarily reflects a decrease in
our borrowings under the Wholesale Loan Facility of $2,645,463, additions to our capital reserve accounts by our customers of
$501,649 accounts for the difference.
Net
cash inflow
During the three months ended September 30, 2015 net cash decreased by $870,408 as compared to the three
months ended September 30, 2014, where net cash decreased by $3,748,979.
Insurance
As
a condition of the RPA and Subordinated Notes, the receivables due Moneytech from its customers or their counterparties are insured
pursuant to a policy issued by Euler Hermes, a Standard & Poor’s rated trade credit insurance provider. Pursuant
to this policy, Moneytech would bear the first $500,000 of losses incurred in any calendar year, after which any bad debt losses
are borne by Euler Hermes. This policy is renewed annually.
The
following tables show, since claim year 2010 (each claim year ends on December 31) the amount of claims submitted to Euler Hermes
for reimbursement, the amounts recognized or denied, the payments received to date and amounts remaining to be paid.
| |
Fiscal year | | |
Fiscal year | | |
Fiscal year | | |
Fiscal year | | |
Fiscal year | | |
Fiscal year | |
| |
Jun 30, 2011 | | |
Jun 30, 2012 | | |
Jun 30, 2013 | | |
Jun 30, 2014 | | |
Jun 30, 2015 | | |
Jun 30, 2016 | |
| |
AUD | | |
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 | ) | |
| (34,061 | ) | |
| - | |
Claims denied | |
| - | | |
| - | | |
| (18,344 | ) | |
| (158,800 | ) | |
| - | | |
| - | |
Closing balance | |
$ | - | | |
$ | 520,012 | | |
$ | 295,145 | | |
$ | 34,061 | | |
$ | - | | |
$ | - | |
| |
Claim
year 2010 | | |
Claim
year 2011 | | |
Claim
year 2012 | | |
Claim
year
2013 | | |
Claim
year
2014 | | |
Claim
year
2015 | |
| |
AUD | | |
AUD | | |
AUD | | |
AUD | | |
AUD | | |
AUD | |
Claims
submitted | |
$ | 960,068 | | |
$ | 615,720 | | |
| | | |
| | | |
| | | |
| | |
Policy
excess | |
| (500,000 | ) | |
| (500,000 | ) | |
No claim submitted as credit
losses do not exceed the policy | |
Claims
denied | |
| (158,800 | ) | |
| (18,344 | ) | |
excess of $500,000 |
Claims
paid | |
| (301,268 | ) | |
| (97,376 | ) | |
| | | |
| | | |
| | | |
| | |
Claims
in progress | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Progression
toward the deductible | |
| N/A
| | |
| N/A
| | |
$ | 146,221 | | |
$ | 80,674 | | |
$ |
348,230 | | |
$ | 153,663 | |
|
1 |
Claim amounts for claim years 2010 and 2011 were recognized in the 2012 fiscal year. In fiscal year 2011, there was no expectation of a claim for claim year 2010. In fiscal 2012, there was a change in circumstances relating to a debt attributable to claim year 2010 which resulted in a claim becoming possible. |
|
2 |
Claim years run January 1 to December 31 each year. |
|
3 |
Claims are not submitted until the policy excess is reached |
Commitments
for Capital Expenditures
We
do not have any commitments for capital expenditures.
The
design and technical development of The Moneytech Exchange is completed and it is operational. Although we will continue to upgrade
and add 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,
stockholders’ 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, 2015 filed on September 17, 2015which 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. |
|
|
|
November 12, 2015 |
By: |
/s/ Hugh Evans |
|
|
Hugh Evans |
|
|
Chief Financial Officer
(Principal Financial
and Accounting Officer) |
|
|
|
November 12, 2015 |
By: |
/s/ Brian M. Pullar |
|
|
Brian M. Pullar |
|
|
Chief
Financial Officer
(Principal
Financial and Accounting Officer)
|
32
Exhibit
31.1
CERTIFICATION
OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO
RULE
13A-14(a)/15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, Hugh
Evans, President and Chief Executive Officer of Source Financial, Inc. (the "Company"), certify that:
1. I have
reviewed this quarterly report on Form 10-Q of the Company;
2. Based
on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect
to the period covered by this report;
3. Based
on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
4. The registrant's
other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a. Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
b. Designed
such internal controls over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated
the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
and
d. Disclosed
in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's
other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent
functions):
a. All significant
deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b. Any fraud,
whether or not material, that involves management or other employees who have a significant role in the registrant's internal
control over financial reporting.
Date:
November 12, 2015 |
|
/s/ Hugh
Evans |
|
|
Hugh
Evans |
|
|
President and
Chief Executive Officer |
Exhibit
31.2
CERTIFICATIONS OF
PRINCIPAL FINANCIAL OFFICER PURSUANT TO
RULE
13A-14(a)/15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, Brian
M. Pullar, Chief Financial Officer of Source Financial, Inc. (the "Company"), certify that:
1. I have
reviewed this quarterly report on Form 10-Q of the Company;
2. Based
on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect
to the period covered by this report;
3. Based
on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
4. The registrant's
other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
(b) Designed
such internal controls over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated
the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
and
(d) Disclosed
in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's
other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent
functions):
(a) All
significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information;
and
(b) Any
fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal
control over financial reporting.
Date:
November 12, 2015 |
|
/s/ Brian
M. Pullar |
|
|
Brian
M. Pullar |
|
|
Chief Financial
Officer |
|
|
(principal financial
officer) |
Exhibit
32.1
CERTIFICATION
OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT
TO 18 U.S.C. SECTION 1350
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In connection
with the Quarterly Report of Source Financial, Inc., a Delaware corporation (the "Company"), on Form 10-Q for the quarter
ended September 30, 2015, as filed with the Securities and Exchange Commission (the "Report"), Hugh Evans, Chief Executive
Officer of the Company, does hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. ss. 1350), that:
(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations
of the Company.
Dated:
November 12, 2015 |
|
/s/
Hugh Evans |
|
|
Hugh
Evans |
|
|
President and
Chief Executive Officer |
|
|
(principal executive
officer) |
A signed
original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company
and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit
32.2
CERTIFICATION
OF PRINCIPAL FINANCIAL OFFICER
PURSUANT
TO 18 U.S.C. SECTION 1350
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In connection
with the Quarterly Report September 30, 2015, as filed with the Securities and Exchange Commission (the "Report"), Brian
M. Pullar, Chief Financial Officer of the Company, does hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (18 U.S.C. ss. 1350), that:
(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations
of the Company.
Dated:
November 12, 2015 |
|
/s/
Brian M. Pullar |
|
|
Brian
M. Pullar |
|
|
Chief Financial
Officer |
|
|
(principal financial
officer) |
A signed
original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company
and furnished to the Securities and Exchange Commission or its staff upon request.
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