UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

For the quarterly period ended September 30, 2014

For the transition period from                      to                     .

Commission File Number 000-55122

SOURCE FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of November 3, 2014, the Registrant had outstanding 7,671,632 shares of common stock, par value $0.001 per share.

SOURCE FINANCIAL, INC.

FORM 10-Q

CONTENTS

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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, 2014 filed on October 14, 2014.

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 FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND 2013

(UNAUDITED)

CONTENTS

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

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

(UNAUDITED)

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

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

SOURCE FINANCIAL, INC. AND SUBSIDIARIES

NOTES TO 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 years ended June 30, 2014.  Current and future financial statements may not be directly comparable to the Company’s historical financial statements.  However, except as disclosed herein, there have been no material changes in the information disclosed in the notes to the financial statements for the year ended June 30, 2014 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission. The unaudited consolidated financial statements should be read in conjunction with the financial statements included in the Form10-K.  In the opinion of Management, all adjustments considered necessary for a fair presentation, consisting solely of normal recurring adjustments, have been made. Operating results for the three months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending June 30, 2015.

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

Note 2 – DISCONTINUED OPERATIONS

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

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

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

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

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

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

Note 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

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

Equity Investments

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

Use of Estimates

The preparation of financial statements in conformity with US GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include collectability of accounts receivable, accounts payable, sales returns and recoverability of long-term assets.

Exchange (Loss) Gain

During the three months ended September 30, 2014 and 2013, the transactions of Moneytech and its wholly owned subsidiaries were denominated in foreign currency and were recorded in Australian dollar (AUD) at the rates of exchange in effect when the transactions occurred. Exchange gains and losses are recognized for the different foreign exchange rates applied when the foreign currency assets and liabilities are settled.

Foreign Currency Translation and Comprehensive (Loss) Income

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

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 global business.

Revenue Recognition

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

Cost of Revenue

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

Research and Development

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

Income Taxes

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

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

Concentration of Credit Risk

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

Risks and Uncertainties

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

Contingencies

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

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

Cash and Cash Equivalents

Cash and equivalents include cash in hand and cash in demand deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less. At September 30, 2014 and June 30, 2014, the Company had $6,981,764 and $10,730,743 in cash respectively, all of which was on deposit in Australia and not covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts.

Allowance for Doubtful Accounts

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

Bad Debt Insurance

As a condition of the RPA (See Note 9), Moneytech maintains credit insurance on the receivables due Moneytech from its customers or their counterparties.  Pursuant to this policy, Moneytech would bear the first $500,000 of aggregate losses incurred due to defaults in any calendar year, after which any bad debt losses are reimbursed by the insurance company.  This policy is renewed annually.  A receivable from the insurance company is recognized when the criteria set forth in the policy, inclusive of bad debt expenses in excess of $500,000 in any year, are met.  The amount recorded as a receivable is offset against bad debt expense. As of September 30, 2014 and June 30, 2014, the Company had insurance claims receivables of $29,810 and $32,085, respectively.

Inventory

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

Property, Plant & Equipment

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

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

For the three months ended September 30, 2014 and 2013, depreciation expense consisted of the following:

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

Earnings per Share (EPS)

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

The following table sets forth the computation of basic and diluted earnings per share for the three months ended September 30, 2014 and 2013:

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

Options to purchase up to 120,737 and 41,249 shares of common stock were anti-dilutive during the three months ended September 30, 2014 and 2013 respectively.

Goodwill

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

The Company evaluated its goodwill for impairment on September 30, 2014, and concluded there was no impairment as of that date.

Intangible Assets

The Company records identifiable intangible assets at fair value on the date of acquisition and evaluates the useful life of each asset. Finite-lived intangible assets primarily consist of software development capitalized. Finite-lived intangible assets are amortized on a straight-line basis and are tested for recoverability if events or changes in circumstances indicate that their carrying amounts may not be recoverable. These intangibles have useful lives ranging from 1 to 10 years. No events or changes in circumstances indicate that impairment existed as of September 30, 2014.

Stock-Based Compensation

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

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

Recently Issued Accounting Pronouncements

There have been no new accounting pronouncements during the three months ended September 30, 2014 that we believe would have a material impact on our financial position or results of operations.

Reclassification

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

Note 4 – TRADE RECEIVABLES, NET

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

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

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

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

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

Note 5 – OTHER ASSETS

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

Note 6 – INTANGIBLE ASSETS

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

The intangible assets are amortized over 10-12 years. Amortization expense of $150,312 and $131,558 was included in cost of revenues for the three months ended September 30, 2014 and 2013, respectively.

Note 7 – GOODWILL

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

Note 8 – TRADE AND OTHER PAYABLES

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

Note 9 – LINE OF CREDIT AND CASH RESERVE LIABILITIES

Wholesale Loan Facility

The Company had a secured line of credit under a Receivables Purchase Agreement (“RPA”) with a bank in Sydney Australia for up to AUD$40 million as of September 30, 2014 and June 30, 2014, respectively. The line of credit is secured mainly by trade receivables. Interest is charged at the bank’s reserve rate plus an agreed upon margin from the bank. The agreement is renewed annually on an agreed anniversary date, the latest of which was December 31, 2013. In 2014, the facility limit was extended to AUD$40 million and renewed until December 31, 2014. Interest expense charged to cost of revenue related to the loan for the three months ended September 30, 2014 and 2013 was approximately USD $457,756 and USD $465,783, respectively.

Cash Reserve

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

Note 10 – SHAREHOLDER’S LOAN

Shareholder’s Loan

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

Note 11 – STOCKHOLDER’S EQUITY

Preferred Stock

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

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

Common Stock

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

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

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

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

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

Note 12 – STOCK COMPENSATION

Restricted shares

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

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

Note 13 – STOCK OPTIONS

On April 19, 2013, the Company entered into an agreement with a software developer. Upon achievement of certain milestones, the contractor could receive up to 100,000 Performance Based Stock Options at an exercise price of $2.50 per share. The options vested and become exercisable immediately upon grant with a 3 year life. As of September 30, 2014, 14,500 of the Performance Based Stock Options are vested. As a result of the return of WTI, as further detailed in footnote 2, no additional shares can be vested. The Fair Value of the options was calculated using the following assumptions: estimated life of three years, volatility of 351%, risk free interest rate of .35%, and dividend yield of 0%. The grant date Fair Value of options was $249,995.

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

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

The Company recorded $70,122 and $37,869 option expense in the three months ended September 30, 2014 and 2013, respectively.

The following is a summary of the activity and position as of the three months ended September 30, 2014 and 2013.

Options outstanding at September 30, 2014 are as follows:

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

Note 14 – RELATED PARTY TRANSACTIONS

During the three months ended September 30, 2014 and 2013, the Company paid a company controlled by the President of Moneytech for consulting services $73,381 and $26,142 respectively.

Note 15 – INCOME TAX

The following is the income tax expense reflected in the Statement of Operations for the three months ended September 30, 2014 and 2013:

The following are the components of income before income tax reflected in the Statement of Operations for the three months ended September 30, 2014 and 2013:

The Company did not have a United States tax paying entity during the three months ended September 30, 2014.

The following is a reconciliation of the provision for income taxes at the US federal income tax rate to the income taxes reflected in the Statement of Operations for the three months ended September 30, 2014 and 2013:

The following are the components of deferred tax reflected in the Statement of Operations for the three months ended September 30, 2014 and 2013:

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

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

As of September 30, 2014, Moneytech had approximately $3,917,723 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, 2014, Source had NOL’s of approximately $13 million dollars to offset future taxable income in the US. Federal NOLs can generally be carried forward 20 years. However, under Internal Revenue Code section 382 due to the change in ownership there are certain limitations placed on the NOL carryover and Source may only use approximately $161,500 per year of the available NOL. The deferred tax assets of the US entities at September 30, 2014 were fully reserved. Management believes it is more likely than not that these assets will not be realized in the near future.

Note 16 – GEOGRAPHIC SEGMENT INFORMATION

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

For the three months ended September 30, 2014 and 2013, geographic segment information is as follows:

Note 17 – EQUITY INVESTMENT

On January 16, 2013 the Company entered into an agreement whereby it received a 37.5% equity interest in 360 Market Pty. Limited (“360”) in exchange for allowing 360 to utilize certain license rights. There was no exchange of cash or debt for the transaction and it was accounted for at its fair value of $0. The investment is accounted for by the equity method since the Company obtained a 37.5% equity interest.  Due to the continuous loss from inception through September 30, 2014 incurred by 360, the Company did not recognize any income or return from the investment as doing so would have created a negative carrying value in the investment account. The Company discontinued using the equity method rather than establish a negative balance. The investment retains a zero balance until subsequent investee profits eliminate all unrealized losses. 360 Market Pty Ltd incurred a profit of $20,422 in the three months ended September 30, 2014 and losses of $15,010, $40,365 and $7,077 in the fiscal years ended 2014, 2013 and 2012 respectively, resulting in an accumulated loss of $42,031 to be recovered before any income is recorded. In addition, 360 has had a negative equity position since inception of the investment thereby precluding any other disclosure regarding our underlying position in the net equity of 360.

Note 18 – COMMITMENTS

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

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

For the three months ended September 30, 2014 and 2013, the aggregate rental expense was USD $37,558 and USD $35,648, respectively.

Future minimum rental payments required under operating leases as of September 30, 2014 are as follows:

Note 19 – SUBSEQUENT EVENTS

Management has evaluated events subsequent through November 14, 2014 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, 2014. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements.

Overview 

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

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

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

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

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

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

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

Discontinued operations

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

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

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

Results of Operations

Three months ended September 30, 2014 and 2013

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, 2014 (“Q1 2015”) and 2013 (“Q1 2014”).  This discussion should be read in conjunction with the consolidated financial statements and notes thereto contained elsewhere in this report.

Set forth below are certain items from our operating statements for the three months ended September 30, 2014 and 2013:

The following table reflects the movements in our revenues and cost of revenues in our functional currency; Australian Dollars, for the three months ended September 30, 2014 and 2013.

Revenue

 Consolidated revenue from continuing operations for Q1 2015 was approximately $1,143,170, a decrease of $49,225 or 4% from our consolidated revenue from continuing operations for Q1 2014 of $1,192,395.  Excluding differences attributable to changes in foreign exchange rates, revenue decreased 5%, primarily as a result of a 4% decrease in Confirmed Capital and Credit Express revenues which accounted for nearly all of the 5% decrease. Excluding differences attributable to changes in foreign exchange rates, the Confirmed Capital and Credit Express revenue decrease is mainly attributable to an decrease in interest revenue of 5% offset by a 15% increase in fees charged to new customers to set up their accounts and to customers who do not meet their payment terms and a decrease in other revenue of 97%.  The lines of credit we funded were approximately AUD$89 million during the three months ended September 30, 2014 and AUD$85 million during the three months ended September 30, 2014.  The other revenue increase is primarily attributable to decreases in referrals of Moneytech’s customers to 360 Markets for foreign exchange services. The small decrease in payment services revenue is mainly attributable to a decrease in breakages associated with expired gift cards and an increase in revenues at MPOS and mPay.  MPOS and mPay are subsidiaries of Moneytech which provide money transfer services in Australia.

Cost of Revenue; Gross Profit

Cost of revenue from continuing operations, which is composed principally of the interest, fees and insurance we pay related to our RPA and the amortization expense of capitalized research and development costs was $816,818 in the three months ended September 30, 2014, an increase of $42,611 or 6% from our cost of revenue of $774,207 for the three months ended September 30, 2013.  Excluding differences attributable to changes in foreign exchange rates, costs of revenue increased 4% primarily as a result of increases in depreciation and amortization costs which accounted for 3 percentage points of the 4% increase, increases in payment services costs of 75% which accounted for approximately 2 percentage points of the 4% increase and increases in Confirmed Capital and Credit Express costs for the remainder.  Excluding differences attributable to changes in foreign exchange rates, the slight decrease in Confirmed Capital and Credit Express costs is mainly attributable to a 75% increase in account issuing expenses, a slight decrease of 3% in interest expense, an increase of 82% in insurance costs and a decrease in fees associated with existing accounts of 77%.  Our interest expense decreased slightly year over year as growth in the volume of credit lines funded in the first quarter of fiscal 2014 was offset by decreases in the amounts funded in the first quarter of fiscal 2015 as a result of the default off Confirmed Capital customers.  The payment services cost increase is mainly attributable to an increase in costs at Mpos and mPay and the increase in amortization is attributable to increased investment in intangibles.

Our profit from continuing operations, decreased $91,836 from $418,188 in the quarter ended September 30, 2013 to $326,352 in the quarter ended September 30, 2014.  This was primarily attributable to net interest and fee revenue decreases at Confirmed Capital and Credit Express. Decline in performance in the payments services business also contributed to the decrease. Net interest and fee revenues decreased primarily because of the loss of confirmed capital customers in the second half of fiscal 2014. The decrease in net interest and fee revenues was primarily due to a decrease in net interest margin because of an increase in fees charged on the portion of the wholesale facility that was not advanced as a result of the loss of these customers. The payments services business was impacted by increased costs of licenses used in the business.

Operating Expenses; Bad Debt Expense; Income from Operations

Apart from the costs under our RPA, the other significant factor in determining our overall profitability is our operating expenses, in particular our bad debt expense.  Our bad debt expense for Q1 2015 was $67,953, representing a decrease of $153,040 from bad debt expense of $220,993 for Q1 2014. We regularly evaluate the credit quality of our customers and this increase is attributable to changes in the specific assessment of several customer balances in line with our credit and collections policy.

The percentage of delinquent balances in our portfolio was 1.88% and 1.93% as of September 30, 2014 and 2013 respectively.  The percentage of delinquent balances in our portfolio averaged 1.65% and 1.99% in the three months ended September 30, 2014 and 2013 respectively.  The average collection period in our portfolio increased from 45 days to 47 days during the three months ended September 30, 2014 and decreased from 45 to 41 days during the three months ended September 30, 2013. Bad debts as a percentage of amount funded was 0.09% and 0.27% in the three months ended September 30, 2014 and 2013 respectively.

Our total operating expenses from continuing operations (other than bad debt) increased by $263,501 or 53% from $497,071 in the first quarter 2014 to $760,572 in the first quarter 2015. This increase is primarily attributed to compensation costs ($181,948 or 117%), professional expenses ($57,630 or 211%) and research and development expenses ($21,141 or 19%).  The compensation costs increase reflects costs of our CFO, Business Development Officer, other staff and non-executive directors that were not yet incurred in the first quarter 2014. These costs are expected to remain in fiscal 2015.  The professional expenses increase primarily reflects increases in legal fees ($49,081) and stock broking and advisory fees ($10,231).  Management anticipates these expenses will continue in the short term but be reduced significantly in total in fiscal 2015.

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

To date, our other expense (income) has consisted of financing costs other than those incurred under the RPA, offset by interest income on the cash reserves we are required to maintain under the RPA, and research and development grants received from the Australian government. In Q1 2015 we accrued AUD $165,000 for research grants we expect to receive later this year from the Australian government.

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

Our net loss from continuing operations before tax for Q1 2015 was $321,969, as opposed to a net loss of $92,806 for Q1 2014.  As a result of $5,837 in taxes incurred in Q1 2015, we incurred a net loss after tax for Q1 2015 of $327,806, as compared to a net loss after tax for Q1 2014 of $141,958.  No tax benefit has been recognized for the losses incurred in the United States because management believes it more likely than not that these assets will not be realized in the near future.  Operations in Australia were not profitable during the quarter, primarily because Confirmed Capital customers lost on their default have not yet been replaced. Expenses of being a public company in the United States continues to weigh on overall profitability.

Net loss from discontinued operations.

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

Other comprehensive income.

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

The average AUD/USD exchange rates were 1 to 0.9165 and 1 to 0.9253 in Q1 2014 and Q1 2015, respectively.

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

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

Trade receivables, Total Assets, Wholesale Loan Facility and Total Liabilities have decreased as a result of the loss, as a result of their default, of a Confirmed Capital customer at June 30, 2014.

Set forth below are certain items from our Statement of Cash Flows for the three months ended September 30, 2014 and 2013:

Net cash provided by (used in) operating activities

During the three months ended September 30, 2014, we used approximately $830,204 of net 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 an increase in trade payables of $2,774,288. Trade receivables decreased due to a decrease in credit lines provided as a result of the default of a Confirmed Capital customer. Trade payables decreased as monies received on behalf of customers were paid to our customers. Adjustments for non-cash items consisted of depreciation and amortization in the amount of $197,872 and stock options and shares issued for compensation of $37,869. 

During the three months ended September 30, 2013, we used approximately $778,429 of net cash in our operating activities.  This reflects our net loss from continuing operations of $141,958 plus $636,471 cash used by changes in operating assets and liabilities and adjustments for non-cash items.   Cash used by working capital items and other activities was primarily impacted by an increase in trade receivables of $421,787 and an increase in buyer payments and sellers’ liabilities and other items using $348,010. Adjustments for non-cash items consisted of depreciation and amortization $177,366 and stock options and shares issued for compensation of $67,422.

Net cash (used in) investing activities

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.

During the three months ended September 30, 2013, net cash used in investing activities of $216,925 primarily reflects capitalized costs incurred on the development of intangible assets, principally software related incurred in the development of The Moneytech Exchange.

Net cash (used in) provided by financing activities

During the 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 account for the difference.

During the three months ended September 30, 2013 net cash provided by financing activities of $820,507 primarily reflects an increase in our borrowings under the Wholesale Loan Facility of $836,053.  Repayments of capital reserve accounts to our customers of $15,546 account for the difference.

Net cash provided by discontinued operations

During the three months ended September 30, 2013, net cash used by discontinued operations of $65,034 primarily reflects the losses made by the Wiki business of $171,154 offset by adjustments for non-cash items and changes in operating assets and liabilities providing $60,375.  Net cash used by investing activities of $10,121 and provided by financing activities of 55,866 accounts for the difference.

Net cash inflow

During the three months ended September 30, 2014, net cash decreased by $3,748,979 as compared to the three months ended September 30, 2013, where net cash decreased by $105,276.