Item 1. Financial Statements
NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed
Consolidated Balance Sheets
|
|
Unaudited
|
|
|
(A)
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2016
|
|
|
|
(In thousands,
except share data)
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
Cash,
cash equivalents and restricted cash
|
$
|
198,891
|
|
$
|
223,644
|
|
Pre-funded social welfare
grants receivable (Note 3)
|
|
3,915
|
|
|
1,580
|
|
Accounts
receivable, net of allowances of December: $3,124; June: $1,669
|
|
102,499
|
|
|
107,805
|
|
Finance loans receivable,
net of allowances of December: $4,203; June: $4,494
|
|
36,721
|
|
|
37,009
|
|
Inventory
(Note 4)
|
|
14,063
|
|
|
10,004
|
|
Deferred income taxes
|
|
6,696
|
|
|
6,956
|
|
Total current assets before settlement assets
|
|
362,785
|
|
|
386,998
|
|
Settlement assets (Note 5)
|
|
333,242
|
|
|
536,725
|
|
Total current assets
|
|
696,027
|
|
|
923,723
|
|
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation of
December: $112,475; June: $99,969
|
|
45,876
|
|
|
54,977
|
|
EQUITY-ACCOUNTED INVESTMENTS
|
|
36,278
|
|
|
25,645
|
|
GOODWILL (Note 7)
|
|
180,686
|
|
|
179,478
|
|
INTANGIBLE ASSETS, net (Note
7)
|
|
44,339
|
|
|
48,556
|
|
OTHER LONG-TERM ASSETS, including reinsurance
assets (Note 6 and Note 8)
|
|
39,072
|
|
|
31,121
|
|
TOTAL
ASSETS
|
|
1,042,278
|
|
|
1,263,500
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
Short-term credit facilities (Note 9)
|
|
-
|
|
|
-
|
|
Accounts payable
|
|
10,649
|
|
|
14,097
|
|
Other
payables
|
|
41,180
|
|
|
37,479
|
|
Current portion of
long-term borrowings (Note 10)
|
|
8,288
|
|
|
8,675
|
|
Income
taxes payable
|
|
4,426
|
|
|
5,235
|
|
Total current liabilities before settlement obligations
|
|
64,543
|
|
|
65,486
|
|
Settlement obligations
(Note 5)
|
|
333,242
|
|
|
536,725
|
|
Total current liabilities
|
|
397,785
|
|
|
602,211
|
|
DEFERRED INCOME TAXES
|
|
11,139
|
|
|
12,559
|
|
LONG-TERM BORROWINGS (Note 10)
|
|
14,872
|
|
|
43,134
|
|
OTHER LONG-TERM LIABILITIES,
including insurance policy liabilities (Note 8)
|
|
2,181
|
|
|
2,376
|
|
TOTAL LIABILITIES
|
|
425,977
|
|
|
660,280
|
|
COMMITMENTS AND CONTINGENCIES
(Note 18)
|
|
|
|
|
|
|
EQUITY
|
|
|
|
|
|
|
COMMON
STOCK (Note 11)
|
|
|
|
|
|
|
Authorized: 200,000,000 with $0.001 par value;
Issued and outstanding shares, net of treasury - December: 52,521,345;
June: 55,271,954
|
|
74
|
|
|
74
|
|
PREFERRED
STOCK
|
|
|
|
|
|
|
Authorized shares: 50,000,000 with $0.001 par value;
Issued and outstanding shares, net of treasury: December: -; June: -
|
|
-
|
|
|
-
|
|
ADDITIONAL PAID-IN-CAPITAL
|
|
223,272
|
|
|
223,978
|
|
TREASURY SHARES, AT COST:
December: 23,621,541; June: 20,483,932
|
|
(273,238
|
)
|
|
(241,627
|
)
|
ACCUMULATED OTHER COMPREHENSIVE LOSS (Note 12)
|
|
(188,643
|
)
|
|
(189,700
|
)
|
RETAINED EARNINGS
|
|
743,595
|
|
|
700,322
|
|
TOTAL NET1 EQUITY
|
|
505,060
|
|
|
493,047
|
|
REDEEMABLE COMMON STOCK
|
|
107,672
|
|
|
107,672
|
|
NON-CONTROLLING INTEREST
|
|
3,569
|
|
|
2,501
|
|
TOTAL EQUITY
|
|
616,301
|
|
|
603,220
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS EQUITY
|
$
|
1,042,278
|
|
$
|
1,263,500
|
|
(A) Derived from audited financial statements
See Notes to Unaudited Condensed Consolidated Financial
Statements
2
NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed
Consolidated Statements of Operations
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands,
except per share data)
|
|
|
(In thousands,
except per share data)
|
|
|
|
|
|
|
|
|
REVENUE
|
$
|
151,433
|
|
$
|
150,281
|
|
$
|
307,066
|
|
$
|
304,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
goods sold, IT processing, servicing
and
support
|
|
73,518
|
|
|
78,668
|
|
|
148,298
|
|
|
156,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administration
|
|
41,703
|
|
|
36,248
|
|
|
80,171
|
|
|
72,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
10,623
|
|
|
10,586
|
|
|
20,827
|
|
|
20,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
25,589
|
|
|
24,779
|
|
|
57,770
|
|
|
55,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST INCOME
|
|
5,061
|
|
|
3,664
|
|
|
9,365
|
|
|
7,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE
|
|
510
|
|
|
1,054
|
|
|
1,306
|
|
|
2,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAX
EXPENSE
|
|
30,140
|
|
|
27,389
|
|
|
65,829
|
|
|
61,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX EXPENSE (Note 17)
|
|
10,984
|
|
|
10,593
|
|
|
22,087
|
|
|
21,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME BEFORE EARNINGS
FROM
EQUITY-ACCOUNTED INVESTMENTS
|
|
19,156
|
|
|
16,796
|
|
|
43,742
|
|
|
40,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS FROM
EQUITY-ACCOUNTED
INVESTMENTS
|
|
74
|
|
|
388
|
|
|
733
|
|
|
576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
19,230
|
|
|
17,184
|
|
|
44,475
|
|
|
40,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LESS NET INCOME ATTRIBUTABLE
TO
NON-CONTROLLING INTEREST
|
|
589
|
|
|
526
|
|
|
1,202
|
|
|
1,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME ATTRIBUTABLE TO
NET1
|
$
|
18,641
|
|
$
|
16,658
|
|
$
|
43,273
|
|
$
|
39,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share, in
U.S. dollars
(Note 14)
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings
attributable to Net1
shareholders
|
$
|
0.35
|
|
$
|
0.35
|
|
$
|
0.81
|
|
$
|
0.84
|
|
Diluted earnings attributable to Net1
shareholders
|
$
|
0.35
|
|
$
|
0.35
|
|
$
|
0.81
|
|
$
|
0.84
|
|
See Notes to Unaudited Condensed Consolidated Financial
Statements
3
NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed
Consolidated Statements of Comprehensive Income
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
19,230
|
|
$
|
17,184
|
|
$
|
44,475
|
|
$
|
40,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized income on asset
available for
sale, net of tax
|
|
-
|
|
|
-
|
|
|
-
|
|
|
50
|
|
Movement in foreign
currency translation
reserve
|
|
(20,766
|
)
|
|
(16,960
|
)
|
|
1,536
|
|
|
(60,656
|
)
|
Total other comprehensive (loss)
income, net of taxes
|
|
(20,766
|
)
|
|
(16,960
|
)
|
|
1,536
|
|
|
(60,606
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss)
income
|
|
(1,536
|
)
|
|
224
|
|
|
46,011
|
|
|
(19,615
|
)
|
Less comprehensive income
attributable
to non-controlling interest
|
|
(624
|
)
|
|
(345
|
)
|
|
(1,681
|
)
|
|
(850
|
)
|
Comprehensive (loss) income
attributable to Net1
|
$
|
(2,160
|
)
|
$
|
(121
|
)
|
$
|
44,330
|
|
$
|
(20,465
|
)
|
See Notes to Unaudited Condensed Consolidated Financial
Statements
4
NET 1 UEPS
TECHNOLOGIES,
INC.
Unaudited
Condensed
Consolidated
Statement
of
Changes
in
Equity for the six
months
ended
December
31, 2016
(dollar
amounts
in
thousands)
|
|
Net 1 UEPS Technologies, Inc.
Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
of
|
|
|
|
|
|
Number of
|
|
|
Additional
|
|
|
|
|
|
other
|
|
|
Total
|
|
|
Redeemable
|
|
|
Non-
|
|
|
|
|
|
|
of
|
|
|
|
|
|
Treasury
|
|
|
Treasury
|
|
|
shares, net of
|
|
|
Paid-In
|
|
|
Retained
|
|
|
comprehensive
|
|
|
Net1
|
|
|
common
|
|
|
controlling
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Shares
|
|
|
treasury
|
|
|
Capital
|
|
|
Earnings
|
|
|
(loss) income
|
|
|
Equity
|
|
|
stock
|
|
|
Interest
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance July 1, 2016
|
|
75,755,886
|
|
$
|
74
|
|
|
(20,483,932
|
)
|
$
|
(241,627
|
)
|
|
55,271,954
|
|
$
|
223,978
|
|
$
|
700,322
|
|
$
|
(189,700
|
)
|
$
|
493,047
|
|
$
|
107,672
|
|
$
|
2,501
|
|
$
|
603,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of common stock
(Note
11)
|
|
|
|
|
|
|
|
(3,137,609
|
)
|
|
(31,611
|
)
|
|
(3,137,609
|
)
|
|
|
|
|
|
|
|
|
|
|
(31,611
|
)
|
|
|
|
|
|
|
|
(31,611
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock granted
(Note 13)
|
|
387,000
|
|
|
|
|
|
|
|
|
|
|
|
387,000
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
charge
(Note 13)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,138
|
|
|
|
|
|
|
|
|
1,138
|
|
|
|
|
|
|
|
|
1,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal of stock comp charge
(Note
13)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,827
|
)
|
|
|
|
|
|
|
|
(1,827
|
)
|
|
|
|
|
|
|
|
(1,827
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit from
vested stock
awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid to
non-controlling
interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
(613
|
)
|
|
(613
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,273
|
|
|
|
|
|
43,273
|
|
|
|
|
|
1,202
|
|
|
44,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
(Note
12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,057
|
|
|
1,057
|
|
|
|
|
|
479
|
|
|
1,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2016
|
|
76,142,886
|
|
$
|
74
|
|
|
(23,621,541
|
)
|
$
|
(273,238
|
)
|
|
52,521,345
|
|
$
|
223,272
|
|
$
|
743,595
|
|
$
|
(188,643
|
)
|
$
|
505,060
|
|
$
|
107,672
|
|
$
|
3,569
|
|
$
|
616,301
|
|
See Notes to Unaudited Condensed Consolidated Financial
Statements
5
NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed
Consolidated Statements of Cash Flows
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Cash flows from operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
19,230
|
|
$
|
17,184
|
|
$
|
44,475
|
|
$
|
40,991
|
|
Depreciation and amortization
|
|
10,623
|
|
|
10,586
|
|
|
20,827
|
|
|
20,701
|
|
Earnings from
equity-accounted investments
|
|
(74
|
)
|
|
(388
|
)
|
|
(733
|
)
|
|
(576
|
)
|
Fair value adjustments
|
|
72
|
|
|
1,567
|
|
|
(11
|
)
|
|
3,000
|
|
Interest payable
|
|
(23
|
)
|
|
645
|
|
|
9
|
|
|
1,354
|
|
(Profit) Loss on disposal of property, plant
and
equipment
|
|
(539
|
)
|
|
11
|
|
|
(473
|
)
|
|
(84
|
)
|
Stock-based compensation
charge (reversal), net
(Note 13)
|
|
635
|
|
|
965
|
|
|
(689
|
)
|
|
1,691
|
|
Facility fee amortized
|
|
31
|
|
|
35
|
|
|
67
|
|
|
69
|
|
Dividends received from
equity accounted
investments
|
|
-
|
|
|
-
|
|
|
370
|
|
|
-
|
|
Decrease (Increase) in accounts receivable,
pre-
funded social welfare grants receivable and finance
loans
receivable
|
|
6,585
|
|
|
(13,847
|
)
|
|
14,351
|
|
|
(31,125
|
)
|
(Increase) Decrease in
inventory
|
|
(3,481
|
)
|
|
776
|
|
|
(3,585
|
)
|
|
(155
|
)
|
Decrease in accounts payable and other
payables
|
|
(5,940
|
)
|
|
(5,418
|
)
|
|
(2,900
|
)
|
|
(2,046
|
)
|
Decrease in taxes payable
|
|
(11,815
|
)
|
|
(8,859
|
)
|
|
(859
|
)
|
|
(1,035
|
)
|
Increase (Decrease) in deferred taxes
|
|
386
|
|
|
789
|
|
|
(1,246
|
)
|
|
(637
|
)
|
Net cash provided by operating
activities
|
|
15,690
|
|
|
4,046
|
|
|
69,603
|
|
|
32,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
(3,126
|
)
|
|
(9,947
|
)
|
|
(6,549
|
)
|
|
(20,645
|
)
|
Proceeds from disposal of property, plant and
equipment
|
|
945
|
|
|
269
|
|
|
1,014
|
|
|
617
|
|
Investment in MobiKwik
|
|
-
|
|
|
-
|
|
|
(15,347
|
)
|
|
-
|
|
Loans to equity accounted investments (Note
6)
|
|
(10,044
|
)
|
|
-
|
|
|
(10,044
|
)
|
|
-
|
|
Acquisitions, net of cash
acquired (Note 2)
|
|
(4,651
|
)
|
|
-
|
|
|
(4,651
|
)
|
|
-
|
|
Net change in settlement assets (Note 5)
|
|
258,166
|
|
|
303,810
|
|
|
220,772
|
|
|
282,227
|
|
Net cash provided by
investing activities
|
|
241,290
|
|
|
294,132
|
|
|
185,195
|
|
|
262,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of treasury stock
(Note 11)
|
|
-
|
|
|
(11,186
|
)
|
|
(32,081
|
)
|
|
(11,186
|
)
|
Repayment of long-term borrowings (Note 10)
|
|
(1,824
|
)
|
|
-
|
|
|
(28,493
|
)
|
|
-
|
|
Guarantee fee paid (Note 10)
|
|
(1,145
|
)
|
|
-
|
|
|
(1,145
|
)
|
|
-
|
|
Dividends paid to non-controlling interest
|
|
(58
|
)
|
|
-
|
|
|
(613
|
)
|
|
-
|
|
Long-term borrowings utilized
(Note 10)
|
|
-
|
|
|
711
|
|
|
247
|
|
|
1,431
|
|
Proceeds from issue of common stock
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,762
|
|
Net change in settlement
obligations (Note 5)
|
|
(258,166
|
)
|
|
(303,810
|
)
|
|
(220,772
|
)
|
|
(282,227
|
)
|
Net cash used in
financing activities
|
|
(261,193
|
)
|
|
(314,285
|
)
|
|
(282,857
|
)
|
|
(288,220
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate
changes on cash
|
|
(2,225
|
)
|
|
(8,086
|
)
|
|
3,306
|
|
|
(22,293
|
)
|
Net decrease in cash, cash equivalents
and
restricted cash
|
|
(6,438
|
)
|
|
(24,193
|
)
|
|
(24,753
|
)
|
|
(16,166
|
)
|
Cash, cash equivalents and
restricted cash
beginning of period
|
|
205,329
|
|
|
125,610
|
|
|
223,644
|
|
|
117,583
|
|
Cash, cash equivalents and restricted cash
end
of period (1)
|
$
|
198,891
|
|
$
|
101,417
|
|
$
|
198,891
|
|
$
|
101,417
|
|
See Notes to Unaudited Condensed Consolidated Financial
Statements
(1) Cash, cash equivalents and restricted cash as of December
31, 2016, includes restricted cash of approximately $43.7 million related to the
guarantee issued by FirstRand Bank Limited (acting through its Rand Merchant
Bank division) as described in Note 10. This cash has been placed into an escrow
account and is considered restricted as to use and therefore is classified as
restricted cash. The restriction will lapse once the guarantee expires, is
utilized or is cancelled.
6
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the
Unaudited Condensed Consolidated Financial Statements
for the three and six
months ended December 31, 2016 and 2015
(All amounts in tables stated
in thousands or thousands of U.S. Dollars, unless otherwise stated)
1.
|
Basis of Presentation and Summary of Significant
Accounting Policies
|
Unaudited Interim
Financial Information
The accompanying unaudited
condensed consolidated financial statements include all majority-owned
subsidiaries over which the Company exercises control and have been prepared in
accordance with U.S. generally accepted accounting principles (GAAP) and the
rules and regulations of the United States Securities and Exchange Commission
for quarterly reports on Form 10-Q and include all of the information and
disclosures required for interim financial reporting. The results of operations
for the three and six months ended December 31, 2016 and 2015, are not
necessarily indicative of the results for the full year. The Company believes
that the disclosures are adequate to make the information presented not
misleading.
These financial statements should
be read in conjunction with the financial statements, accounting policies and
financial notes thereto included in the Companys Annual Report on Form 10-K for
the fiscal year ended June 30, 2016. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements reflect all
adjustments (consisting only of normal recurring adjustments), which are
necessary for a fair representation of financial results for the interim periods
presented.
References to the Company refer
to Net1 and its consolidated subsidiaries, unless the context otherwise
requires. References to Net1 are references solely to Net 1 UEPS Technologies,
Inc.
Recent accounting
pronouncements adopted
In February 2015, the FASB issued
guidance regarding
Amendments to the Consolidation Analysis
. This
guidance amends both the variable interest entity and voting interest entity
consolidation models. The requirement to assess an entity under a different
consolidation model may change previous consolidation conclusions. The guidance
is effective for the Company beginning July 1, 2016. The adoption of this
guidance did not have a material impact on the Companys financial statements.
In November 2016, the FASB issued
guidance regarding
Restricted Cash - a consensus of the FASB Emerging Issues
Task Force.
This guidance amends current guidance to add or clarify the
classification and presentation of restricted cash in the statement of cash
flows. The guidance is effective for the Company beginning July 1, 2018, however
the Company has early adopted the guidance, effective December 31, 2016. The
adoption of this guidance did not have a material impact on the Companys
financial statements.
Recent accounting
pronouncements not yet adopted as of December 31, 2016
In May 2014, the FASB issued
guidance regarding
Revenue from Contracts with Customers
. This guidance
requires an entity to recognize revenue when a customer obtains control of
promised goods or services in an amount that reflects the consideration to which
the entity expects to receive in exchange for those goods or services. In
addition, the standard requires disclosure of the nature, amount, timing, and
uncertainty of revenue and cash flows arising from contracts with customers. The
guidance was to be effective for the Company beginning July 1, 2017, however in
August 2015, the FASB issued guidance regarding
Revenue from Contracts with
Customers, Deferral of the Effective Date
. This guidance defers the required
implementation date specified in
Revenue from Contracts with Customers
to
December 2017. Public companies may elect to adopt the standard along the
original timeline. The guidance is effective for the Company beginning July 1,
2018. The Company expects that this guidance may have a material impact on its
financial statements and is currently evaluating the impact of this guidance on
its financial statements on adoption.
In August 2014, the FASB issued
guidance regarding
Disclosure of Uncertainties about an Entitys Ability to
Continue as a Going Concern
. This guidance requires an entity to perform
interim and annual assessments of its ability to continue as a going concern
within one year of the date that its financial statements are issued. An entity
must provide certain disclosures if conditions or events raise substantial doubt
about the entitys ability to continue as a going concern. The guidance is
effective for the Company beginning July 1, 2017. Early adoption is permitted.
The Company is currently assessing the impact of this guidance on its financial
statements disclosure.
7
1.
|
Basis of Presentation and Summary of Significant
Accounting Policies (continued)
|
Recent accounting
pronouncements not yet adopted as of December 31, 2016 (continued)
In July 2015, the FASB issued
guidance regarding
Simplifying the Measurement of Inventory
. This
guidance requires entities to measure most inventory at the lower of cost and
net realizable value, thereby simplifying the current guidance under which an
entity must measure inventory at the lower of cost or market (market in this
context is defined as one of three different measures). The guidance will not
apply to inventories that are measured by using either the last-in, first-out
(LIFO) method or the retail inventory method (RIM). The guidance is
effective for the Company beginning July 1, 2017. Early adoption is permitted.
The Company is currently assessing the impact of this guidance on its financial
statements disclosure.
In November 2015, the FASB issued
guidance regarding
Balance Sheet Classification of Deferred Taxes
. This
guidance requires that deferred tax liabilities and assets are to be classified
as non-current in a classified statement of financial position. The current
requirement that deferred tax liabilities and assets of a tax-paying component
of an entity be offset and presented as a single amount is not affected by the
amendments in this update. This guidance is effective for the Company beginning
July 1, 2017, with early adoption permitted on a prospective or retrospective
basis. The Company is currently assessing the impact of this guidance on its
financial statements disclosures.
In January 2016, the FASB issued
guidance regarding
Recognition and Measurement of Financial Assets and
Financial Liabilities
. The guidance primarily affects the accounting for
equity investments, financial liabilities under the fair value option and the
presentation and disclosure requirements for financial instruments. In addition,
the guidance clarifies the valuation allowance assessment when recognizing
deferred tax assets resulting from unrealized losses on available-for-sale debt
securities. This guidance is effective for the Company beginning July 1, 2018,
and early adoption is not permitted, with certain exceptions. The amendments are
required to be applied by means of a cumulative-effect adjustment on the balance
sheet as of the beginning of the fiscal year of adoption. The Company is
currently assessing the impact of this guidance on its financial statements
disclosure.
In February 2016, the FASB issued
guidance regarding
Leases
. The guidance increases transparency and
comparability among organizations by requiring the recognition of lease assets
and lease liabilities on the balance sheet. The amendments to current lease
guidance includes the recognition of assets and liabilities by lessees for those
leases currently classified as operating leases. The guidance also requires
disclosures to meet the objective of enabling users of financial statements to
assess the amount, timing, and uncertainty of cash flows arising from leases.
This guidance is effective for the Company beginning July 1, 2019. Early
adoption is permitted. The Company expects that this guidance may have a
material impact on its financial statements and is currently evaluating the
impact of this guidance on its financial statements on adoption.
In March 2016, the FASB issued
guidance regarding
Improvements to Employee Share-Based Payment
Accounting
. The guidance simplifies several aspects of the accounting for
employee share-based payment transactions for both public and nonpublic
entities, including the accounting for income taxes, forfeitures, and statutory
tax withholding requirements, as well as classification in the statement of cash
flows. This guidance is effective for the Company beginning July 1, 2017. Early
adoption is permitted. The Company is currently assessing the impact of this
guidance on its financial statements disclosure.
In June 2016, the FASB issued
guidance regarding
Measurement of Credit Losses on Financial Instruments
.
The guidance replaces the incurred loss impairment methodology in current GAAP
with a methodology that reflects expected credit losses and requires
consideration of a broader range of reasonable and supportable information to
inform credit loss estimates. For trade and other receivables, loans, and other
financial instruments, an entity is required to use a forward-looking expected
loss model rather than the incurred loss model for recognizing credit losses
which reflects losses that are probable. Credit losses relating to
available-for-sale debt securities will also be recorded through an allowance
for credit losses rather than as a reduction in the amortized cost basis of the
securities. This guidance is effective for the Company beginning July 1, 2020.
Early adoption is permitted beginning July 1, 2019. The Company is currently
assessing the impact of this guidance on its financial statements disclosure.
In June 2016, the FASB issued
guidance regarding
Classification of Certain Cash Receipts and Cash
Payments
. The guidance is intended to reduce diversity in practice and
explains how certain cash receipts and payments are presented and classified in
the statement of cash flows, including beneficial interests in securitization,
which would impact the presentation of the deferred purchase price from sales of
receivables. This guidance is effective for the Company beginning July 1, 2018,
and must be applied retrospectively. Early adoption is permitted. The Company is
currently assessing the impact of this guidance on its financial statements
disclosure.
8
1.
|
Basis of Presentation and Summary of Significant
Accounting Policies (continued)
|
Recent accounting
pronouncements not yet adopted as of December 31, 2016 (continued)
In January 2017, the FASB issued
guidance regarding
Clarifying the Definition of a Business.
This guidance
provides a more robust framework to use in determining when a set of assets and
activities is a business. Because the current definition of a business is
interpreted broadly and can be difficult to apply, stakeholders indicated that
analyzing transactions is inefficient and costly and that the definition does
not permit the use of reasonable judgment. The amendments provide more
consistency in applying the guidance, reduce the costs of application, and make
the definition of a business more operable. The guidance is effective for the
Company beginning July 1, 2018. Early adoption is permitted. The Company is
currently assessing the impact of this guidance on its financial statements
disclosure.
In January 2017, the FASB issued
guidance regarding
Simplifying the Test for Goodwill Impairment.
This
guidance removes the requirement for an entity to calculate the implied fair
value of goodwill (as part of step 2 of the current goodwill impairment test) in
measuring a goodwill impairment loss. The guidance is effective for the Company
beginning July 1, 2020. Early adoption is permitted for interim or annual
goodwill impairment tests performed on testing dates after January 1, 2017. The
Company is currently assessing the impact of this guidance on its financial
statements disclosure.
The cash paid, net of cash
received related to the Companys various acquisitions during the six months
ended December 31, 2016, are summarized in the table below:
|
|
|
2016
|
|
|
C4U-Malta Limited (C4U Malta)
|
$
|
2,940
|
|
|
Pros Software (Pty) Ltd (Pros Software)
|
|
1,711
|
|
|
Total cash paid, net of cash received
|
$
|
4,651
|
|
C4U Malta
In November 2016, the Company
acquired a 100% interest in C4U Malta, a licensed Maltese Financial Services
Authority-supervised electronic money institution, for approximately $3.9
million (€3.6 million translated at the foreign exchange rates applicable on the
date of acquisition). C4Us license has been passported across all member states
of the European Union. The Company intends to apply for a principal membership
with the major card associations as soon as possible and to integrate a robust
and reliable issuing and acquiring processing platform in C4U to enable the
issuance of electronic money instruments, such as electronic money accounts,
prepaid cards and virtual cards, after a transitional period of integration and
technology adaption. The Company plans to build and reinforce C4U such that it
operates as its principal regulated electronic money institution with the
ability to cover all of the Companys financial services activities and business
in the European Union.
Pros Software
In October 2016, the Company
acquired a 100% interest in Pros Software, a software development and consulting
services company based near Johannesburg, South Africa, for ZAR 25.0 million
($1.8 million, translated at the foreign exchange rates applicable on the date
of acquisition). Pros Software performs software development and consulting
services for a number of clients, including for the Company, and has a specialty
practice in business intelligence.
The preliminary purchase price
allocation of C4U Malta and Pros Software acquisitions, translated at the
foreign exchange rates applicable on the date of acquisition, is provided in the
table below:
|
|
|
C4U Malta
|
|
|
Pros Software
|
|
|
Total
|
|
|
Cash and cash equivalents
|
$
|
999
|
|
$
|
110
|
|
$
|
1,109
|
|
|
Accounts receivable
|
|
983
|
|
|
165
|
|
|
1,148
|
|
|
Property, plant and equipment, net
|
|
30
|
|
|
9
|
|
|
39
|
|
|
Deferred tax assets
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Intangible assets (Note 7)
|
|
1,078
|
|
|
2,311
|
|
|
3,389
|
|
|
Goodwill (Note 7)
|
|
2,475
|
|
|
-
|
|
|
2,475
|
|
|
Accounts payables and other payables
|
|
(1,570
|
)
|
|
(58
|
)
|
|
(1,628
|
)
|
|
Income taxes payable
|
|
-
|
|
|
(69
|
)
|
|
(69
|
)
|
|
Deferred tax liabilities
|
|
(56
|
)
|
|
(647
|
)
|
|
(703
|
)
|
|
Total
purchase price
|
$
|
3,939
|
|
$
|
1,821
|
|
$
|
5,760
|
|
9
2.
|
Acquisitions (continued)
|
The preliminary purchase price
allocations are based on management estimates as of December 31, 2016, and may
be adjusted up to one year following the closing of the acquisition. The Company
expects to finalize the purchase price allocation on or before June 30, 2017.
Pro forma results of operations have not been presented because the effect of
the C4U Malta and Pros Software acquisitions, individually and in the aggregate,
were not material to the Company. During the six months ended December 31, 2016,
the Company incurred acquisition-related expenditure of $0.2 million related to
these acquisitions. Since the closing of the C4U Malta acquisition on November
1, 2016, it has contributed revenue and a net loss after acquired intangible
asset amortization, net of taxation, of $0.1 million and $0.2 million,
respectively. Since the closing of the Pros Software acquisition on October 1,
2016, it has contributed revenue and a net loss after acquired intangible asset
amortization, net of taxation, of $0.2 million and $0.6 million, respectively.
3.
|
Pre-funded social welfare grants
receivable
|
Pre-funded social welfare grants receivable represents amounts
pre-funded by the Company to certain merchants participating in the merchant
acquiring system. The January 2017 payment service commenced on January 1, 2017,
but the Company pre-funded certain merchants participating in the merchant
acquiring system on the last two days of December 2016.
The Companys inventory comprised
the following category as of December 31, 2016 and June 30, 2016.
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
|
2016
|
|
|
2016
|
|
|
Finished goods
|
$
|
14,063
|
|
$
|
10,004
|
|
|
|
$
|
14,063
|
|
$
|
10,004
|
|
5.
|
Settlement assets and settlement
obligations
|
Settlement assets comprise (1)
cash received from the South African government that the Company holds pending
disbursement to recipient beneficiaries of social welfare grants and (2) cash
received from customers on whose behalf the Company processes payroll payments
that the Company will disburse to customer employees, payroll-related payees and
other payees designated by the customer.
Settlement obligations comprise
(1) amounts that the Company is obligated to disburse to recipient cardholders
of social welfare grants, and (2) amounts that the Company is obligated to pay
to customer employees, payroll-related payees and other payees designated by the
customer.
The balances at each reporting
date may vary widely depending on the timing of the receipts and payments of
these assets and obligations.
Net change in settlement assets
and net change in settlement obligations included in the unaudited condensed
consolidated statement of cash flows for each of the three and six months ended
December 31, 2015, have been increased by $39.4 million as a result of the
restatement described in Note 2(Significant accounting policiesSettlement
assets and settlement obligations) to the Companys audited consolidated
financial statements included in its Annual Report on Form 10-K for the year
ended June 30, 2016.
6.
|
Fair value of financial
instruments
|
Initial recognition
and measurement
Financial instruments are
recognized when the Company becomes a party to the transaction. Initial
measurements are at cost, which includes transaction costs.
Risk
management
The Company seeks to reduce its
exposure to currencies other than the South African rand through a policy of
matching, to the extent possible, assets and liabilities denominated in those
currencies. In addition, the Company uses financial instruments in order to
economically hedge its exposure to exchange rate and interest rate fluctuations
arising from its operations. The Company is also exposed to equity price and
liquidity risks as well as credit risks.
10
6.
|
Fair value of financial instruments
(continued)
|
Risk management
(continued)
Currency
exchange risk
The Company is subject to
currency exchange risk because it purchases inventories that it is required to
settle in other currencies, primarily the euro and U.S. dollar. The Company has
used forward contracts in order to limit its exposure in these transactions to
fluctuations in exchange rates between the South African rand, on the one hand,
and the U.S. dollar and the euro, on the other hand.
Translation
risk
Translation risk relates to the
risk that the Companys results of operations will vary significantly as the
U.S. dollar is its reporting currency, but it earns most of its revenues and
incurs most of its expenses in ZAR. The U.S. dollar to ZAR exchange rate has
fluctuated significantly over the past three years. As exchange rates are
outside the Companys control, there can be no assurance that future
fluctuations will not adversely affect the Companys results of operations and
financial condition.
Interest
rate risk
As a result of its normal
borrowing and leasing activities, the Companys operating results are exposed to
fluctuations in interest rates, which it manages primarily through regular
financing activities. The Company generally maintains limited investment in cash
equivalents and has occasionally invested in marketable securities.
Credit
risk
Credit risk relates to the risk
of loss that the Company would incur as a result of non-performance by
counterparties. The Company maintains credit risk policies with regard to its
counterparties to minimize overall credit risk. These policies include an
evaluation of a potential counterpartys financial condition, credit rating, and
other credit criteria and risk mitigation tools as the Companys management
deems appropriate.
With respect to credit risk on
financial instruments, the Company maintains a policy of entering into such
transactions only with South African and European financial institutions that
have a credit rating of BBB- or better, as determined by credit rating agencies
such as Standard & Poors, Moodys and Fitch Ratings.
UEPS-based
microlending credit risk
The Company is exposed to credit
risk in its UEPS-based microlending activities, which provides unsecured
short-term loans to qualifying customers. The Company manages this risk by
performing an affordability test for each prospective customer and assigns a
creditworthiness score, which takes into account a variety of factors such as
other debts and total expenditures on normal household and lifestyle expenses.
Equity
price and liquidity risk
Equity price risk relates to the
risk of loss that the Company would incur as a result of the volatility in the
exchange-traded price of equity securities that it holds and the risk that it
may not be able to liquidate these securities. The market price of these
securities may fluctuate for a variety of reasons, consequently, the amount the
Company may obtain in a subsequent sale of these securities may significantly
differ from the reported market value.
Liquidity risk relates to the
risk of loss that the Company would incur as a result of the lack of liquidity
on the exchange on which these securities are listed. The Company may not be
able to sell some or all of these securities at one time, or over an extended
period of time without influencing the exchange traded price, or at all.
Financial instruments
The following section describes
the valuation methodologies the Company uses to measure its significant
financial assets and liabilities at fair value.
In general, and where applicable,
the Company uses quoted prices in active markets for identical assets or
liabilities to determine fair value. This pricing methodology applies to Level 1
investments. If quoted prices in active markets for identical assets or
liabilities are not available to determine fair value, then the Company uses
quoted prices for similar assets and liabilities or inputs other than the quoted
prices that are observable either directly or indirectly. These investments are
included in Level 2 investments. In circumstances in which inputs are generally
unobservable, values typically reflect managements estimates of assumptions
that market participants would use in pricing the asset or liability.
11
6.
|
Fair value of financial instruments
(continued)
|
Financial instruments
(continued)
The fair values are therefore
determined using model-based techniques that include option pricing models,
discounted cash flow models, and similar techniques. Investments valued using
such techniques are included in Level 3 investments.
Derivative
transactions - Foreign exchange contracts
As part of the Companys risk
management strategy, the Company enters into derivative transactions to mitigate
exposures to foreign currencies using foreign exchange contracts. These foreign
exchange contracts are over-the-counter derivative transactions. Substantially
all of the Companys derivative exposures are with counterparties that have
long-term credit ratings of BBB- or better. The Company uses quoted prices in
active markets for similar assets and liabilities to determine fair value (Level
2). The Company has no derivatives that require fair value measurement under
Level 1 or 3 of the fair value hierarchy.
The Companys outstanding foreign
exchange contracts are as follows: As of December 31, 2016 None.
As of June 30, 2016
|
|
|
|
|
|
Fair market
|
|
|
|
|
|
Notional amount
|
|
Strike price
|
|
|
value price
|
|
|
Maturity
|
|
|
EUR 573,765.00
|
|
ZAR 15.9587
|
|
|
ZAR 16.3393
|
|
|
July 20, 2016
|
|
|
EUR 554,494.50
|
|
ZAR 16.0643
|
|
|
ZAR 16.4564
|
|
|
August 19, 2016
|
|
|
EUR 465,711.00
|
|
ZAR 16.1798
|
|
|
ZAR 16.582
|
|
|
September 20, 2016
|
|
|
EUR 393,675.00
|
|
ZAR 16.2911
|
|
|
ZAR 16.7017
|
|
|
October 20, 2016
|
|
|
EUR 302,368.50
|
|
ZAR 16.4085
|
|
|
ZAR 16.8301
|
|
|
November 21, 2016
|
|
The following table presents the
Companys assets measured at fair value on a recurring basis as of December 31,
2016, according to the fair value hierarchy:
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
price in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
markets for
|
|
|
other
|
|
|
Significant
|
|
|
|
|
|
|
|
identical
|
|
|
observable
|
|
|
unobservable
|
|
|
|
|
|
|
|
assets
|
|
|
inputs
|
|
|
inputs
|
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related to insurance
business (included in
other long-term
assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
$
|
572
|
|
$
|
-
|
|
$
|
-
|
|
$
|
572
|
|
|
Other
|
|
-
|
|
|
35
|
|
|
-
|
|
|
35
|
|
|
Total assets at fair
value
|
$
|
572
|
|
$
|
35
|
|
$
|
-
|
|
$
|
607
|
|
12
6.
|
Fair value of financial instruments
(continued)
|
The following table presents the
Companys assets measured at fair value on a recurring basis as of June 30,
2016, according to the fair value hierarchy:
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
price in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
markets for
|
|
|
other
|
|
|
Significant
|
|
|
|
|
|
|
|
identical
|
|
|
observable
|
|
|
unobservable
|
|
|
|
|
|
|
|
assets
|
|
|
inputs
|
|
|
inputs
|
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related to insurance business
(included in
other long-term assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
$
|
533
|
|
$
|
-
|
|
$
|
-
|
|
$
|
533
|
|
|
Foreign exchange contracts
|
|
-
|
|
|
62
|
|
|
-
|
|
|
62
|
|
|
Other
|
|
-
|
|
|
37
|
|
|
-
|
|
|
37
|
|
|
Total assets at fair value
|
$
|
533
|
|
$
|
99
|
|
$
|
-
|
|
$
|
632
|
|
Changes in the Companys
investment in Finbond Group Limited, or Finbond, (Level 3 that are measured at
fair value on a recurring basis) were insignificant during the six months ended
December 31, 2015. There have been no transfers in or out of Level 3 during the
three and six months ended December 31, 2016 and during the three months ended
December 31, 2015, respectively.
Assets and
liabilities measured at fair value on a nonrecurring basis
The Company measures its assets
at fair value on a nonrecurring basis when they are deemed to be
other-than-temporarily impaired. The Company has no liabilities that are
measured at fair value on a nonrecurring basis. The Company reviews the carrying
values of its assets when events and circumstances warrant and considers all
available evidence in evaluating when declines in fair value are
other-than-temporary. The fair values of the Companys assets are determined
using the best information available, and may include quoted market prices,
market comparables, and discounted cash flow projections. An impairment charge
is recorded when the cost of the assets exceeds its fair value and the excess is
determined to be other-than-temporary. The Company has not recorded any
impairment charges during the reporting periods presented herein.
Equity accounted
investments
Finbond
On October 7, 2016, the Company
provided a loan of ZAR 139.2 million ($10.0 million) to Finbond in order for
Finbond to partially finance its expansion strategy in the United States.
Interest on the loan is payable quarterly in arrears and is based on the London
Interbank Offered Rate (LIBOR) in effect from time to time plus a margin of
10.00% . The LIBOR rate was 0.7717% on December 31, 2016. The loan is repayable
in full at the earlier of Finbond concluding a rights offer or February 28,
2017. Finbond expects to conclude the rights offering during the first quarter
of calendar 2017, and the Company has provided an irrevocable undertaking to
participate in the rights offering and convert the ZAR 139.2 million loan to
Finbond shares as part of this process.
7.
|
Goodwill and intangible assets,
net
|
Goodwill
Summarized below is the movement
in the carrying value of goodwill for the six months ended December 31, 2016:
|
|
|
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
|
Gross value
|
|
|
impairment
|
|
|
value
|
|
|
Balance as of June 30, 2016
|
$
|
179,478
|
|
$
|
-
|
|
$
|
179,478
|
|
|
Acquisition of C4U Malta (Note 2)
|
|
2,475
|
|
|
-
|
|
|
2,475
|
|
|
Foreign currency
adjustment
(1)
|
|
(1,267
|
)
|
|
-
|
|
|
(1,267
|
)
|
|
Balance as
of December 31, 2016
|
$
|
180,686
|
|
$
|
-
|
|
$
|
180,686
|
|
(1) Represents the effects of
the fluctuations between the South African rand, Euro and the Korean won, and
the U.S. dollar on the carrying value.
13
7.
|
Goodwill and intangible assets, net
(continued)
|
Goodwill (continued)
Goodwill has been allocated to
the Companys reportable segments as follows:
|
|
|
South
|
|
|
|
|
|
Financial
|
|
|
|
|
|
|
|
African
|
|
|
International
|
|
|
inclusion and
|
|
|
|
|
|
|
|
transaction
|
|
|
transaction
|
|
|
applied
|
|
|
Carrying
|
|
|
|
|
processing
|
|
|
processing
|
|
|
technologies
|
|
|
value
|
|
|
Balance as of June 30, 2016
|
$
|
20,425
|
|
$
|
136,185
|
|
$
|
22,868
|
|
$
|
179,478
|
|
|
Acquisition of C4U Malta (Note 2)
|
|
-
|
|
|
2,475
|
|
|
-
|
|
|
2,475
|
|
|
Foreign currency
adjustment
(1)
|
|
1,554
|
|
|
(4,118
|
)
|
|
1,297
|
|
|
(1,267
|
)
|
|
Balance as
of December 31, 2016
|
$
|
21,979
|
|
$
|
134,542
|
|
$
|
24,165
|
|
$
|
180,686
|
|
(1) Represents the effects of
the fluctuations between the South African rand, Euro and the Korean won, and
the U.S. dollar on the carrying value.
Intangible assets, net
Intangible
assets acquired
Summarized below is the fair
value of the Pros Software and C4U Malta intangible assets acquired, translated
at the exchange rate applicable as of the acquisition date, and the
weighted-average amortization period of the intangible assets:
|
|
|
Fair value
|
|
|
Weighted-
|
|
|
|
|
as of
|
|
|
average
|
|
|
|
|
acquisition
|
|
|
amortization period
|
|
|
|
|
date
|
|
|
(in years)
|
|
|
Finite-lived intangible asset:
|
|
|
|
|
|
|
|
Customer relationships Pros
Software
|
$
|
2,311
|
|
|
0.75
|
|
|
Customer relationships C4U Malta
|
$
|
186
|
|
|
0.65
|
|
|
Software and unpatented technology
|
$
|
147
|
|
|
1.25
|
|
|
Infinite-lived intangible asset:
|
|
|
|
|
|
|
|
Financial institution license
|
$
|
745
|
|
|
n/a
|
|
On acquisition, the Company
recognized a deferred tax liability of approximately $0.7 million related to the
acquisition of the intangible assets.
Carrying
value and amortization of intangible assets
Summarized below is the carrying
value and accumulated amortization of the intangible assets as of December 31,
2016 and June 30, 2016:
|
|
|
As of December 31, 2016
|
|
|
As of June 30, 2016
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
|
carrying
|
|
|
Accumulated
|
|
|
carrying
|
|
|
carrying
|
|
|
Accumulated
|
|
|
carrying
|
|
|
|
|
value
|
|
|
amortization
|
|
|
value
|
|
|
value
|
|
|
amortization
|
|
|
value
|
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
(1)
|
$
|
94,654
|
|
$
|
(55,986
|
)
|
$
|
38,668
|
|
$
|
94,529
|
|
$
|
(51,557
|
)
|
$
|
42,972
|
|
|
Software and unpatented technology
(1)
|
|
30,959
|
|
|
(28,532
|
)
|
|
2,427
|
|
|
31,452
|
|
|
(28,791
|
)
|
|
2,661
|
|
|
FTS patent
|
|
2,789
|
|
|
(2,789
|
)
|
|
-
|
|
|
2,592
|
|
|
(2,592
|
)
|
|
-
|
|
|
Exclusive licenses
|
|
4,506
|
|
|
(4,506
|
)
|
|
-
|
|
|
4,506
|
|
|
(4,506
|
)
|
|
-
|
|
|
Trademarks
|
|
6,670
|
|
|
(4,140
|
)
|
|
2,530
|
|
|
6,685
|
|
|
(3,762
|
)
|
|
2,923
|
|
|
Total finite-lived intangible
assets
|
|
139,578
|
|
|
(95,953
|
)
|
|
43,625
|
|
|
139,764
|
|
|
(91,208
|
)
|
|
48,556
|
|
|
Infinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial institution license
|
|
714
|
|
|
-
|
|
|
714
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Total
infinite-lived intangible
assets
|
|
714
|
|
|
-
|
|
|
714
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Total intangible assets
|
$
|
140,292
|
|
$
|
(95,953
|
)
|
$
|
44,339
|
|
$
|
139,764
|
|
$
|
(91,208
|
)
|
$
|
48,556
|
|
(1) Includes the customer
relationships acquired as part of the Pros Software acquisition in October 2016,
and the customer relationships and software and unpatented technology acquired
as part of the C4U Malta acquisition in November 2016.
14
7.
|
Goodwill and intangible assets, net
(continued)
|
Intangible assets, net
(continued)
Aggregate amortization expense on
the finite-lived intangible assets for the three months ended December 31, 2016
and 2015, was approximately $3.6 million and $2.5 million, respectively.
Aggregate amortization expense on the finite-lived intangible assets for the six
months ended December 31, 2016 and 2015, was approximately $6.5 million and $5.9
million, respectively.
Future estimated annual
amortization expense for the next five fiscal years and thereafter, assuming
exchange rates that prevailed on December 31, 2016, is presented in the table
below. Actual amortization expense in future periods could differ from this
estimate as a result of acquisitions, changes in useful lives, exchange rate
fluctuations and other relevant factors.
|
2017
|
$
|
14,241
|
|
|
2018
|
|
11,061
|
|
|
2019
|
|
10,391
|
|
|
2020
|
|
9,695
|
|
|
2021
|
|
4,236
|
|
|
Thereafter
|
$
|
371
|
|
8.
|
Reinsurance assets and policy holder liabilities under
insurance and investment contracts
|
Reinsurance assets and
policy holder liabilities under insurance contracts
Summarized below is the movement
in reinsurance assets and policy holder liabilities under insurance contracts
during the six months ended December 31, 2016:
|
|
|
Reinsurance
|
|
|
Insurance
|
|
|
|
|
assets
(1)
|
|
|
contracts
(2)
|
|
|
Balance as of June 30, 2016
|
$
|
171
|
|
$
|
(1,078
|
)
|
|
Increase in policy holder benefits
under insurance contracts
|
|
365
|
|
|
(1,811
|
)
|
|
Claims and
policyholders benefits under insurance contracts .
|
|
(353
|
)
|
|
1,375
|
|
|
Foreign currency
adjustment
(3)
|
|
13
|
|
|
(82
|
)
|
|
Balance
as of December 31, 2016
|
$
|
196
|
|
$
|
(1,596
|
)
|
|
(1)
|
Included in other long-term assets.
|
|
(2)
|
Included in other long-term liabilities.
|
|
(3)
|
Represents the effects of the fluctuations between the
ZAR against the U.S. dollar.
|
The Company has agreements with
reinsurance companies in order to limit its losses from large insurance
contracts, however, if the reinsurer is unable to meet its obligations, the
Company retains the liability.
The Company determines its
reserves for future policy benefits under its life insurance products using a
model which estimates claims incurred that have not been reported at the balance
sheet date. This model includes best estimate assumptions of experience plus
prescribed margins, as required in the markets in which these products are
offered, namely South Africa. The best estimate assumptions include those
assumptions related to mortality, morbidity and claim reporting delays, and the
main assumptions used to calculate the reserve for future policy benefits
include (i) mortality and morbidity assumptions reflecting the companys most
recent experience and (ii) claim reporting delays reflecting Company specific
and industry experience.
15
8.
|
Reinsurance assets and policy holder liabilities under
insurance and investment contracts (continued)
|
Assets and policy holder
liabilities under investment contracts
Summarized below is the movement
in assets and policy holder liabilities under investment contracts during the
six months ended December 31, 2016:
|
|
|
|
|
|
Investment
|
|
|
|
|
Assets
(1)
|
|
|
contracts
(2)
|
|
|
Balance as of June 30, 2016
|
$
|
528
|
|
$
|
(528
|
)
|
|
Increase in policy holder benefits
under investment contracts .
|
|
18
|
|
|
(18
|
)
|
|
Maturity of claims
under investment contracts
|
|
(13
|
)
|
|
13
|
|
|
Foreign currency
adjustment
(3)
|
|
41
|
|
|
(41
|
)
|
|
Balance
as of December 31, 2016
|
$
|
574
|
|
$
|
(574
|
)
|
|
(1)
|
Included in other long-term assets.
|
|
(2)
|
Included in other long-term liabilities.
|
|
(3)
|
Represents the effects of the fluctuations between the
ZAR against the U.S. dollar.
|
The Company does not offer any
investment products with guarantees related to capital or returns.
9.
|
Short-term credit
facilities
|
The Companys short-term credit
facilities are described in Note 12 to the Companys audited consolidated
financial statements included in its Annual Report on Form 10-K for the year
ended June 30, 2016.
South Africa
The aggregate amount of the
Companys short-term South African credit facility with Nedbank Limited
(Nedbank) was ZAR 400 million ($29.2 million) and consists of (i) a primary
amount of up to ZAR 200 million ($14.6 million), which is immediately available,
and (ii) a secondary amount of up to ZAR 200 million ($14.6 million), which is
not immediately available (all amounts denominated in ZAR and translated at
exchange rates applicable as of December 31, 2016). The primary amount comprises
an overdraft facility of up to ZAR 50 million ($3.5 million) and indirect and
derivative facilities of up to ZAR 150 million ($10.9 million), which include
letters of guarantee, letters of credit and forward exchange contracts (all
amounts denominated in ZAR and translated at exchange rates applicable as of
December 31, 2016).
On December 9, 2016, Nedbank
issued a letter (the Nedbank Facility Letter) to the Company under which it
agreed to temporarily increase the overdraft facility by the secondary amount of
ZAR 200 million to ZAR 250 million. The increase in the overdraft to ZAR 250
million is available until the earlier of the day on which the Company issues
shares to the value of $45.0 million (refer to Note 11) or the day on which
FirstRand Bank Limited (acting through its Rand Merchant Bank division) repays
ZAR 600 million back to the Company that is currently held in escrow related to
the issuance of a ZAR 2 billion guarantee to Net1 SA (refer to Note 10).
As of December 31, 2016, the
interest rate on the overdraft facility was 9.35% . The Company has ceded its
investment in Cash Paymaster Services Proprietary Limited as security for its
repayment obligations under the facility. A commitment fee of 0.35% per annum is
payable on the monthly unutilized amount of the overdraft portion of the primary
amount. The Company is required to comply with customary non-financial
covenants, including, without limitation, covenants that restrict its ability to
dispose of or encumber its assets, incur additional indebtedness or engage in
certain business combinations.
As of December 31, 2016 and June
30, 2016, respectively, the Company had not utilized any of its overdraft
facility. As of December 31, 2016, the Company had utilized ZAR 130.5 million
($9.5 million, translated at exchange rates applicable as of December 31, 2016)
of its ZAR 150 million indirect and derivative facilities to enable the bank to
issue guarantees, including stand-by letters of credit, in order for the Company
to honor its obligations to third parties requiring such guarantees (refer to
Note 18). As of June 30, 2016, the Company had utilized ZAR 131.1 million ($8.9
million, translated at exchange rates applicable as of June 30, 2016) of its ZAR
150 million indirect and derivative facilities.
Korea
The Company had not utilized any
of its KRW 10 billion ($8.3 million, translated at exchange rates applicable as
of December 31, 2016) overdraft facility as of December 31, 2016 or June 30,
2016. As of December 31, 2016, the interest rate on the overdraft facility was
3.47% . The facility expired in January 2017, and has been renewed through
January 2018.
16
Korea
The Companys Korean senior
secured loan facility is described in Note 13 to the Companys audited
consolidated financial statements included in its Annual Report on Form 10-K for
the year ended June 30, 2016. The current carrying value as of December 31,
2016, is $23.2 million. As of December 31, 2016, the carrying amount of the
long-term borrowings approximated fair value. The interest rate in effect on
December 31, 2016, was 4.49% .
On July 29, 2016, the Company
utilized approximately KRW 0.3 billion ($0.2 million) of its Facility C
revolving credit facility to pay interest due. On the same day, the Company made
unscheduled payments of KRW 20 billion ($17.8 million) towards its Facility A
loan, and KRW 10 billion ($8.9 million) towards its Facility C revolving credit
facility. On October 31, 2016, the Company made an unscheduled payment of KRW
2.1 billion ($1.8 million) towards its Facility A loan as a result of a
distribution from KSNET paid to Net1 Korea which was contractually required to
be applied against interest and principal outstanding. The next scheduled
principal payment of $8.3 million (translated at exchange rates applicable as of
December 31, 2016) is due on April 29, 2017.
Interest expense incurred during
the three months ended December 31, 2016 and 2015, was $0.2 million and $0.7
million, respectively. Interest expense incurred during the six months ended
December 31, 2016 and 2015, was $0.7 million and $1.4 million, respectively.
Prepaid facility fees amortized during the three months ended December 31, 2016
and 2015, was $0.03 million and $0.04 million respectively. Prepaid facility
fees amortized during the six months ended December 31, 2016 and 2015, was $0.07
million and $0.1 million, respectively.
South Africa
On October 4, 2016, the Company,
through one of its subsidiaries, Net1 Applied Technologies South Africa
Proprietary Limited (Net1 SA), entered into a Subscription Agreement (the
Blue Label Subscription Agreement) with Blue Label Telecoms Limited (Blue
Label), a JSE-listed company which is a leading provider of prepaid electricity
and airtime in South Africa. Pursuant to the Blue Label Subscription Agreement,
Net1 SA will subscribe for approximately 117.9 million ordinary shares of Blue
Label at a price of ZAR 16.96 per share, for an aggregate price of ZAR 2.0
billion.
On October 20, 2016, Net1 SA and
Blue Label signed an addendum to the Blue Label Subscription Agreement which,
among other things, established the subscription date and required FirstRand
Bank Limited (acting through its Rand Merchant Bank division) (RMB) to issue a
guarantee to Blue Label for the purchase price of the Blue Label shares to be
purchased by Net1 SA (the Guarantee). On that same date, and in connection
with the Blue Label Subscription Agreement, Net1 SA entered into a Common Terms
Agreement, a Senior Facility A Agreement, Senior Facility B Agreement, Senior
Facility C Agreement, Subordination Agreement, Security Cession & Pledge and
certain ancillary loan documents (collectively, the Loan Documents) with RMB,
pursuant to which, among other things, Net1 SA may borrow up to an aggregate of
ZAR 1.4 billion ($101.9 million, translated at exchange rates applicable as of
December 31, 2016) to finance a portion of its working capital requirements and
a portion of its investment in Blue Label. The amounts available under these
loans and an escrow deposit of ZAR 600 million ($43.7 million, translated at
exchange rates applicable as of December 31, 2016) made by Net1 SA serve as
security for the Guarantee. Net1 and certain of the Companys other subsidiaries
have agreed to guarantee the obligations of Net1 SA to RMB and subordinate any
claims they may have against Net1 SA and certain of its subsidiaries to RMBs
claims against such persons. The Loan Documents provide for a Facility A term
loan of up to ZAR 500 million ($36.3 million), a Facility B term loan of up to
ZAR 900 million ($64.5 million), amounts translated at exchange rates applicable
as of December 31, 2016, and a Facility C term loan in an amount equal to the
aggregate amount of voluntary prepayments of the outstanding principal amount of
the Facility A loan.
On November 15, 2016, RMB, the
Company, Net1 SA and certain of their respective affiliates entered into a
letter agreement (the Guarantee Letter) amending the Loan Documents to extend
the term of the Guarantee, as referenced therein, to February 28, 2017.
On November 16, 2016, Net1 SA and
Blue Label entered into an Amended and Restated Subscription Agreement (the
A&R Agreement) which, among other things, extended the subscription date
to a date, to be specified by Blue Label, during the period between January 23,
2017 to February 28, 2017 (inclusive).
On November 15, 2016, RMB issued
a new guarantee in favor of Blue Label for the purchase price of the Blue Label
shares to be purchased by Net1 SA (the New Guarantee). In accordance with the
terms of the Guarantee Letter, the New Guarantee will expire on February 28,
2017. Upon closing under the A&R Agreement, Net1 SA expects Blue Label to
deliver the New Guarantee to RMB for payment of the subscription price of the
Blue Label shares.
17
10.
|
Long-term borrowings
(continued)
|
South Africa (continued)
The Company paid a guarantee fee
of approximately ZAR 16.0 million ($1.1 million) during the three months ended
December 31, 2016. Interest on the loans is payable monthly based on the
Johannesburg Interbank Agreed Rate (JIBAR) in effect from time to time plus a
margin of 1.35% for the Facility A and Facility C loans and 2.75% for the
Facility B loan. The JIBAR rate was 7.4% on December 31, 2016.
Principal repayments on the
Facility A and Facility B loans are due in eight equal quarterly installments,
beginning on January 31, 2017, and all of the loans mature on October 20, 2018.
Principal repayment on the Facility C loan is due in quarterly installments to
be determined by RMB subject to the date of borrowing thereunder. Voluntary
prepayments are permitted without early repayment fees or penalties.
The loans are secured by a pledge
by Net1 SA of its entire equity interest in Blue Label. The Loan Documents
contain customary covenants that require Net1 SA to maintain a specified total
net leverage ratio and restrict the ability of Net1 SA, and certain of its
subsidiaries to make certain distributions with respect to their capital stock,
prepay other debt, encumber their assets, incur additional indebtedness, make
investment above specified levels, engage in certain business combinations and
engage in other corporate activities.
The following table presents
reconciliation between the number of shares, net of treasury, presented in the
unaudited condensed consolidated statement of changes in equity during the six
months ended December 31, 2016 and 2015, respectively, and the number of shares,
net of treasury, excluding non-vested equity shares that have not vested during
the six months ended December 31, 2016 and 2015, respectively:
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Number of shares, net of
treasury:
|
|
|
|
|
|
|
|
Statement of changes in
equity
|
|
52,521,345
|
|
|
46,573,489
|
|
|
Less:
Non-vested equity shares that have not vested (Note 13)
|
|
(904,356
|
)
|
|
(589,447
|
)
|
|
Number
of shares, net of treasury excluding non-vested equity shares that have
not vested
|
|
51,616,989
|
|
|
45,984,042
|
|
Sale of common stock
On October 6, 2016, the Company
entered into stock purchase agreements with two investors under which the
Company agreed to sell each of the investors 2.5 million shares of the its
common stock at a price of $9.00 per share, for aggregate gross proceeds to the
Company of $45.0 million. On November 16, 2016, the parties amended each stock
purchase agreement to have the closing date occur on the earlier of (i) a date
to be specified by the Company in writing to the respective investor which date
shall be no earlier than January 23, 2017, and no later than February 28, 2017;
provided however, that such date must be at least five business days after such
notice is delivered; and (ii) a date to be specified by the respective Investor
in writing to the Company which date shall be no earlier than January 23, 2017,
and no later than February 28, 2017; provided however, that such date must be at
least five business days after such notice is delivered. The sale of the shares
will be registered under the Securities Act of 1933, as amended, pursuant to the
Companys shelf registration statement on Form S-3. Each of the investors will
be contractually restricted from selling or otherwise disposing of the purchased
shares for a period of six months after the date of issuance.
Common stock repurchases
Executed under share repurchase
authorizations
In February 2016, the Companys
Board of Directors approved the replenishment of its share repurchase
authorization to repurchase up to an aggregate of $100 million of common stock.
The authorization has no expiration date. On June 29, 2016, the Company adopted
a Rule 10b5-1 trading plan for the purpose of repurchasing approximately $50
million of its common stock, which was included within the original share
repurchase authorization. The Company did not repurchase any of its shares
during the three months ended December 31, 2016. During the three months ended
December 31, 2015, the Company repurchased 749,213 shares for approximately
$11.2 million under its share repurchase authorization. During the six months
ended December 31, 2016 and 2015, the Company repurchased 3,137,609 shares for
approximately $31.6 million and 749,213 shares for approximately $11.2 million,
respectively, under its share repurchase authorizations.
18
12.
|
Accumulated other comprehensive
loss
|
The table below presents the
change in accumulated other comprehensive (loss) income per component during the
six months ended December 31, 2016:
|
|
|
Six months
ended
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
net
|
|
|
|
|
|
|
|
|
|
|
unrealized
|
|
|
|
|
|
|
|
Accumulated
|
|
|
income on
|
|
|
|
|
|
|
|
foreign
|
|
|
asset
|
|
|
|
|
|
|
|
currency
|
|
|
available for
|
|
|
|
|
|
|
|
translation
|
|
|
sale, net of
|
|
|
|
|
|
|
|
reserve
|
|
|
tax
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2016
|
$
|
(189,700
|
)
|
$
|
-
|
|
$
|
(189,700
|
)
|
|
Movement in foreign
currency translation reserve
|
|
1,057
|
|
|
-
|
|
|
1,057
|
|
|
Balance as of December 31, 2016
|
$
|
(188,643
|
)
|
$
|
-
|
|
$
|
(188,643
|
)
|
There were no reclassifications
from accumulated other comprehensive loss to comprehensive (loss) income during
the three and six months ended December 31, 2016 or 2015, respectively.
13.
|
Stock-based compensation
|
Stock option and restricted stock
activity
Options
The following table summarizes
stock option activity for the six months ended December 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
average
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
average
|
|
|
remaining
|
|
|
Aggregate
|
|
|
average
|
|
|
|
|
|
|
|
exercise
|
|
|
contractual
|
|
|
intrinsic
|
|
|
grant date
|
|
|
|
|
Number of
|
|
|
price
|
|
|
term
|
|
|
value
|
|
|
fair value
|
|
|
|
|
shares
|
|
|
($)
|
|
|
(in years)
|
|
|
($000)
|
|
|
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding June 30, 2016
|
|
2,077,524
|
|
|
15.92
|
|
|
3.65
|
|
|
926
|
|
|
|
|
|
Expired unexercised
|
|
(474,443
|
)
|
|
22.51
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31,
2016
|
|
1,603,081
|
|
|
13.98
|
|
|
4.25
|
|
|
1,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding June 30, 2015
|
|
2,401,169
|
|
|
15.34
|
|
|
4.74
|
|
|
11,516
|
|
|
|
|
|
Exercised
|
|
(323,645
|
)
|
|
11.62
|
|
|
|
|
|
2,669
|
|
|
|
|
|
Outstanding December 31,
2015
|
|
2,077,524
|
|
|
15.92
|
|
|
4.08
|
|
|
3,623
|
|
|
|
|
No stock options were awarded
during the three and six months ended December 31, 2016 or 2015. There were no
forfeitures during the three months ended December 31, 2016 or during the three
and six months ended December 31, 2015; however, during the six months ended
December 31, 2016, 474,443 stock options awarded in August 2006, expired
unexercised.
The following table presents
stock options vested and expecting to vest as of December 31, 2016:
|
|
|
|
|
|
Weighted
|
|
|
average
|
|
|
|
|
|
|
|
|
|
|
average
|
|
|
remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
|
exercise
|
|
|
contractual
|
|
|
intrinsic
|
|
|
|
|
Number of
|
|
|
price
|
|
|
term
|
|
|
value
|
|
|
|
|
shares
|
|
|
($)
|
|
|
(in years)
|
|
|
($000)
|
|
|
Vested and expecting to vest
December 31, 2016
|
|
1,603,081
|
|
|
13.98
|
|
|
4.25
|
|
|
1,685
|
|
19
13.
|
Stock-based compensation
(continued)
|
Stock option and restricted stock
activity (continued)
Options (continued)
These options have an exercise
price range of $7.35 to $24.46.
The following table presents
stock options that are exercisable as of December 31, 2016:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
average
|
|
|
|
|
|
|
|
|
|
|
average
|
|
|
remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
|
exercise
|
|
|
contractual
|
|
|
intrinsic
|
|
|
|
|
Number of
|
|
|
price
|
|
|
term
|
|
|
value
|
|
|
|
|
shares
|
|
|
($)
|
|
|
(in years)
|
|
|
($000)
|
|
|
Exercisable December 31,
2016
|
|
1,448,278
|
|
|
14.28
|
|
|
3.87
|
|
|
1,646
|
|
No stock options became
exercisable during the three months ended December 31, 2016 and 2015,
respectively. During the six months ended December 31, 2016 and 2015,
respectively, 154,803 and 373,435 stock options became exercisable. No stock
options were exercised during the three and six months ended December 31, 2016,
and during the three months ended December 31, 2015. The Company received
approximately $3.8 million from the exercise of 323,645 stock options, during
the six months ended December 31, 2015. The Company issues new shares to satisfy
stock option exercises.
Restricted stock
The following table summarizes
restricted stock activity for the six months ended December 31, 2016 and 2015:
|
|
|
Number of
|
|
|
Weighted
|
|
|
|
|
shares of
|
|
|
average grant
|
|
|
|
|
restricted
|
|
|
date fair value
|
|
|
|
|
stock
|
|
|
($000)
|
|
|
Non-vested June 30, 2016
|
|
589,447
|
|
|
7,622
|
|
|
Granted August 2016
|
|
387,000
|
|
|
4,145
|
|
|
Vested August 2016
|
|
(72,091
|
)
|
|
735
|
|
|
Non-vested December 31,
2016
|
|
904,356
|
|
|
11,142
|
|
|
|
|
|
|
|
|
|
|
Non-vested June 30, 2015
|
|
341,529
|
|
|
1,759
|
|
|
Granted August 2015
|
|
319,492
|
|
|
581
|
|
|
Vested August 2015
|
|
(71,574
|
)
|
|
1,435
|
|
|
Non-vested December 31, 2015
|
|
589,447
|
|
|
7,622
|
|
The August 2016 grants comprise
350,000 and 37,000 shares of restricted stock awarded to executive officers and
non-employee directors, respectively. The shares of restricted stock awarded to
executive officers in August 2016 are subject to time-based and
performance-based vesting conditions. In order for any of the shares to vest,
the recipient must remain employed by the Company on a full-time basis on the
date that it files its Annual Report on Form 10-K for the fiscal year ended June
30, 2019. If that condition is satisfied, then the shares will vest based on the
level of Fundamental EPS the Company achieves for the fiscal year ended June 30,
2019 (2019 Fundamental EPS), as follows:
|
|
One-third of the shares will vest if the
Company achieves 2019 Fundamental EPS of $2.60;
|
|
|
Two-thirds of the shares will vest if the
Company achieves 2019 Fundamental EPS of $2.80; and
|
|
|
All of the shares will vest if the Company
achieves 2019 Fundamental EPS of $3.00.
|
At levels of 2019 Fundamental EPS
greater than $2.60 and less than $3.00, the number of shares that will vest will
be determined by linear interpolation relative to 2019 Fundamental EPS of $2.80.
Any shares that do not vest in accordance with the above-described conditions
will be forfeited. All shares of restricted stock have been valued utilizing the
closing price of shares of the Companys common stock quoted on The Nasdaq
Global Select Market on the date of grant.
20
13.
|
Stock-based compensation
(continued)
|
Stock option and restricted stock
activity (continued)
Restricted stock (continued)
The August 2015 grants comprise
301,537 and 17,955 shares of restricted stock awarded to employees and
non-employee directors, respectively. The shares of restricted stock awarded to
employees in August 2015 are subject to time-based and performance-based vesting
conditions. In order for any of the shares to vest, the recipient must remain
employed by the Company on a full-time basis on the date that it files its
Annual Report on Form 10-K for the fiscal year ended June 30, 2018. If that
condition is satisfied, then the shares will vest based on the level of
Fundamental EPS the Company achieves for the fiscal year ended June 30, 2018
(2018 Fundamental EPS), as follows:
|
|
One-third of the shares will vest if the
Company achieves 2018 Fundamental EPS of $2.88;
|
|
|
Two-thirds of the shares will vest if the
Company achieves 2018 Fundamental EPS of $3.30; and
|
|
|
All of the shares will vest if the Company
achieves 2018 Fundamental EPS of $3.76.
|
At levels of 2018 Fundamental EPS
greater than $2.88 and less than $3.76, the number of shares that will vest will
be determined by linear interpolation relative to 2018 Fundamental EPS of $3.30.
Any shares that do not vest in accordance with the above-described conditions
will be forfeited. All shares of restricted stock have been valued utilizing the
closing price of shares of the Companys common stock quoted on The Nasdaq
Global Select Market on the date of grant. The Company has reversed the
stock-based compensation charge recognized to date related to the 301,537 shares
of restricted stock because it believes that it is unlikely that the 2018
Fundamental EPS target will be achieved due to the dilutive impact on the
fundamental EPS calculation as a result of issuance of the approximate 10
million shares to the IFC in May 2016.
The fair value of restricted
stock vesting during the six months ended December 31, 2016 and 2015,
respectively, was $0.7 million and $1.4 million.
Stock-based compensation charge and
unrecognized compensation cost
The Company has recorded a
stock-based compensation charge of $0.6 million and $1.0 million, respectively,
during the three months ended December 31, 2016 and 2015, which comprised:
|
|
|
|
|
|
Allocated to cost
|
|
|
|
|
|
|
|
|
|
|
of goods sold, IT
|
|
|
Allocated to
|
|
|
|
|
|
|
|
processing,
|
|
|
selling, general
|
|
|
|
|
Total
|
|
|
servicing and
|
|
|
and
|
|
|
|
|
charge
|
|
|
support
|
|
|
administration
|
|
|
Three months ended December
31, 2016
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation charge
|
$
|
635
|
|
$
|
-
|
|
$
|
635
|
|
|
Total three months ended December 31, 2016 .
|
$
|
635
|
|
$
|
-
|
|
$
|
635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December
31, 2015
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation charge
|
$
|
965
|
|
$
|
-
|
|
$
|
965
|
|
|
Total three months ended December 31, 2015 .
|
$
|
965
|
|
$
|
-
|
|
$
|
965
|
|
The Company has recorded a
stock-based compensation (reversal) charge, net of ($0.7 million) and $0.7
million, respectively, during the six months ended December 31, 2016 and 2015,
which comprised:
|
|
|
|
|
|
Allocated to cost
|
|
|
|
|
|
|
|
|
|
|
of goods sold, IT
|
|
|
Allocated to
|
|
|
|
|
|
|
|
processing,
|
|
|
selling, general
|
|
|
|
|
Total
|
|
|
servicing and
|
|
|
and
|
|
|
|
|
charge
|
|
|
support
|
|
|
administration
|
|
|
Six months ended December 31,
2016
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation charge
|
$
|
1,138
|
|
$
|
-
|
|
$
|
1,138
|
|
|
Reversal of stock
compensation charge related to restricted stock
|
|
(1,827
|
)
|
|
-
|
|
|
(1,827
|
)
|
|
Total six months ended December 31, 2016
|
$
|
(689
|
)
|
$
|
-
|
|
$
|
(689
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation charge
|
$
|
1,691
|
|
$
|
-
|
|
$
|
1,691
|
|
|
Total six months ended December 31, 2015
|
$
|
1,691
|
|
$
|
-
|
|
$
|
1,691
|
|
21
13.
|
Stock-based compensation
(continued)
|
Stock-based compensation charge and
unrecognized compensation cost (continued)
The stock-based compensation
charges have been allocated to selling, general and administration based on the
allocation of the cash compensation paid to the employees.
As of December 31, 2016, the
total unrecognized compensation cost related to stock options was approximately
$0.5 million, which the Company expects to recognize over approximately one
year. As of December 31, 2016, the total unrecognized compensation cost related
to restricted stock awards was approximately $4.1 million, which the Company
expects to recognize over approximately two years. This amount excludes the
total unrecognized compensation cost as of December 31, 2016, related to
restricted stock awards that the Company expects will not vest due to it not
achieving the 2018 Fundamental EPS of approximately $6.0 million. As of December
31, 2016, the cumulative unrecorded stock-based compensation charge related to
these awards of restricted stock that the Company has determined are expected
not to vest and has not expensed in its consolidated statement of operations is
approximately $2.9 million (which amount includes the $1.8 million reversed).
As of December 31, 2016 and June
30, 2016, respectively, the Company has recorded a deferred tax asset of
approximately $1.7 million and 1.8 million related to the stock-based
compensation charge recognized related to employees and directors of Net1 as it
is able to deduct the grant date fair value for taxation purposes.
The Company has issued redeemable
common stock which is redeemable at an amount other than fair value. Redemption
of a class of common stock at other than fair value increases or decreases the
carrying amount of the redeemable common stock and is reflected in basic
earnings per share using the two-class method. There were no redemptions of
common stock, or adjustments to the carrying value of the redeemable common
stock during the three and six months ended December 31, 2016 or 2015.
Accordingly the two-class method presented below does not include the impact of
any redemption. The Companys redeemable common stock is described in Note 14 to
the Companys audited consolidated financial statements included in its Annual
Report on Form 10-K for the year ended June 30, 2016.
Basic earnings per share include
shares of restricted stock that meet the definition of a participating security
because these shares are eligible to receive non-forfeitable dividend
equivalents at the same rate as common stock. Basic earnings per share have been
calculated using the two-class method and basic earnings per share for the three
and six months ended December 31, 2016 and 2015, reflects only undistributed
earnings. The computation below of basic earnings per share excludes the net
income attributable to shares of unvested restricted stock (participating
non-vested restricted stock) from the numerator and excludes the dilutive impact
of these unvested shares of restricted stock from the denominator.
Diluted earnings per share have
been calculated to give effect to the number of shares of additional common
stock that would have been outstanding if the potential dilutive instruments had
been issued in each period. Stock options are included in the calculation of
diluted earnings per share utilizing the treasury stock method and are not
considered to be participating securities as the stock options do not contain
non-forfeitable dividend rights. The calculation of diluted earnings per share
includes the dilutive effect of a portion of the restricted stock granted to
employees in August 2013, August 2014, November 2014, August 2015 and August
2016, as these shares of restricted stock are considered contingently returnable
shares for the purposes of the diluted earnings per share calculation and the
vesting conditions in respect of a portion of the restricted stock had been
satisfied. The vesting conditions for awards made in August 2016 and August 2015
are discussed in Note 13 and the vesting conditions for all other awards are
discussed in Note 18 to the Companys audited consolidated financial statements
included in its Annual Report on Form 10-K for the year ended June 30, 2016.
22
14.
|
Earnings per share
(continued)
|
The following table presents net
income attributable to Net1 (income from continuing operations) and the share
data used in the basic and diluted earnings per share computations using the
two-class method:
|
|
|
Three
months ended
|
|
|
Six months
ended
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
(in thousands
except
|
|
|
(in thousands
except
|
|
|
|
|
percent and
|
|
|
percent and
|
|
|
|
|
per share
data)
|
|
|
per share
data)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable
to Net1
|
$
|
18,641
|
|
$
|
16,658
|
|
$
|
43,273
|
|
$
|
39,678
|
|
|
Undistributed earnings
|
|
18,641
|
|
|
16,658
|
|
|
43,273
|
|
|
39,678
|
|
|
Percent
allocated to common shareholders (Calculation 1)
|
|
98%
|
|
|
99%
|
|
|
98%
|
|
|
99%
|
|
|
Numerator
for earnings per share: basic and diluted
|
$
|
18,296
|
|
$
|
16,426
|
|
$
|
42,561
|
|
$
|
39,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for
basic earnings per share: weighted-
average common shares outstanding
|
|
51,549
|
|
|
46,429
|
|
|
53,301
|
|
|
46,413
|
|
|
Effect of
dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
122
|
|
|
314
|
|
|
106
|
|
|
387
|
|
|
Denominator
for diluted earnings per share:
adjusted
weighted average
common shares
outstanding and assumed conversion
|
|
51,671
|
|
|
46,743
|
|
|
52,407
|
|
|
46,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.35
|
|
$
|
0.35
|
|
$
|
0.81
|
|
$
|
0.84
|
|
|
Diluted
|
$
|
0.35
|
|
$
|
0.35
|
|
$
|
0.81
|
|
$
|
0.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Calculation 1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted-average common shares outstanding (A)
|
|
51,549
|
|
|
46,429
|
|
|
53,301
|
|
|
46,413
|
|
|
Basic weighted-average
common shares outstanding
and unvested restricted shares expected to vest
(B)
|
|
52,521
|
|
|
47,086
|
|
|
53,176
|
|
|
47,007
|
|
|
Percent allocated to
common shareholders (A) / (B)
|
|
98%
|
|
|
99%
|
|
|
98%
|
|
|
99%
|
|
Options to purchase 705,126
shares of the Companys common stock at prices ranging from $11.23 to $24.46 per
share were outstanding during the three and six months ended December 31, 2016,
but were not included in the computation of diluted earnings per share because
the options exercise price were greater than the average market price of the
Companys common stock. The options, which expire at various dates through
August 27, 2024, were still outstanding as of December 31, 2016.
15.
|
Supplemental cash flow
information
|
The following table presents
supplemental cash flow disclosures for the three and six months ended December
31, 2016 and 2015:
|
|
|
Three
months ended
|
|
|
Six months
ended
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
Cash received from interest
|
$
|
5,050
|
|
$
|
3,656
|
|
$
|
9,335
|
|
$
|
7,921
|
|
|
Cash paid for interest
|
$
|
496
|
|
$
|
1,112
|
|
$
|
1,572
|
|
$
|
2,051
|
|
|
Cash paid for income taxes
|
$
|
22,564
|
|
$
|
20,256
|
|
$
|
24,067
|
|
$
|
24,322
|
|
Treasury shares, at cost included
in the Companys condensed consolidated balance sheet as of June 30, 2016,
includes 47,056 shares of the Companys common stock acquired for approximately
$0.5 million which were paid for on July 1, 2016. The liability for this payment
was included in accounts payable on the Companys condensed consolidated balance
sheet as of June 30, 2016. The payment of approximately $0.5 million is included
in acquisition of treasury stock in the Companys condensed consolidated
statement of cash flows for the six months ended December 31, 2016.
23
The Company discloses segment
information as reflected in the management information systems reports that its
chief operating decision maker uses in making decisions and to report certain
entity-wide disclosures about products and services, major customers, and the
countries in which the entity holds material assets or reports material
revenues. A description of the Companys operating segments is contained in Note
23 to the Companys audited consolidated financial statements included in its
Annual Report on Form 10-K for the year ended June 30, 2016.
The reconciliation of the
reportable segments revenue to revenue from external customers for the three
months ended December 31, 2016 and 2015, respectively, is as follows:
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
From
|
|
|
|
|
Reportable
|
|
|
Inter-
|
|
|
external
|
|
|
|
|
Segment
|
|
|
segment
|
|
|
customers
|
|
|
South African transaction
processing
|
$
|
59,862
|
|
$
|
5,395
|
|
$
|
54,467
|
|
|
International transaction processing
|
|
44,000
|
|
|
-
|
|
|
44,000
|
|
|
Financial inclusion and
applied technologies
|
|
59,258
|
|
|
6,292
|
|
|
52,966
|
|
|
Total for the three months ended
December 31, 2016
|
$
|
163,120
|
|
$
|
11,687
|
|
$
|
151,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction processing
|
$
|
52,764
|
|
$
|
3,350
|
|
$
|
49,414
|
|
|
International transaction
processing
|
|
40,836
|
|
|
-
|
|
|
40,836
|
|
|
Financial inclusion and applied technologies
|
|
65,686
|
|
|
5,655
|
|
|
60,031
|
|
|
Total for the three
months ended December 31, 2015
|
$
|
159,286
|
|
$
|
9,005
|
|
$
|
150,281
|
|
The reconciliation of the
reportable segments revenue to revenue from external customers for the six
months ended December 31, 2016 and 2015, respectively, is as follows:
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
From
|
|
|
|
|
Reportable
|
|
|
Inter-
|
|
|
external
|
|
|
|
|
Segment
|
|
|
segment
|
|
|
customers
|
|
|
South African transaction
processing
|
$
|
117,430
|
|
$
|
10,796
|
|
$
|
106,634
|
|
|
International transaction processing
|
|
90,190
|
|
|
-
|
|
|
90,190
|
|
|
Financial inclusion and
applied technologies
|
|
122,800
|
|
|
12,558
|
|
|
110,242
|
|
|
Total for the six months ended December
31, 2016
|
$
|
330,420
|
|
$
|
23,354
|
|
$
|
307,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction processing
|
$
|
108,403
|
|
$
|
6,977
|
|
$
|
101,426
|
|
|
International transaction
processing
|
|
82,065
|
|
|
-
|
|
|
82,065
|
|
|
Financial inclusion and applied technologies
|
|
133,046
|
|
|
11,783
|
|
|
121,263
|
|
|
Total for the six
months ended December 31, 2015
|
$
|
323,514
|
|
$
|
18,760
|
|
$
|
304,754
|
|
The Company does not allocate
interest income, interest expense or income tax expense to its reportable
segments. The Company evaluates segment performance based on segment operating
income before acquisition-related intangible asset amortization which represents
operating income before acquisition-related intangible asset amortization and
allocation of expenses allocated to Corporate/Eliminations, all under GAAP. The
reconciliation of the reportable segments measure of profit or loss to income
before income taxes for the three and six months ended December 31, 2016 and
2015, respectively, is as follows:
|
|
|
Three
months ended
|
|
|
Six months
ended
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
Reportable segments measure
of profit or loss
|
$
|
33,383
|
|
$
|
29,839
|
|
$
|
67,931
|
|
$
|
66,447
|
|
|
Operating income:
Corporate/Eliminations
|
|
(7,794
|
)
|
|
(5,060
|
)
|
|
(10,161
|
)
|
|
(10,453
|
)
|
|
Interest income
|
|
5,061
|
|
|
3,664
|
|
|
9,365
|
|
|
7,939
|
|
|
Interest expense
|
|
(510
|
)
|
|
(1,054
|
)
|
|
(1,306
|
)
|
|
(2,028
|
)
|
|
Income
before income taxes
|
$
|
30,140
|
|
$
|
27,389
|
|
$
|
65,829
|
|
$
|
61,905
|
|
24
16.
|
Operating segments
(continued)
|
The following tables summarize
segment information which is prepared in accordance with GAAP for the three and
six months ended December 31, 2016 and 2015:
|
|
|
Three
months ended
|
|
|
Six months
ended
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction
processing
|
$
|
59,862
|
|
$
|
52,764
|
|
$
|
117,430
|
|
$
|
108,403
|
|
|
International transaction processing
|
|
44,000
|
|
|
40,836
|
|
|
90,190
|
|
|
82,065
|
|
|
Financial inclusion and
applied technologies
|
|
59,258
|
|
|
65,686
|
|
|
122,800
|
|
|
133,046
|
|
|
Total
|
|
163,120
|
|
|
159,286
|
|
|
330,420
|
|
|
323,514
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South
African transaction processing
|
|
15,372
|
|
|
12,080
|
|
|
28,920
|
|
|
25,591
|
|
|
International transaction
processing
|
|
3,904
|
|
|
4,240
|
|
|
9,721
|
|
|
10,783
|
|
|
Financial
inclusion and applied technologies
|
|
14,107
|
|
|
13,519
|
|
|
29,290
|
|
|
30,073
|
|
|
Subtotal:
Operating segments
|
|
33,383
|
|
|
29,839
|
|
|
67,931
|
|
|
66,447
|
|
|
Corporate/Eliminations
|
|
(7,794
|
)
|
|
(5,060
|
)
|
|
(10,161
|
)
|
|
(10,453
|
)
|
|
Total
|
|
25,589
|
|
|
24,779
|
|
|
57,770
|
|
|
55,994
|
|
|
Depreciation and
amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction
processing
|
|
1,137
|
|
|
1,600
|
|
|
2,294
|
|
|
3,395
|
|
|
International transaction processing
|
|
5,521
|
|
|
6,063
|
|
|
11,357
|
|
|
10,759
|
|
|
Financial inclusion and
applied technologies
|
|
354
|
|
|
332
|
|
|
691
|
|
|
572
|
|
|
Subtotal: Operating segments
|
|
7,012
|
|
|
7,995
|
|
|
14,342
|
|
|
14,726
|
|
|
Corporate/Eliminations
|
|
3,611
|
|
|
2,591
|
|
|
6,485
|
|
|
5,975
|
|
|
Total
|
|
10,623
|
|
|
10,586
|
|
|
20,827
|
|
|
20,701
|
|
|
Expenditures for long-lived assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South
African transaction processing
|
|
635
|
|
|
1,096
|
|
|
1,042
|
|
|
2,543
|
|
|
International transaction
processing
|
|
2,167
|
|
|
8,205
|
|
|
4,966
|
|
|
16,243
|
|
|
Financial
inclusion and applied technologies
|
|
324
|
|
|
646
|
|
|
541
|
|
|
1,859
|
|
|
Subtotal:
Operating segments
|
|
3,126
|
|
|
9,947
|
|
|
6,549
|
|
|
20,645
|
|
|
Corporate/Eliminations
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Total
|
$
|
3,126
|
|
$
|
9,947
|
|
$
|
6,549
|
|
$
|
20,645
|
|
The segment information as
reviewed by the chief operating decision maker does not include a measure of
segment assets per segment as all of the significant assets are used in the
operations of all, rather than any one, of the segments. The Company does not
have dedicated assets assigned to a particular operating segment. Accordingly,
it is not meaningful to attempt an arbitrary allocation and segment asset
allocation is therefore not presented.
It is impractical to disclose
revenues from external customers for each product and service or each group of
similar products and services.
Income tax in interim periods
For the purposes of interim
financial reporting, the Company determines the appropriate income tax provision
by first applying the effective tax rate expected to be applicable for the full
fiscal year to ordinary income. This amount is then adjusted for the tax effect
of significant unusual or extraordinary items, for instance, changes in tax law,
valuation allowances and non-deductible transaction-related expenses that are
reported separately, and have an impact on the tax charge. The cumulative effect
of any change in the enacted tax rate, if and when applicable, on the opening
balance of deferred tax assets and liabilities is also included in the tax
charge as a discrete event in the interim period in which the enactment date
occurs.
For the three and six months
ended December 31, 2016, the tax charge was calculated using the expected
effective tax rate for the year. The Companys effective tax rate for the three
and six months ended December 31, 2016, was 36.4% and 33.6%, respectively, and
was higher than the South African statutory rate as a result of additional taxes
payable resulting from the finalization of a tax review in South Korea,
non-deductible expenses and the tax impact attributable to distributions from
our South African subsidiary.
25
17.
|
Income tax (continued)
|
Income tax in interim periods
(continued)
The Companys effective tax rate
for the three and six months ended December 31, 2015, was 38.7% and 34.7%,
respectively, and was higher than the South African statutory rate as a result
of non-deductible expenses (including consulting and legal fees) and the tax
impact, including withholding taxes, of distributions from subsidiary companies
in foreign jurisdictions.
Uncertain tax positions
There were no changes during the
three months ended December 31, 2016. The Company utilized approximately $0.3
million of its unrecognized tax benefits during the six months ended December
31, 2016 as a result of the finalization of a tax review in South Korea. As of
December 31, 2016, the Company had accrued interest related to uncertain tax
positions of approximately $0.1 million on its balance sheet.
The Company does not expect
changes related to its unrecognized tax benefits will have a significant impact
on its results of operations or financial position in the next 12 months.
As of December 31, 2016 and June
30, 2016, the Company has unrecognized tax benefits of $1.7 million and $1.9
million, respectively, all of which would impact the Companys effective tax
rate. The Company files income tax returns mainly in South Africa, South Korea,
India, the United Kingdom, Botswana and in the U.S. federal jurisdiction. As of
December 31, 2016, the Companys South African subsidiaries are no longer
subject to income tax examination by the South African Revenue Service for
periods before June 30, 2012. The Company is subject to income tax in other
jurisdictions outside South Africa, none of which are individually material to
its financial position, results of operations or cash flows.
18.
|
Commitments and
contingencies
|
Guarantees
The South African Revenue Service
and certain of the Companys customers, suppliers and other business partners
have asked the Company to provide them with guarantees, including standby
letters of credit, issued by a South African bank. The Company is required to
procure these guarantees for these third parties to operate its business.
Nedbank has issued guarantees to
these third parties amounting to ZAR 130.5 million ($9.5 million, translated at
exchange rates applicable as of December 31, 2016) and thereby utilizing part of
the Companys short-term facility. The Company in turn has provided nonrecourse,
unsecured counter-guarantees to Nedbank for ZAR 130.5 million ($9.5 million,
translated at exchange rates applicable as of December 31, 2016). The Company
pays commission of between 0.4% per annum to 2.0% per annum of the face value of
these guarantees and does not recover any of the commission from third
parties.
The Company has not recognized
any obligation related to these counter-guarantees in its consolidated balance
sheet as of December 31, 2016 and June 30, 2016. The maximum potential amount
that the Company could pay under these guarantees is ZAR 130.5 million ($9.5
million, translated at exchange rates applicable as of December 31, 2016). The
guarantees have reduced the amount available for borrowings under the Companys
short-term credit facility described in Note 9.
Contingencies
The Company is subject to a
variety of insignificant claims and suits that arise from time to time in the
ordinary course of business.
Management currently believes
that the resolution of these matters, individually or in the aggregate, will not
have a material adverse impact on the Companys financial position, results of
operations or cash flows.
26
Strategic investments
Bank Frick
On January 12, 2017, the Company
entered into a Share Purchase Agreement with the Kuno Frick Family Foundation
(Frick Foundation) to acquire a 30% interest in Bank Frick & Co AG (Bank
Frick), a fully licensed bank based in Balzers, Liechtenstein, from the Frick
Foundation. The completion of the investment is subject to approval from the
Liechtenstein Financial Market Authority. Following the successful completion of
this investment, the Company will have a two-year option to acquire a further
35% in Bank Frick.
Bank Frick provides a complete
suite of banking services, with one of its key strategic pillars being the
provision of payment services and funding of financial technology opportunities.
Bank Frick holds acquiring licenses from both Visa and MasterCard and operates a
branch in London. The Company and Bank Frick have jointly identified many
exciting opportunities that would require funding, including for the Companys
working capital finance, card issuing and acquiring and transaction processing
activities. The investment in Bank Frick provides the Company with a stable,
long term and strategic relationship with a fully licensed bank. The Company and
Bank Frick have agreed that approximately $30 million of the banks free equity
will be utilized as seed capital for a fund dedicated to the Companys future
activities.
27
Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion should
be read in conjunction with our Annual Report on Form 10-K for the year ended
June 30, 2016, and the unaudited condensed consolidated financial statements and
the accompanying notes included in this Form 10-Q.
Forward-looking statements
Some of the statements in this
Form 10-Q constitute forward-looking statements. These statements relate to
future events or our future financial performance and involve known and unknown
risks, uncertainties and other factors that may cause our or our industrys
actual results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed, implied or inferred by these forward-looking statements.
Such factors include, among other things, those listed under Item 1A.Risk
Factors and elsewhere in our Annual Report on Form 10-K for the year ended June
30, 2016 and in this Quarterly Report on Form 10-Q. In some cases, you can
identify forward-looking statements by terminology such as may, will,
should, could, would, expects, plans, intends, anticipates,
believes, estimates, predicts, potential or continue or the negative
of such terms and other comparable terminology.
Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we do
not know whether we can achieve positive future results, levels of activity,
performance, or goals. Actual events or results may differ materially. We
undertake no obligation to update any of the forward-looking statements after
the date of this Form 10-Q to conform those statements to reflect the occurrence
of unanticipated events, except as required by applicable law.
You should read this Form 10-Q
and the documents that we reference herein and the documents we have filed as
exhibits hereto and thereto and which we have filed with the Securities and
Exchange Commission completely and with the understanding that our actual future
results, levels of activity, performance and achievements may be materially
different from what we expect. We qualify all of our forward-looking statements
by these cautionary statements.
Recent Developments
SASSA contract
Our contract with SASSA ends on
March 31, 2017. In April 2014, the South African Constitutional Court declared
the contract constitutionally invalid due to certain administrative
irregularities by SASSA during its tender process. The Constitutional Court
suspended the invalidity of our contract until SASSA awarded a new five year
contract under a fresh tender process. The Constitutional Court further ruled
that if SASSA did not award a new contract, the declaration of invalidity would
be further suspended until our contract expired on March 31, 2017, and SASSA was
required to report to the Constitutional Court if and when it would be in a
position to assume the grant distribution service. SASSA commenced a fresh
tender process during 2015 but did not award a new contract as the three
responses received were determined to be non-compliant. We did not participate
in the 2015 tender process.
At a Parliamentary briefing
session on February 1, 2017, SASSA informed the meeting that it will not be
ready to assume the payment function on April 1, 2017. SASSA expressed its
intention to approach the Constitutional Court to obtain permission to extend
our contract.
On February 9, 2017 we received a letter
from SASSA stating: After much deliberation and following due process the South
African Social Security Agency (SASSA) is now in a position to formally express
its intentions to hold an exploratory meeting with Cash Paymaster Services (Pty)
Ltd (CPS) on probabilities to assist in the transition of SASSA operations
(while ensuring grant payment continuity) towards a new service model that must
be subject to a regular procurement process.
Based on the above stated fact, SASSA
requires a principle confirmation from CPS that it is amenable to agree to the
proposed meeting to explore the possibilities to avail the companys services as
an interim arrangement regarding the payment of social grants for the period
extending from 31 March 2017.
We have formally responded to SASSA
indicating our willingness to convene an urgent meeting as requested. It
is not clear if our contract could be extended under the Public Finance
Management Act or if a new transition contract would be required. We cannot
predict when or if SASSA will approach the Constitutional Court, what the outcome
of such approach would be, or what the terms and conditions of any agreement
between SASSA and us would be. We are fully aware of the critical nature of the
services we provide to millions of South Africans and the need for uninterrupted
service delivery and we remain committed to assist our social grant recipients,
SASSA and the South African government within the ambit of all the relevant laws
and regulations.
Progress of financial inclusion
initiatives in South Africa
At February 6, 2017, we had more
than 1.8 million active EPE accounts, compared to 1.6 million at October 26,
2016. EPE is a fully transactional account created to serve the needs of South
Africas unbanked and under-banked population, and is available to all consumers
regardless of their financial or social status or whether they are SASSA
recipients. The EPE account offers customers a comprehensive suite of financial
and various financial inclusion services, such as prepaid products, in an
economical, convenient and secure solution. EPE provides account holders with a
UEPS-EMV debit MasterCard, mobile and internet banking services, ATM and POS
services, as well as loans, insurance and other financial products and
value-added services. However, SASSA is challenging the ability of beneficiaries
to freely transact with the grants that they receive.
In order for us to address the
sizeable opportunity for EPE and related financial inclusion services in South
Africa, we have had to expand our brick-and-mortar financial services branch
infrastructure and supplement our nationwide distribution with a UEPS/EMV-enabled ATM network, as well as a
dedicated sales force. At December 31, 2016, we had 142 branches, 936 ATMs, and
1,895 dedicated employees.
28
In December 2015, we resumed
marketing and business development activities in selected areas for the
distribution of our simple, low-cost life insurance products and have sold
approximately 280,000 new policies through January 31, 2016, in addition to the
basic life insurance policy provided with every EPE account opened. We continue
to recruit additional and often-times specialized staff to expand our insurance
activities during fiscal 2017.
We experienced higher
year-over-year growth in the demand for our loans. Tougher economic conditions
in South Africa, aggravated by rising food prices as a result of widespread
drought conditions and a weakening currency, has had an impact on the number of
clients who qualify for our loan products.
The graph
below presents the growth of the number of EPE cards and Smart Life policies:
Bank Frick
On January 12, 2017, we acquired
a 30% interest in Bank Frick & Co AG, or Bank Frick, a fully licensed bank
based in Balzers, Liechtenstein. The completion of the investment is subject to
approval from the Liechtenstein Financial Market Authority. Following the
successful completion of this investment, the Company will have a two-year
option to acquire a further 35% in Bank Frick.
Bank Frick provides a complete
suite of banking services, with one of its key strategic pillars being the
provision of payment services and funding of financial technology opportunities.
Bank Frick holds acquiring licenses from both Visa and MasterCard and operates a
branch in London. We have jointly identified many exciting opportunities with
Bank Fricks management team that would require funding, including for the
Companys working capital finance, card issuing and acquiring and transaction
processing activities. The investment in Bank Frick provides us with a stable,
long term and strategic relationship with a fully licensed bank. We have agreed
with Bank Frick that approximately $30 million of the banks free equity will be
utilized as seed capital for a fund dedicated to our future activities.
User access security enhancements
to prepaid products
User security remains of
paramount importance to us and, as we continue to evaluate and introduce non-PIN
based security enhancements to our product offerings, which can, in certain
cases, result in an initial drop off while the technology is rolled out,
understood and adopted. We introduced our new biometric-linking feature during
the first quarter of fiscal 2017, which has reduced the number of transacting
users as the adoption rate scales. This in turn therefore impacted volume in
prepaid sales vouchers on Umoja Manje during the quarter.
29
We believe that the adverse
impact of the new security on sales volumes will rectify itself over time as we
further entrench ourselves as the most secure, convenient and cost effective
service provider in the market. Our biometric security enhancements provide the
leadership in solving an industry-wide endemic of unauthorized transactions by
providing non-repudiable transaction authorizations. Our mobile vending channel
now incorporates biometry - which makes it the first of its kind, and will
facilitate the launch of further digital services that incorporate dual
authorization-and-identification factors.
Critical Accounting Policies
Our unaudited condensed
consolidated financial statements have been prepared in accordance with U.S.
GAAP, which requires management to make estimates and assumptions about future
events that affect the reported amount of assets and liabilities and disclosure
of contingent assets and liabilities. As future events and their effects cannot
be determined with absolute certainty, the determination of estimates requires
managements judgment based on a variety of assumptions and other determinants
such as historical experience, current and expected market conditions and
certain scientific evaluation techniques.
Critical accounting policies are
those that reflect significant judgments or uncertainties, and potentially may
result in materially different results under different assumptions and
conditions. Management has identified the following critical accounting policies
that are described in more detail in our Annual Report on Form 10-K for the year
ended June 30, 2016:
|
|
Business combinations and the recoverability of goodwill;
|
|
|
Intangible assets acquired through acquisitions;
|
|
|
Deferred taxation;
|
|
|
Stock-based compensation and equity instrument issued
pursuant to BEE transaction;
|
|
|
Accounts receivable and allowance for doubtful accounts
receivable; and
|
|
|
Research and development.
|
Recent accounting pronouncements
adopted
Refer to Note 1 to our unaudited
condensed consolidated financial statements for a full description of recent
accounting pronouncements adopted, including the dates of adoption and the
effects on our condensed consolidated financial statements.
Recent accounting pronouncements not
yet adopted as of December 31, 2016
Refer to Note 1 to our unaudited
condensed consolidated financial statements for a full description of recent
accounting pronouncements not yet adopted as of December 31, 2016, including the
expected dates of adoption and effects on our financial condition, results of
operations and cash flows.
30
Currency Exchange Rate Information
Actual exchange rates
The actual exchange rates for and at
the end of the periods presented were as follows:
Table 1
|
|
Three
months ended
|
|
|
Six months
ended
|
|
|
Year ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
ZAR : $ average exchange rate
|
|
13.9300
|
|
|
14.2261
|
|
|
14.0095
|
|
|
13.6072
|
|
|
14.5062
|
|
Highest ZAR : $ rate during period
|
|
14.4618
|
|
|
15.8939
|
|
|
14.8114
|
|
|
15.8939
|
|
|
16.8231
|
|
Lowest ZAR : $ rate during
period
|
|
13.3634
|
|
|
13.0836
|
|
|
13.3000
|
|
|
12.1965
|
|
|
12.1965
|
|
Rate at end of period
|
|
13.7392
|
|
|
15.5419
|
|
|
13.7392
|
|
|
15.5419
|
|
|
14.7838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KRW : $ average exchange rate
|
|
1,159
|
|
|
1,158
|
|
|
1,140
|
|
|
1,164
|
|
|
1,173
|
|
Highest KRW : $ rate during
period
|
|
1,210
|
|
|
1,187
|
|
|
1,210
|
|
|
1,203
|
|
|
1,245
|
|
Lowest KRW : $ rate during period
|
|
1,100
|
|
|
1,128
|
|
|
1,092
|
|
|
1,122
|
|
|
1,122
|
|
Rate at end of period
|
|
1,207
|
|
|
1,176
|
|
|
1,207
|
|
|
1,176
|
|
|
1,153
|
|
ZAR: US $ Exchange Rates
31
KRW: US $ Exchange Rates
Translation exchange rates for financial reporting purposes
We are required to translate our
results of operations from ZAR and KRW to U.S. dollars on a monthly basis. Thus,
the average rates used to translate this data for the three and six months ended
December 31, 2016 and 2015, vary slightly from the averages shown in the table
above. The translation rates we use in presenting our results of operations are
the rates shown in the following table:
Table 2
|
|
Three
months ended
|
|
|
Six months
ended
|
|
|
Year ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
Income and expense items: $1
= ZAR .
|
|
13.9434
|
|
|
14.1196
|
|
|
14.0292
|
|
|
13.4906
|
|
|
14.3842
|
|
Income and expense items: $1 = KRW
|
|
1,172
|
|
|
1,161
|
|
|
1,152
|
|
|
1,165
|
|
|
1,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet items: $1 = ZAR
|
|
13.7392
|
|
|
15.5419
|
|
|
13.7392
|
|
|
15.5419
|
|
|
14.7838
|
|
Balance sheet items: $1 = KRW
|
|
1,207
|
|
|
1,176
|
|
|
1,207
|
|
|
1,176
|
|
|
1,153
|
|
Results of operations
The discussion of our
consolidated overall results of operations is based on amounts as reflected in
our unaudited condensed consolidated financial statements which are prepared in
accordance with U.S. GAAP. We analyze our results of operations both in U.S.
dollars, as presented in the consolidated financial statements, and
supplementally in ZAR, because ZAR is the functional currency of the entities
which contribute the majority of our profits and is the currency in which the
majority of our transactions are initially incurred and measured. Due to the
significant impact of currency fluctuations between the U.S. dollar and ZAR on
our reported results and because we use the U.S. dollar as our reporting
currency, we believe that the supplemental presentation of our results of
operations in ZAR is useful to investors to understand the changes in the
underlying trends of our business.
Fiscal 2017 includes the results
of Masterpayment and T24 for the entire period, Pros Software from October 1,
2016, and C4U Malta from November 1, 2016. Fiscal 2016 does not include
Masterpayment, T24, Pros Software or C4U Malta.
Our operating segment revenue
presented in Results of operations by operating segment represents total
revenue per operating segment before inter-segment eliminations. Reconciliation
between total operating segment revenue and revenue presented in our unaudited
condensed consolidated financial statements is included in Note 16 to those
statements.
32
We analyze our business and
operations in terms of three inter-related but independent operating segments:
(1) South African transaction processing, (2) International transaction
processing and (3) Financial inclusion and applied technologies. In addition,
corporate and corporate office activities that are impracticable to ascribe
directly to any of the other operating segments, as well as any inter-segment
eliminations, are included in corporate/eliminations.
Second quarter of fiscal 2017 compared to second quarter of
fiscal 2016
The following factors had a
significant influence on our results of operations during the second quarter of
fiscal 2017 as compared with the same period in the prior year:
|
|
Growth in lending and insurance businesses:
We continued to experience volume growth and operating
efficiencies in our lending and insurance businesses during the second
quarter of fiscal 2017, which has resulted in an improved contribution to
our financial inclusion revenue and operating income. The growth in our
lending book during December 2015 resulted in a substantial increase in
the allowance for doubtful finance loans receivable during the second
quarter of fiscal 2016, in accordance with our policy of providing for
doubtful finance loans receivable at the time that a loan is originated;
|
|
|
Ongoing contributions from EasyPay Everywhere:
Growth in EPE revenue and operating income was driven primarily by
ongoing adoption of our EPE offering as we further expanded our customer
base utilizing our ATM infrastructure;
|
|
|
Masterpayment expansion costs:
Masterpayment has incurred additional employment costs as it grows
its staff complement to execute its expansion plan into new markets;
|
|
|
Impact of changes in specific regulations in South
Korea governing fees charged on card transactions:
The new
regulations governing the fees that may be charged on card transactions
have adversely impacted our revenues and operating income in South Korea;
|
|
|
Further refund related to industry-wide litigation
in South Korea:
Our results were positively impacted by a refund
of $0.8 million that had been paid several years ago in connection with
industry-wide litigation that has now been finalized;
|
|
|
Lower prepaid sales resulting from improved
security features to our Manje products:
The introduction of our
new biometric-linking feature was implemented this quarter and adversely
impacted the number of transacting users purchasing prepaid products
through our mobile channel; and
|
|
|
Higher transaction-related costs in fiscal 2017:
We incurred $1.2
million in transaction-related costs pertaining to various acquisition and
investment initiatives pursued during the second quarter of fiscal 2017;
and
|
|
|
Tax impact of dividends from South African
subsidiary in fiscal 2016:
Our income tax expense for the second
quarter of fiscal 2016 includes approximately $2.4 million related to the
tax impact, including withholding taxes, resulting from distributions from
our South African subsidiary during October 2015, which helped reduce the
impact of a weakened ZAR on our reported cash balances. The conversion of
a significant portion of our ZAR cash reserves to USD negatively impacted
our interest income in fiscal 2016 due the material difference between ZAR
and USD deposit rates.
|
33
Consolidated overall results of
operations
This discussion is based on the
amounts which were prepared in accordance with U.S. GAAP.
The following tables show the
changes in the items comprising our statements of operations, both in U.S.
dollars and in ZAR:
|
|
In U.S.
Dollars
|
|
Table 3
|
|
(U.S. GAAP)
|
|
|
|
Three months ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
$ %
|
|
|
|
$ 000
|
|
|
$ 000
|
|
|
change
|
|
Revenue
|
|
151,433
|
|
|
150,281
|
|
|
1%
|
|
Cost of goods sold, IT processing, servicing
and support
|
|
73,518
|
|
|
78,668
|
|
|
(7%
|
)
|
Selling, general and
administration
|
|
41,703
|
|
|
36,248
|
|
|
15%
|
|
Depreciation and amortization
|
|
10,623
|
|
|
10,586
|
|
|
0%
|
|
Operating income
|
|
25,589
|
|
|
24,779
|
|
|
3%
|
|
Interest income
|
|
5,061
|
|
|
3,664
|
|
|
38%
|
|
Interest expense
|
|
510
|
|
|
1,054
|
|
|
(52%
|
)
|
Income before income tax expense
|
|
30,140
|
|
|
27,389
|
|
|
10%
|
|
Income tax expense
|
|
10,984
|
|
|
10,593
|
|
|
4%
|
|
Net income before earnings from
equity-accounted investments
|
|
19,156
|
|
|
16,796
|
|
|
14%
|
|
Earnings from
equity-accounted investments
|
|
74
|
|
|
388
|
|
|
(81%
|
)
|
Net income
|
|
19,230
|
|
|
17,184
|
|
|
12%
|
|
Less net income attributable
to non-controlling interest
|
|
589
|
|
|
526
|
|
|
12%
|
|
Net income attributable to us
|
|
18,641
|
|
|
16,658
|
|
|
12%
|
|
|
|
In South
African Rand
|
|
Table 4
|
|
(U.S. GAAP)
|
|
|
|
Three months ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
ZAR
|
|
|
ZAR
|
|
|
ZAR %
|
|
|
|
000
|
|
|
000
|
|
|
change
|
|
Revenue
|
|
2,111,493
|
|
|
2,121,908
|
|
|
(0%
|
)
|
Cost of goods sold, IT processing, servicing
and support
|
|
1,025,093
|
|
|
1,110,761
|
|
|
(8%
|
)
|
Selling, general and
administration
|
|
581,482
|
|
|
511,807
|
|
|
14%
|
|
Depreciation and amortization
|
|
148,120
|
|
|
149,470
|
|
|
(1%
|
)
|
Operating income
|
|
356,798
|
|
|
349,870
|
|
|
2%
|
|
Interest income
|
|
70,568
|
|
|
51,734
|
|
|
36%
|
|
Interest expense
|
|
7,111
|
|
|
14,882
|
|
|
(52%
|
)
|
Income before income tax expense
|
|
420,255
|
|
|
386,722
|
|
|
9%
|
|
Income tax expense
|
|
153,154
|
|
|
149,569
|
|
|
2%
|
|
Net income before earnings from
equity-accounted investments
|
|
267,101
|
|
|
237,153
|
|
|
13%
|
|
Earnings from
equity-accounted investments
|
|
1,032
|
|
|
5,478
|
|
|
(81%
|
)
|
Net income
|
|
268,133
|
|
|
242,631
|
|
|
11%
|
|
Less net income attributable
to non-controlling interest
|
|
8,213
|
|
|
7,427
|
|
|
11%
|
|
Net income attributable to us
|
|
259,920
|
|
|
235,204
|
|
|
11%
|
|
In ZAR, the modest decrease in
revenue was primarily due to lower prepaid airtime sales, fewer ad hoc terminal
sales, and a lower contribution from KSNET due to regulatory changes in South
Korea, which was partially offset by more fees generated from our EPE and ATM
offerings, improved lending and insurance activities, the inclusion of T24 and
Masterpayments businesses, and an increase in the number of SASSA UEPS/EMV
beneficiaries paid.
In ZAR, the decrease in cost of
goods sold, IT processing, servicing and support was primarily due to fewer
prepaid airtime and ad hoc terminal sales, which was partially offset by higher
expenses incurred from increased usage of the South African National Payment
System by beneficiaries, expenses incurred to operate our EPE and ATM offerings,
and the inclusion of T24 and Masterpayments businesses.
34
In ZAR, our selling, general and
administration expense increased primarily due to a higher staff complement
resulting from our EPE roll-out in fiscal 2016, the impact of October 2016
annual salary increases for our South African and UK-based employees, as well as
increases in goods and services purchased from third parties.
Our operating income margin for
second quarter of fiscal 2017 and 2016 was 17% and 16% respectively. We discuss
the components of operating income margin under Results of operations by
operating segment. The increase was primarily attributable to the impact of the
allowance for doubtful finance loans receivable on our fiscal 2016 results and
lower prepaid airtime sales in fiscal 2017, which was partially offset by the
higher cost of goods sold, IT processing, servicing and support referred to
above
Depreciation and amortization
decreased primarily due to lower overall amortization of intangible assets that
are fully amortized and tangible assets that are fully depreciated. These
decreases were partially offset by an increase in depreciation related to more
ATMs in South Africa and terminals used to provide transaction processing in
Korea as well as an increase in acquisition-related intangible asset
amortization resulting from recent transactions, including T24 and
Masterpayment.
Interest on surplus cash
increased to $5.1 million (ZAR 70.6 million) from $3.7 million (ZAR 51.7
million), due primarily to higher average daily ZAR cash balances and ZAR
interest rates, partially offset by the lower interest earned on the U.S. dollar
cash reserves that we converted from ZAR through distributions from our South
African subsidiary.
Interest expense decreased to
$0.5 million (ZAR 7.1 million) from $1.1 million (ZAR 14.9 million) due to a
lower average long-term debt balance on our South Korean debt and a lower
interest rate.
Fiscal 2017 tax expense was $11.0
million (ZAR 153.2 million) compared to $10.6 million (ZAR 149.6 million) in
fiscal 2016. Our effective tax rate for fiscal 2017, was 36.4% and was higher
than the South African statutory rate as a result of non-deductible expenses.
Our effective tax rate for fiscal 2016, was 38.7% and was higher than the South
African statutory rate as a result of non-deductible expenses (including
consulting and legal fees) and the tax impact, including withholding taxes, of
approximately $2.4 million attributable to a distribution from our South African
subsidiary, which were intended to help reduce the impact of a weakening ZAR on
our reported cash balances.
Results of operations by operating
segment
The composition of revenue and
the contributions of our business activities to operating income are illustrated
below:
Table 5
|
|
In U.S. Dollars (U.S.
GAAP)
|
|
|
|
Three months ended December 31,
|
|
|
|
2016
|
|
|
% of
|
|
|
2015
|
|
|
% of
|
|
|
%
|
|
Operating Segment
|
|
$ 000
|
|
|
total
|
|
|
$ 000
|
|
|
total
|
|
|
change
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction processing
|
|
59,862
|
|
|
40%
|
|
|
52,764
|
|
|
35%
|
|
|
13%
|
|
International transaction
processing
|
|
44,000
|
|
|
29%
|
|
|
40,836
|
|
|
27%
|
|
|
8%
|
|
Financial inclusion and applied technologies
|
|
59,258
|
|
|
39%
|
|
|
65,686
|
|
|
44%
|
|
|
(10%
|
)
|
Subtotal: Operating segments
|
|
163,120
|
|
|
108%
|
|
|
159,286
|
|
|
106%
|
|
|
2%
|
|
Intersegment
eliminations
|
|
(11,687
|
)
|
|
(8%
|
)
|
|
(9,005
|
)
|
|
(6%
|
)
|
|
30%
|
|
Consolidated
revenue
|
|
151,433
|
|
|
100%
|
|
|
150,281
|
|
|
100%
|
|
|
1%
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction
processing
|
|
15,372
|
|
|
60%
|
|
|
12,080
|
|
|
49%
|
|
|
27%
|
|
International transaction processing
|
|
3,904
|
|
|
15%
|
|
|
4,240
|
|
|
17%
|
|
|
(8%
|
)
|
Financial inclusion and
applied technologies
|
|
14,107
|
|
|
55%
|
|
|
13,519
|
|
|
55%
|
|
|
4%
|
|
Subtotal:
Operating segments
|
|
33,383
|
|
|
130%
|
|
|
29,839
|
|
|
121%
|
|
|
12%
|
|
Corporate/Eliminations
|
|
(7,794
|
)
|
|
(30%
|
)
|
|
(5,060
|
)
|
|
(21%
|
)
|
|
54%
|
|
Consolidated operating income
|
|
25,589
|
|
|
100%
|
|
|
24,779
|
|
|
100%
|
|
|
3%
|
|
35
Table 6
|
|
|
|
|
In South African Rand (U.S. GAAP)
|
|
|
|
|
|
|
|
|
|
Three months ended December 31,
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
ZAR
|
|
|
% of
|
|
|
ZAR
|
|
|
% of
|
|
|
%
|
|
Operating Segment
|
|
000
|
|
|
total
|
|
|
000
|
|
|
total
|
|
|
change
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction processing
|
|
834,680
|
|
|
40%
|
|
|
745,007
|
|
|
35%
|
|
|
12%
|
|
International transaction
processing
|
|
613,510
|
|
|
29%
|
|
|
576,588
|
|
|
27%
|
|
|
6%
|
|
Financial inclusion and applied technologies
|
|
826,258
|
|
|
39%
|
|
|
927,460
|
|
|
44%
|
|
|
(11%
|
)
|
Subtotal: Operating segments
|
|
2,274,448
|
|
|
108%
|
|
|
2,249,055
|
|
|
106%
|
|
|
1%
|
|
Intersegment
eliminations
|
|
(162,955
|
)
|
|
(8%
|
)
|
|
(127,147
|
)
|
|
(6%
|
)
|
|
28%
|
|
Consolidated
revenue
|
|
2,111,493
|
|
|
100%
|
|
|
2,121,908
|
|
|
100%
|
|
|
-
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction
processing
|
|
214,338
|
|
|
60%
|
|
|
170,565
|
|
|
49%
|
|
|
26%
|
|
International transaction processing
|
|
54,435
|
|
|
15%
|
|
|
59,867
|
|
|
17%
|
|
|
(9%
|
)
|
Financial inclusion and
applied technologies
|
|
196,700
|
|
|
55%
|
|
|
190,883
|
|
|
55%
|
|
|
3%
|
|
Subtotal:
Operating segments
|
|
465,473
|
|
|
130%
|
|
|
421,315
|
|
|
121%
|
|
|
10%
|
|
Corporate/Eliminations
|
|
(108,675
|
)
|
|
(30%
|
)
|
|
(71,445
|
)
|
|
(21%
|
)
|
|
52%
|
|
Consolidated operating income
|
|
356,798
|
|
|
100%
|
|
|
349,870
|
|
|
100%
|
|
|
2%
|
|
South African transaction processing
In ZAR, the increase in segment
revenue and operating income was primarily due to higher EPE transaction revenue
as a result of increased usage of our ATMs, increased inter-segment transaction
processing activities, and a modest increase in the number of social welfare
grants distributed.
Our operating income margin for
the second quarter of fiscal 2017 and 2016 was 26% and 23%, respectively. Our
fiscal 2017 margin includes higher EPE revenue as a result of increased ATM
transactions, an increase in inter-segment transaction processing activities, an
increase in the number of beneficiaries paid in the second quarter of fiscal
2017, which was partially offset by annual salary increases granted to our South
African employees.
International transaction-based
activities
South Korean regulators have
recently introduced specific regulations governing the fees that may be charged
on card transactions, as is the case in most other developed economies. These
regulations have a direct impact on card issuers in South Korea and consistent
with global practices, card issuers have renegotiated their fees with South
Korean VAN companies, including KSNET, which has had an adverse impact on
KSNETs financial performance. Operating income and margin for the second
quarter of fiscal 2017 was positively impacted by a refund of approximately $0.8
million that had been paid several years ago in connection with industry-wide
litigation that has now been finalized. This refund is in addition to the $1.7
million refund received in the third quarter of fiscal 2015. We do not expect
any further refunds related to this litigation and believe the matter is now
closed.
Segment revenue increased during
the second quarter of fiscal 2017, primarily due to the inclusion of T24 and
Masterpayment; however, this growth was partially offset by a lower contribution
from KSNET due to the regulatory changes described above. Operating income
during the second quarter of fiscal 2017 was lower due a decrease in revenue and
an increase in depreciation expenses at KSNET, losses incurred by Masterpayment
as it grows its staff complement to execute its expansion plan into new markets,
and ongoing ZAZOO start-up costs in the UK and India, which was partially offset
by a positive contribution by T24 and the $0.8 million refund referred to
above.
Operating income margin for the
second quarter of fiscal 2017 and 2016 was 9% and 10%, respectively.
Financial inclusion and applied
technologies
In ZAR, Financial inclusion and
applied technologies revenue decreased primarily due to the introduction of our
new biometric linking feature for prepaid airtime and other value added
services, which adversely impacted sales, as well as fewer ad-hoc terminal
sales, partially offset by increased volumes in our lending and insurance
businesses, an increase in inter-segment revenues and higher card sales.
Operating income margin for the
Financial inclusion and applied technologies segment was 24% and 21% during the
second quarter of fiscal 2017 and 2016, respectively, and has increased
primarily due to improved revenues from our lending and insurance businesses and
an increase in inter-segment revenues and fewer low margin prepaid product
sales, offset by fewer ad hoc terminal and annual salary increases granted to
our South African employees.
36
Corporate/Eliminations
Our corporate expenses generally
include acquisition-related intangible asset amortization; expenditure related
to compliance with the Sarbanes-Oxley Act of 2002; non-employee directors fees;
employee and executive bonuses; stock-based compensation; legal fees; audit
fees; directors and officers insurance premiums; telecommunications expenses;
property-related expenditures including utilities, rental, security and
maintenance; and elimination entries.
Our corporate expenses have
increased primarily due to higher transaction-related expenditures, higher
amortization costs and modest increases in U.S. dollar denominated goods and
services purchased from third parties and directors fees.
First half of fiscal 2017 compared
to first half of fiscal 2016
The following factors had a
significant influence on our results of operations during the first half of
fiscal 2017 as compared with the same period in the prior year:
|
|
Unfavorable impact from the strengthening of the
U.S. dollar against ZAR:
The U.S. dollar appreciated by 4% against
the ZAR during the first half of fiscal 2017, which negatively impacted
our reported results;
|
|
|
Growth in lending and insurance businesses:
We continued to experience volume growth and operating
efficiencies in our lending and insurance businesses during the first half
of fiscal 2017, which has resulted in an improved contribution to our
financial inclusion revenue and operating income;
|
|
|
Ongoing contributions from EasyPay Everywhere:
Growth in EPE revenue and operating income was driven primarily
due to ongoing adoption of our EPE offering as we further expanded our
customer base utilizing our ATM infrastructure;
|
|
|
Impact of changes in specific regulations in South
Korea governing fees charged on card transactions:
The new
regulations governing the fees that may be charged on card transactions
have adversely impacted our revenues and operating income in South Korea;
|
|
|
Lower prepaid sales resulting from improved
security features to our Manje products:
The introduction of our
new biometric-linking feature was implemented in the first quarter of
fiscal 2017 and adversely impacted the number of transacting users
purchasing prepaid products through our mobile channel;
|
|
|
Higher transaction-related costs in fiscal 2017:
We incurred
$1.5 million in transaction-related costs pertaining to various
acquisition and investment initiatives pursued during the first half of
fiscal 2017; and
|
|
|
Tax impact of dividends from South African
subsidiary in fiscal 2016:
Our income tax expense for fiscal 2016
includes approximately $2.9 million related to the tax impact, including
withholding taxes, resulting from distributions from our South African
subsidiary which helped reduce the impact of a weakened ZAR on our
reported cash balances. The conversion of a significant portion of our ZAR
cash reserves to USD negatively impacted our interest income in fiscal
2016 due the material difference between ZAR and USD deposit rates.
|
37
Consolidated overall results of
operations
This discussion is based on the
amounts which were prepared in accordance with U.S. GAAP.
The following tables show the
changes in the items comprising our statements of operations, both in U.S.
dollars and in ZAR:
|
|
In U.S.
Dollars
|
|
Table 7
|
|
(U.S. GAAP)
|
|
|
|
Six months ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
$ %
|
|
|
|
$ 000
|
|
|
$ 000
|
|
|
change
|
|
Revenue
|
|
307,066
|
|
|
304,754
|
|
|
1%
|
|
Cost of goods sold, IT processing, servicing
and support
|
|
148,298
|
|
|
156,050
|
|
|
(5%
|
)
|
Selling, general and
administration
|
|
80,171
|
|
|
72,009
|
|
|
11%
|
|
Depreciation and amortization
|
|
20,827
|
|
|
20,701
|
|
|
1%
|
|
Operating income
|
|
57,770
|
|
|
55,994
|
|
|
3%
|
|
Interest income
|
|
9,365
|
|
|
7,939
|
|
|
18%
|
|
Interest expense
|
|
1,306
|
|
|
2,028
|
|
|
(36%
|
)
|
Income before income tax expense
|
|
65,829
|
|
|
61,905
|
|
|
6%
|
|
Income tax expense
|
|
22,087
|
|
|
21,490
|
|
|
3%
|
|
Net income before earnings from
equity-accounted investments
|
|
43,742
|
|
|
40,415
|
|
|
8%
|
|
Earnings from
equity-accounted investments
|
|
733
|
|
|
576
|
|
|
27%
|
|
Net income
|
|
44,475
|
|
|
40,991
|
|
|
8%
|
|
Less net income attributable
to non-controlling interest
|
|
1,202
|
|
|
1,313
|
|
|
(8%
|
)
|
Net income attributable to us
|
|
43,273
|
|
|
39,678
|
|
|
9%
|
|
|
|
In South
African Rand
|
|
Table 8
|
|
(U.S. GAAP)
|
|
|
|
Six months ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
ZAR
|
|
|
ZAR
|
|
|
ZAR %
|
|
|
|
000
|
|
|
000
|
|
|
change
|
|
Revenue
|
|
4,307,891
|
|
|
4,111,315
|
|
|
5%
|
|
Cost of goods sold, IT processing, servicing
and support
|
|
2,080,503
|
|
|
2,105,208
|
|
|
(1%
|
)
|
Selling, general and
administration
|
|
1,124,735
|
|
|
971,445
|
|
|
16%
|
|
Depreciation and amortization
|
|
292,187
|
|
|
279,269
|
|
|
5%
|
|
Operating income
|
|
810,466
|
|
|
755,393
|
|
|
7%
|
|
Interest income
|
|
131,383
|
|
|
107,102
|
|
|
23%
|
|
Interest expense
|
|
18,322
|
|
|
27,359
|
|
|
(33%
|
)
|
Income before income tax expense
|
|
923,527
|
|
|
835,136
|
|
|
11%
|
|
Income tax expense
|
|
309,863
|
|
|
289,913
|
|
|
7%
|
|
Net income before earnings from
equity-accounted investments
|
|
613,664
|
|
|
545,223
|
|
|
13%
|
|
Earnings from
equity-accounted investments
|
|
10,283
|
|
|
7,771
|
|
|
32%
|
|
Net income
|
|
623,947
|
|
|
552,994
|
|
|
13%
|
|
Less net income attributable
to non-controlling interest
|
|
16,863
|
|
|
17,713
|
|
|
(5%
|
)
|
Net income attributable to us
|
|
607,084
|
|
|
535,281
|
|
|
13%
|
|
In ZAR, the increase in revenue
was primarily due to more fees generated from our EPE and ATM offerings,
improved lending and insurance activities, the inclusion of T24 and
Masterpayments businesses, and an increase in the number of SASSA UEPS/EMV
beneficiaries paid, which was partially offset by lower prepaid airtime sales,
fewer ad hoc terminal sales, and a lower contribution from KSNET due to
regulatory changes in South Korea.
In ZAR, the decrease in cost of
goods sold, IT processing, servicing and support was primarily due to fewer
prepaid airtime and ad hoc terminal sales, which was partially offset by higher
expenses incurred from increased usage of the South African National Payment
System by beneficiaries, expenses incurred to operate our EPE and ATM offerings
and expanding our branch network, and the inclusion of T24 and Masterpayments
businesses.
38
Our selling, general and
administration expense increased primarily due to a higher staff complement
resulting from our EPE roll-out in fiscal 2016, the impact of October 2016
annual salary increases for our South African and UK-based employees, as well as
increases in goods and services purchased from third parties.
Our operating income margin for
first half of fiscal 2017 and 2016 was 19% and 18% respectively. We discuss the
components of operating income margin under Results of operations by operating
segment. The increase was primarily attributable to attributable to the impact
of the allowance for doubtful finance loans receivable on our fiscal 2016
results and the reversal of stock-based compensation charges, which was
partially offset by an increase in depreciation expense.
Depreciation and amortization
increased primarily due to an increase in depreciation related to more ATMs in
South Africa and terminals used to provide transaction processing in Korea as
well as an increase in acquisition-related intangible asset amortization
resulting from recent acquisitions, including T24 and Masterpayment. These
increases were partially offset by lower overall amortization of intangible
assets that are fully amortized and tangible assets that are fully depreciated.
Interest on surplus cash
increased to $9.4 million (ZAR 131.4 million) from $7.9 million (ZAR 107.1
million), due primarily to higher average daily ZAR cash balances and ZAR
interest rates, partially offset by the lower interest earned on the U.S. dollar
cash reserves that we converted from ZAR through distributions from our South
African subsidiary.
Interest expense decreased to
$1.3 million (ZAR 18.3 million) from $2.0 million (ZAR 27.4 million) due to a
lower average long-term debt balance on our South Korean debt and a lower
interest rate.
Fiscal 2017 tax expense was $22.1
million (ZAR 309.9 million) compared to $21.5 million (ZAR 289.9 million) in
fiscal 2016. Our effective tax rate for fiscal 2017, was 33.6% and was higher
than the South African statutory rate as a result of non-deductible expenses and
the tax impact attributable to distributions from our South African subsidiary.
Our effective tax rate for the first half of fiscal 2016, was 34.7% and was
higher than the South African statutory rate as a result of non-deductible
expenses (including consulting and legal fees) and the tax impact, including
withholding taxes, of approximately $2.9 million attributable to distributions
from our South African subsidiary.
Earnings from equity-accounted
investments for the first half of fiscal 2017 have increased primarily due to
the inclusion of our portion of Finbonds net income. Finbond is listed on the
Johannesburg Stock Exchange and reports its six month results during our first
half and its annual results during our fourth quarter. We have included our
portion of its interim net income in our first half 2017 results and expect to
record the last six months of its fiscal year ended February 2017 net income in
our third quarter of fiscal 2017 results.
Results of operations by operating
segment
The composition of revenue and
the contributions of our business activities to operating income are illustrated
below:
Table 9
|
|
|
|
|
In U.S. Dollars (U.S.
GAAP)
|
|
|
|
|
|
|
|
|
|
Six months ended December 31,
|
|
|
|
|
|
|
2016
|
|
|
% of
|
|
|
2015
|
|
|
% of
|
|
|
%
|
|
Operating Segment
|
|
$ 000
|
|
|
total
|
|
|
$ 000
|
|
|
total
|
|
|
change
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction processing
|
|
117,430
|
|
|
38%
|
|
|
108,403
|
|
|
36%
|
|
|
8%
|
|
International transaction
processing
|
|
90,190
|
|
|
29%
|
|
|
82,065
|
|
|
27%
|
|
|
10%
|
|
Financial inclusion and applied technologies
|
|
122,800
|
|
|
40%
|
|
|
133,046
|
|
|
44%
|
|
|
(8%
|
)
|
Subtotal: Operating segments
|
|
330,420
|
|
|
107%
|
|
|
323,514
|
|
|
107%
|
|
|
2%
|
|
Intersegment
eliminations
|
|
(23,354
|
)
|
|
(7%
|
)
|
|
(18,760
|
)
|
|
(7%
|
)
|
|
24%
|
|
Consolidated
revenue
|
|
307,066
|
|
|
100%
|
|
|
304,754
|
|
|
100%
|
|
|
1%
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction
processing
|
|
28,920
|
|
|
50%
|
|
|
25,591
|
|
|
46%
|
|
|
13%
|
|
International transaction processing
|
|
9,721
|
|
|
17%
|
|
|
10,783
|
|
|
19%
|
|
|
(10%
|
)
|
Financial inclusion and
applied technologies
|
|
29,290
|
|
|
51%
|
|
|
30,073
|
|
|
54%
|
|
|
(3%
|
)
|
Subtotal:
Operating segments
|
|
67,931
|
|
|
118%
|
|
|
66,447
|
|
|
119%
|
|
|
2%
|
|
Corporate/Eliminations
|
|
(10,161
|
)
|
|
(18%
|
)
|
|
(10,453
|
)
|
|
(19%
|
)
|
|
(3%
|
)
|
Consolidated operating income
|
|
57,770
|
|
|
100%
|
|
|
55,994
|
|
|
100%
|
|
|
3%
|
|
39
Table 10
|
|
In South African Rand (U.S.
GAAP)
|
|
|
|
Six months ended December 31,
|
|
|
|
2016
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
ZAR
|
|
|
% of
|
|
|
ZAR
|
|
|
% of
|
|
|
%
|
|
Operating Segment
|
|
000
|
|
|
total
|
|
|
000
|
|
|
total
|
|
|
change
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction processing
|
|
1,647,449
|
|
|
38%
|
|
|
1,462,422
|
|
|
36%
|
|
|
13%
|
|
International transaction
processing
|
|
1,265,294
|
|
|
29%
|
|
|
1,107,106
|
|
|
27%
|
|
|
14%
|
|
Financial inclusion and applied technologies
|
|
1,722,786
|
|
|
40%
|
|
|
1,794,870
|
|
|
44%
|
|
|
(4%
|
)
|
Subtotal: Operating segments
|
|
4,635,529
|
|
|
107%
|
|
|
4,364,398
|
|
|
107%
|
|
|
6%
|
|
Intersegment
eliminations
|
|
(327,638
|
)
|
|
(7%
|
)
|
|
(253,083
|
)
|
|
(7%
|
)
|
|
29%
|
|
Consolidated
revenue
|
|
4,307,891
|
|
|
100%
|
|
|
4,111,315
|
|
|
100%
|
|
|
5%
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction
processing
|
|
405,724
|
|
|
50%
|
|
|
345,238
|
|
|
46%
|
|
|
18%
|
|
International transaction processing
|
|
136,378
|
|
|
17%
|
|
|
145,469
|
|
|
19%
|
|
|
(6%
|
)
|
Financial inclusion and
applied technologies
|
|
410,915
|
|
|
51%
|
|
|
405,703
|
|
|
54%
|
|
|
1%
|
|
Subtotal:
Operating segments
|
|
953,017
|
|
|
118%
|
|
|
896,410
|
|
|
119%
|
|
|
6%
|
|
Corporate/Eliminations
|
|
(142,551
|
)
|
|
(18%
|
)
|
|
(141,017
|
)
|
|
(19%
|
)
|
|
1%
|
|
Consolidated operating income
|
|
810,466
|
|
|
100%
|
|
|
755,393
|
|
|
100%
|
|
|
7%
|
|
South African transaction processing
In ZAR, the increase in segment
revenue and operating income was primarily due to higher EPE transaction revenue
as a result of increased usage of our ATMs, increased inter-segment transaction
processing activities, and a modest increase in the number of social welfare
grants distributed.
Our operating income margin for
the first half of fiscal 2017 and 2016 was 25% and 24%, respectively. Our fiscal
2017 margin includes higher EPE revenue as a result of increased ATM
transactions, an increase in inter-segment transaction processing activities, an
increase in the number of beneficiaries paid in the first half of fiscal 2017
and a modest increase in the margin of transaction fees generated from
cardholders using the South African National Payment System, which was partially
offset by annual salary increases granted to our South African employees.
International transaction-based
activities
Segment revenue increased during
the first half of fiscal 2017, primarily due to the inclusion of T24 and
Masterpayment; however, this growth was partially offset by a lower contribution
from KSNET due to the regulatory changes. Operating income during the first half
of fiscal 2017 was lower due a decrease in revenue and higher depreciation
expenses at KSNET, losses incurred by Masterpayment as it grows its staff
complement to execute its expansion plan into new markets, and ongoing ZAZOO
start-up costs in the UK and India, which was partially offset by a positive
contribution by T24. Operating income and margin for the first half of fiscal
2017, was also positively impacted by a refund of approximately $0.8 million
that had been paid several years ago in connection with industry-wide litigation
that has now been finalized.
Operating
income margin for the first half of fiscal 2017 and 2016 was 11% and 13%,
respectively.
Financial inclusion and applied
technologies
In ZAR, Financial inclusion and
applied technologies revenue decreased primarily due to the introduction of our
new biometric linking feature for prepaid airtime and other value added
services, which adversely impacted sales, as well as fewer ad-hoc terminal
sales, partially offset by increased volumes in our lending and insurance
businesses, an increase in inter-segment revenues and higher card sales
Operating income margin for the
Financial inclusion and applied technologies segment for the first half of
fiscal 2017 and 2016 was 24% and 23%, respectively, and has increased primarily
due to improved revenues from our lending and insurance businesses and an
increase in inter-segment revenues and fewer low margin prepaid product sales,
offset by fewer ad hoc terminal sales and annual salary increases granted to our
South African employees.
40
Corporate/Eliminations
Our corporate expenses generally
include acquisition-related intangible asset amortization; expenditure related
to compliance with the Sarbanes-Oxley Act of 2002; non-employee directors fees;
employee and executive bonuses; stock-based compensation; legal fees; audit
fees; directors and officers insurance premiums; telecommunications expenses;
property-related expenditures including utilities, rental, security and
maintenance; and elimination entries.
In USD, our corporate expenses
have marginally decreased primarily due to reversal of stock-based compensation
charges, lower provision for incentives, and the impact of the stronger U.S.
dollar on goods and services procured in other currencies, primarily the ZAR,
partially offset by higher transaction-related expenditures and amortization
costs and modest increases in U.S. dollar denominated goods and services
purchased from third parties and directors fees.
Liquidity and Capital Resources
At December 31, 2016, our cash,
cash equivalents and restricted cash were $198.9 million, and includes the $43.7
million of restricted cash discussed below, and comprised mainly ZAR-denominated
balances of ZAR 1.2 billion ($84.4 million), U.S. dollar-denominated balances of
$69.1 million, KRW-denominated balances of KRW 40.6 billion ($36.9 million) and
other currency deposits, primarily euros, of $8.5 million. The decrease in our
cash balances from June 30, 2016, was primarily due to repurchase of shares of
our common stock; unscheduled repayments of our Korean debt; payment of taxes;
the investment in MobiKwik, C4U and Pros Software; a loan to Finbond and capital
expenditures, which was partially offset by the expansion of most of our core
businesses.
We currently believe that our
cash and credit facilities are sufficient to fund our future operations for at
least the next four quarters.
We generally invest the surplus
cash held by our South African operations in overnight call accounts that we
maintain at South African banking institutions, and surplus cash held by our
non-South African companies in the U.S. dollar denominated money market
accounts. We have invested surplus cash in Korea in short-term investment
accounts at Korean banking institutions.
Historically, we have financed
most of our operations, research and development, working capital, capital
expenditures and acquisitions through our internally generated cash. When
considering whether to borrow under our financing facilities, we consider the
cost of capital, cost of financing, opportunity cost of utilizing surplus cash
and availability of tax efficient structures to moderate financing costs. For
instance, in October 2016, we obtained loan facilities from RMB to fund a
portion of our working capital requirements and a portion of the Blue Label
investment. Refer to Note 10 to our unaudited condensed consolidated financial
statements for the three months ended December 31, 2016 for additional
information related to these loan facilities.
Our cash, cash equivalents and
restricted cash presented in our unaudited condensed consolidated balance sheet
as of December 31, 2016, includes restricted cash of approximately $43.7 million
related to the guarantee issued by RMB as described in Note 10 to the unaudited
condensed consolidated financial statements. This cash has been placed into an
escrow account and is considered restricted as to use and therefore is
classified as restricted cash. The restriction will lapse once the guarantee
expires, is utilized or is cancelled.
We have a short-term South
African credit facility with Nedbank Limited of ZAR 400 million ($29.2 million),
which consists of (i) a primary amount of up to ZAR 200 million, which is
immediately available, and (ii) a secondary amount of up to ZAR 200 million,
which is not immediately available. The primary amounts comprise an overdraft
facility of up to ZAR 50 million and indirect and derivative facilities of up to
ZAR 150 million, which includes letters of guarantee, letters of credit and
forward exchange contracts. On December 9, 2016, Nedbank issued a letter to us
under which it agreed to temporarily increase the overdraft facility by the
secondary amount of ZAR 200 million to ZAR 250 million. The increase in the
overdraft to ZAR 250 million is available until the earlier of the day on which
we issue shares to the value of $45.0 million or the day on which RMB repays ZAR
600 million back to us that is currently held in escrow related to the issuance
of a ZAR 2 billion guarantee to us.
As of December 31, 2016, we used
none of the overdraft and ZAR 131.1 million ($9.5 million) of the indirect and
derivative facilities to obtain foreign exchange contracts and to support
guarantees issued by Nedbank to various third parties on our behalf. Refer to
Note 12 to our audited consolidated financial statements included in our Annual
Report on Form 10-K for the year ended June 30, 2016, for additional information
related to our short-term facilities.
41
As of December 31, 2016, we had
outstanding long-term debt of KRW 27.9 billion (approximately $23.2 million
translated at exchange rates applicable as of December 31, 2016) under credit
facilities with a group of South Korean banks. The loans bear interest at the
South Korean CD rate in effect from time to time (1.39% as of December 31, 2016)
plus a margin of 3.10% for one of the term loan facilities and the revolver.
Scheduled remaining repayments of the term loans and loan under the revolving
credit facility are as follows: April 2017 and 2018 (KRW 10 billion each) and
October 2018 (KRW 8.3 billion plus all outstanding loans under our revolving
credit facility). Refer to Note 13 to our audited consolidated financial
statements included in our Annual Report on Form 10-K for the year ended June
30, 2016 and Note 10 to our unaudited condensed consolidated financial
statements for the three months ended December 31, 2016, for additional
information related to our long-term borrowings.
Cash flows from operating activities
Second quarter
Net cash provided by operating
activities for the second quarter of fiscal 2017 was $15.7 million (ZAR 218.8
million) compared to $4.0 million (ZAR 52.4 million) for the second quarter of
fiscal 2016. Excluding the impact of interest received, interest paid under our
Korean debt and taxes presented in the table below, in ZAR, the increase in cash
from operating activities resulted from improved trading activity during fiscal
2017.
During the second quarter of
fiscal 2017, we paid South African tax of $17.8 million (ZAR 246.6 million)
related to our 2017 tax year in South Africa. We also paid taxes totaling $5.0
million in other tax jurisdictions, primarily South Korea. During the second
quarter of fiscal 2016, we paid South African tax of $15.8 million (ZAR 238.1
million) related to our 2016 tax year in South Africa. We paid dividend
withholding taxes of $1.8 million (ZAR 25.0 million) during the second quarter
of fiscal 2016. We also paid taxes totaling $2.6 million in other tax
jurisdictions, primarily South Korea.
Taxes paid during the second
quarter of fiscal 2017 and 2016 were as follows:
Table 11
|
|
Three months ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
$
|
|
|
ZAR
|
|
|
ZAR
|
|
|
|
000
|
|
|
000
|
|
|
000
|
|
|
000
|
|
First provisional payments
|
|
17,775
|
|
|
15,841
|
|
|
246,558
|
|
|
238,127
|
|
Taxation paid related to prior years
|
|
1
|
|
|
-
|
|
|
13
|
|
|
-
|
|
Taxation refunds received
|
|
(166
|
)
|
|
-
|
|
|
(2,315
|
)
|
|
-
|
|
Dividend withholding taxation
|
|
-
|
|
|
1,821
|
|
|
-
|
|
|
25,000
|
|
Total South African taxes paid
|
|
17,610
|
|
|
17,662
|
|
|
244,256
|
|
|
263,127
|
|
Foreign taxes paid
|
|
4,954
|
|
|
2,594
|
|
|
69,186
|
|
|
37,524
|
|
Total
tax paid
|
|
22,564
|
|
|
20,256
|
|
|
313,442
|
|
|
300,651
|
|
First half
Net cash provided by operating
activities for the first half of fiscal 2017 was $69.6 million (ZAR 970.4
million) compared to $32.1 million (ZAR 416.6 million) for the first half of
fiscal 2016. Excluding the impact of interest received, interest paid under our
Korean debt and taxes presented in the table below, in ZAR, the increase in cash
from operating activities resulted from improved trading activity during fiscal
2017.
During the first half of fiscal
2017, we paid South African tax of $17.8 million (ZAR 246.6 million) related to
our 2017 tax year and $1.2 million (ZAR 16.7 million) related to prior tax
years. We also received a refund of approximately $1.4 million (ZAR 18.9
million) related to taxes overpaid in previous tax years in South Africa. We
paid dividend withholding taxes of $1.5 million (ZAR 21.3 million) during the
first half of fiscal 2017. We also paid taxes totaling $5.0 million in other tax
jurisdictions, primarily South Korea. During the first half of fiscal 2016, we
paid South African tax of $15.8 million (ZAR 238.1 million) related to our 2016
tax year and $3.4 million (ZAR 46.8 million) related to prior tax years. We paid
dividend withholding taxes of $2.6 million (ZAR 35.0 million) during the first
half of fiscal 2016. We also paid taxes totaling $2.6 million in other tax
jurisdictions, primarily South Korea.
42
Taxes paid during the first half
of fiscal 2017 and 2016 were as follows:
Table 12
|
|
Six months ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
$
|
|
|
ZAR
|
|
|
ZAR
|
|
|
|
000
|
|
|
000
|
|
|
000
|
|
|
000
|
|
First provisional payments
|
|
17,775
|
|
|
15,841
|
|
|
246,558
|
|
|
238,127
|
|
Taxation paid related to prior years
|
|
1,187
|
|
|
3,436
|
|
|
16,721
|
|
|
46,840
|
|
Taxation refunds received
|
|
(1,369
|
)
|
|
(176
|
)
|
|
(18,878
|
)
|
|
(2,402
|
)
|
Dividend withholding taxation
|
|
1,471
|
|
|
2,610
|
|
|
21,300
|
|
|
35,000
|
|
Total South African taxes paid
|
|
19,064
|
|
|
21,711
|
|
|
265,701
|
|
|
317,565
|
|
Foreign taxes paid
|
|
5,003
|
|
|
2,611
|
|
|
69,877
|
|
|
37,756
|
|
Total
tax paid
|
|
24,067
|
|
|
24,322
|
|
|
335,578
|
|
|
355,321
|
|
Cash flows from investing activities
Second quarter
Cash used in investing activities
for the second quarter of fiscal 2017 includes capital expenditure of $3.1
million (ZAR 43.6 million), primarily for the acquisition of payment processing
terminals in Korea. Our Korean capital expenditures have declined due to
regulatory changes in South Korea which now prohibit the provision of payment
equipment to the majority of merchants. We also provided a $10.0 million loan to
Finbond and paid approximately $2.9 million and $1.7 million, respectively, net
of cash received, to acquire 100% of each of C4U Malta and Pros Softwares
ordinary shares.
Cash used in investing activities
for the second quarter of fiscal 2016 includes capital expenditure of $9.9
million (ZAR 141.5 million), primarily for the acquisition of payment processing
terminals in Korea and the rollout of ATMs in South Africa.
First half
Cash used in investing activities
for the first half of fiscal 2017 includes capital expenditure of $6.5 million
(ZAR 91.9 million), primarily for the acquisition of payment processing
terminals in Korea. We also paid approximately $15.3 million for a 7.5% interest
in MobiKwik; provided a $10.0 million loan to Finbond and paid approximately
$2.9 million and $1.7 million, respectively, net of cash received, to acquire
100% of each of C4U Malta and Pros Softwares ordinary shares.
Cash used in investing activities
for the first half of fiscal 2016 includes capital expenditure of $20.6 million
(ZAR 280.9 million), primarily for the acquisition of payment processing
terminals in Korea and the rollout of ATMs in South Africa.
Cash flows from financing activities
Second quarter
During the second quarter of
fiscal 2017, we made a $1.8 million unscheduled repayment of our Korean debt and
paid a guarantee fee of $1.1 million related to the guarantee issued by RMB.
During the second quarter of
fiscal 2016, we acquired 749,213 shares of our common stock for approximately
$11.2 million and utilized approximately $0.7 million of our Korean borrowings
to pay quarterly interest due.
First half
During the first half of fiscal
2017, we paid approximately $31.6 million to repurchase 3,137,609 shares of our
common stock and also paid $0.5 million, on July 1, 2016, related to settlement
of amounts outstanding related to the repurchases at the end of June 2016. We
also made a $28.5 million unscheduled repayment of our Korean debt. In addition,
we paid a guarantee fee of $1.1 million related to the guarantee issued by RMB
and paid a dividend of approximately $0.6 million to certain of our
non-controlling interests.
During the first half of fiscal
2016, we received approximately $3.8 million from the exercise of stock options,
acquired 749,213 shares of our common stock for approximately $11.2 million, and
utilized approximately $1.4 million of our Korean borrowings to pay quarterly
interest due.
43
Off-Balance Sheet Arrangements
We have no off-balance sheet
arrangements.
Capital Expenditures
We expect capital spending for
the third quarter of fiscal 2017 to primarily include the acquisition of payment
terminals for the expansion of our operations in Korea and expansion of our ATM
infrastructure and branch network in South Africa.
Our historical capital
expenditures for the second quarter of fiscal 2017 and 2016 are discussed under
Liquidity and Capital ResourcesCash flows from investing activities. All of
our capital expenditures for the past three fiscal years were funded through
internally-generated funds. We had outstanding capital commitments as of
December 31, 2016, of $0.1 million related mainly to the procurement of
equipment. We expect to fund these expenditures through internally-generated
funds.