Item 1. Financial Statements
NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed
Consolidated Balance Sheets
|
|
Unaudited
|
|
|
(A)
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands,
except share data)
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
Cash and
cash equivalents
|
$
|
87,172
|
|
$
|
258,457
|
|
Pre-funded social welfare
grants receivable (Note 2)
|
|
4,643
|
|
|
2,322
|
|
Accounts
receivable, net of allowances of March: $966; June: $1,255
|
|
120,664
|
|
|
111,429
|
|
Finance loans receivable,
net of allowances of March: $17,622; June: $7,469
|
|
76,916
|
|
|
80,177
|
|
Inventory
(Note 3)
|
|
11,808
|
|
|
8,020
|
|
Deferred income taxes
(Note 1)
|
|
-
|
|
|
5,330
|
|
Total current assets before settlement assets
|
|
301,203
|
|
|
465,735
|
|
Settlement assets (Note 4)
|
|
394,138
|
|
|
640,455
|
|
Total
current assets
|
|
695,341
|
|
|
1,106,190
|
|
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation of March: $145,163; June: $120,212
|
|
31,592
|
|
|
39,411
|
|
EQUITY-ACCOUNTED INVESTMENTS
(Note 6)
|
|
185,023
|
|
|
27,862
|
|
GOODWILL (Note 7)
|
|
182,534
|
|
|
188,833
|
|
INTANGIBLE ASSETS, net (Note
7)
|
|
31,428
|
|
|
38,764
|
|
DEFERRED INCOME TAXES (Note 1)
|
|
3,363
|
|
|
-
|
|
OTHER LONG-TERM ASSETS,
including reinsurance assets (Note 6 and Note 8)
|
|
271,185
|
|
|
49,696
|
|
TOTAL ASSETS
|
|
1,400,466
|
|
|
1,450,756
|
|
LIABILITIES
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
Short-term credit facilities (Note 9)
|
|
3,400
|
|
|
16,579
|
|
Accounts payable
|
|
16,995
|
|
|
15,136
|
|
Other
payables
|
|
43,001
|
|
|
34,799
|
|
Current portion of
long-term borrowings (Note 10)
|
|
56,446
|
|
|
8,738
|
|
Income
taxes payable
|
|
14,502
|
|
|
5,607
|
|
Total current liabilities before settlement obligations
|
|
134,344
|
|
|
80,859
|
|
Settlement obligations
(Note 4)
|
|
394,138
|
|
|
640,455
|
|
Total
current liabilities
|
|
528,482
|
|
|
721,314
|
|
DEFERRED INCOME TAXES (Note
1)
|
|
17,789
|
|
|
11,139
|
|
LONG-TERM BORROWINGS (Note 10)
|
|
19,008
|
|
|
7,501
|
|
OTHER LONG-TERM LIABILITIES,
including insurance policy liabilities (Note 8)
|
|
2,901
|
|
|
2,795
|
|
TOTAL LIABILITIES
|
|
568,180
|
|
|
742,749
|
|
COMMITMENTS AND CONTINGENCIES
(Note 18)
|
|
|
|
|
|
|
REDEEMABLE COMMON STOCK (Note 1)
|
|
107,672
|
|
|
107,672
|
|
EQUITY
|
|
|
|
|
|
|
COMMON STOCK (Note
11)
Authorized: 200,000,000 with
$0.001 par value;
Issued and
outstanding shares, net of treasury - March: 56,855,187; June: 56,369,737
|
|
80
|
|
|
80
|
|
PREFERRED
STOCK
Authorized shares: 50,000,000
with $0.001 par value;
Issued and
outstanding shares, net of treasury: March: -; June: -
|
|
-
|
|
|
-
|
|
ADDITIONAL PAID-IN-CAPITAL
|
|
275,536
|
|
|
273,733
|
|
TREASURY SHARES, AT COST:
March: 24,891,292; June: 24,891,292
|
|
(286,951
|
)
|
|
(286,951
|
)
|
ACCUMULATED OTHER COMPREHENSIVE LOSS (Note
12)
|
|
(73,481
|
)
|
|
(162,569
|
)
|
RETAINED EARNINGS
|
|
805,390
|
|
|
773,276
|
|
TOTAL NET1 EQUITY
|
|
720,574
|
|
|
597,569
|
|
NON-CONTROLLING INTEREST
|
|
4,040
|
|
|
2,766
|
|
TOTAL
EQUITY (Note 1)
|
|
724,614
|
|
|
600,335
|
|
TOTAL
LIABILITIES, REDEEMABLE COMMON STOCK AND
SHAREHOLDERS
EQUITY
|
$
|
1,400,466
|
|
$
|
1,450,756
|
|
(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
|
|
|
Nine months
ended
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(In
thousands, except per share data)
|
|
|
(In
thousands, except per share data)
|
|
REVENUE
|
$
|
162,721
|
|
$
|
147,944
|
|
$
|
463,695
|
|
$
|
455,010
|
|
EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold, IT processing, servicing and support
|
|
77,860
|
|
|
70,912
|
|
|
226,506
|
|
|
219,210
|
|
Selling, general and administration
|
|
48,091
|
|
|
42,195
|
|
|
141,417
|
|
|
122,366
|
|
Depreciation and amortization
|
|
9,341
|
|
|
10,290
|
|
|
27,030
|
|
|
31,117
|
|
Impairment loss (note 7)
|
|
19,865
|
|
|
-
|
|
|
19,865
|
|
|
-
|
|
OPERATING INCOME
|
|
7,564
|
|
|
24,547
|
|
|
48,877
|
|
|
82,317
|
|
INTEREST INCOME
|
|
5,154
|
|
|
5,124
|
|
|
14,903
|
|
|
14,489
|
|
INTEREST EXPENSE
|
|
2,426
|
|
|
467
|
|
|
6,872
|
|
|
1,773
|
|
INCOME BEFORE INCOME TAX
EXPENSE
|
|
10,292
|
|
|
29,204
|
|
|
56,908
|
|
|
95,033
|
|
INCOME TAX EXPENSE (Note 17)
|
|
10,941
|
|
|
10,233
|
|
|
31,280
|
|
|
32,320
|
|
NET (LOSS) INCOME BEFORE
EARNINGS FROM EQUITY-ACCOUNTED INVESTMENTS
|
|
(649
|
)
|
|
18,971
|
|
|
25,628
|
|
|
62,713
|
|
EARNINGS FROM
EQUITY-ACCOUNTED INVESTMENTS
|
|
3,960
|
|
|
45
|
|
|
7,389
|
|
|
778
|
|
NET INCOME
|
|
3,311
|
|
|
19,016
|
|
|
33,017
|
|
|
63,491
|
|
LESS NET INCOME ATTRIBUTABLE
TO NON- CONTROLLING INTEREST
|
|
302
|
|
|
624
|
|
|
903
|
|
|
1,826
|
|
NET INCOME ATTRIBUTABLE TO
NET1
|
$
|
3,009
|
|
$
|
18,392
|
|
$
|
32,114
|
|
$
|
61,665
|
|
Net income per share, in
U.S. dollars
(Note 14)
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings attributable to Net1 shareholders
|
$
|
0.05
|
|
$
|
0.34
|
|
$
|
0.57
|
|
$
|
1.16
|
|
Diluted earnings attributable to Net1 shareholders
|
$
|
0.05
|
|
$
|
0.34
|
|
$
|
0.56
|
|
$
|
1.16
|
|
See Notes to Unaudited Condensed Consolidated Financial
Statements
3
NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed
Consolidated Statements of Comprehensive Income
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
3,311
|
|
$
|
19,016
|
|
$
|
33,017
|
|
$
|
63,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
(loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Movement in
foreign currency translation reserve
|
|
20,683
|
|
|
24,158
|
|
|
60,320
|
|
|
25,694
|
|
Net
unrealized income on asset available for sale, net of tax
|
|
29,366
|
|
|
-
|
|
|
29,366
|
|
|
-
|
|
Movement
in foreign currency translation reserve
related to equity-accounted
investments
|
|
-
|
|
|
-
|
|
|
(227
|
)
|
|
-
|
|
Total other comprehensive income, net of taxes
|
|
50,049
|
|
|
24,158
|
|
|
89,459
|
|
|
25,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
53,360
|
|
|
43,174
|
|
|
122,476
|
|
|
89,185
|
|
Less comprehensive income attributable to non- controlling interest
|
|
(473
|
)
|
|
(649
|
)
|
|
(1,274
|
)
|
|
(2,330
|
)
|
Comprehensive income attributable to Net1
|
$
|
52,887
|
|
$
|
42,525
|
|
$
|
121,202
|
|
$
|
86,855
|
|
See Notes to Unaudited Condensed Consolidated Financial
Statements
4
NET 1 UEPS
TECHNOLOGIES,
INC.
Unaudited
Condensed
Consolidated
Statement
of
Changes
in Equity for the nine
months
ended March 31, 2018 (dollar
amounts
in
thousands)
|
|
Net 1 UEPS Technologies, Inc.
Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
of
|
|
|
|
|
|
Number of
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
Non-
|
|
|
|
|
|
Redeemable
|
|
|
|
of
|
|
|
|
|
|
Treasury
|
|
|
Treasury
|
|
|
Shares, Net
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Net1
|
|
|
Controlling
|
|
|
|
|
|
Common Stock
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Shares
|
|
|
of Treasury
|
|
|
Capital
|
|
|
Earnings
|
|
|
(Loss) Income
|
|
|
Equity
|
|
|
Interest
|
|
|
Total
|
|
|
(Note 1)
|
|
Balance July 1, 2017
|
|
81,261,029
|
|
$
|
80
|
|
|
(24,891,292
|
)
|
$
|
(286,951
|
)
|
|
56,369,737
|
|
$
|
273,733
|
|
$
|
773,276
|
|
$
|
(162,569
|
)
|
$
|
597,569
|
|
$
|
2,766
|
|
$
|
600,335
|
|
$
|
107,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock granted
(Note 13)
|
|
611,411
|
|
|
|
|
|
|
|
|
|
|
|
611,411
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
charge (Note 13)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,052
|
|
|
|
|
|
|
|
|
2,052
|
|
|
|
|
|
2,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal of stock
compensation charge (Note 13)
|
|
(125,961
|
)
|
|
|
|
|
|
|
|
|
|
|
(125,961
|
)
|
|
(42
|
)
|
|
|
|
|
|
|
|
(42
|
)
|
|
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal of stock based-
compensation charge related to equity-accounted investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(207
|
)
|
|
|
|
|
|
|
|
(207
|
)
|
|
|
|
|
(207
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,114
|
|
|
|
|
|
32,114
|
|
|
903
|
|
|
33,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
(Note 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89,088
|
|
|
89,088
|
|
|
371
|
|
|
89,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance March 31, 2018
|
|
81,746,479
|
|
$
|
80
|
|
|
(24,891,292
|
)
|
$
|
(286,951
|
)
|
|
56,855,187
|
|
$
|
275,536
|
|
$
|
805,390
|
|
$
|
(73,481
|
)
|
$
|
720,574
|
|
$
|
4,040
|
|
$
|
724,614
|
|
$
|
107,672
|
|
See Notes to Unaudited Condensed Consolidated Financial
Statements
5
NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed
Consolidated Statements of Cash Flows
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Cash flows from operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
3,311
|
|
$
|
19,016
|
|
$
|
33,017
|
|
$
|
63,491
|
|
Depreciation and amortization
|
|
9,341
|
|
|
10,290
|
|
|
27,030
|
|
|
31,117
|
|
Earnings from equity-accounted investments
|
|
(3,960
|
)
|
|
(45
|
)
|
|
(7,389
|
)
|
|
(778
|
)
|
Interest on Cedar Cellular
note (Note 6)
|
|
(587
|
)
|
|
-
|
|
|
(769
|
)
|
|
-
|
|
Fair value adjustments
|
|
(110
|
)
|
|
(50
|
)
|
|
(209
|
)
|
|
(61
|
)
|
Interest payable
|
|
(17
|
)
|
|
75
|
|
|
(264
|
)
|
|
84
|
|
Facility fee amortized
|
|
120
|
|
|
27
|
|
|
467
|
|
|
94
|
|
(Profit) Loss on disposal of
property, plant and equipment
|
|
(50
|
)
|
|
(98
|
)
|
|
71
|
|
|
(571
|
)
|
Profit on disposal of business
|
|
-
|
|
|
-
|
|
|
(463
|
)
|
|
-
|
|
Stock-based compensation
charge (reversal), net (Note 13)
|
|
575
|
|
|
621
|
|
|
2,010
|
|
|
(68
|
)
|
Dividends received from equity accounted
investments
|
|
1,946
|
|
|
-
|
|
|
4,111
|
|
|
370
|
|
Impairment loss (Note 7)
|
|
19,865
|
|
|
-
|
|
|
19,865
|
|
|
-
|
|
Decrease (Increase) in accounts receivable,
pre-funded social welfare grants receivable and finance loans receivable
|
|
42,558
|
|
|
(16,612
|
)
|
|
9,422
|
|
|
(2,261
|
)
|
Decrease (Increase) in
inventory
|
|
1,072
|
|
|
3,893
|
|
|
(2,776
|
)
|
|
308
|
|
Increase (Decrease) in accounts payable and
other payables
|
|
2,827
|
|
|
(1,486
|
)
|
|
5,775
|
|
|
(4,386
|
)
|
Decrease in taxes payable
|
|
9,007
|
|
|
6,678
|
|
|
8,091
|
|
|
5,819
|
|
Decrease in deferred taxes
|
|
(653
|
)
|
|
(506
|
)
|
|
(225
|
)
|
|
(1,752
|
)
|
Net cash provided
by operating activities
|
|
85,245
|
|
|
21,803
|
|
|
97,764
|
|
|
91,406
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
(4,225
|
)
|
|
(1,949
|
)
|
|
(7,801
|
)
|
|
(8,498
|
)
|
Proceeds from disposal of property, plant and
equipment
|
|
160
|
|
|
330
|
|
|
575
|
|
|
1,344
|
|
Investment in Cell C (Note 6)
|
|
-
|
|
|
-
|
|
|
(151,003
|
)
|
|
-
|
|
Investment in equity of equity-accounted
investments (Note 6)
|
|
(18,597
|
)
|
|
-
|
|
|
(132,335
|
)
|
|
-
|
|
Loans to equity-accounted
investments (Note 6)
|
|
(10,635
|
)
|
|
(2,000
|
)
|
|
(10,635
|
)
|
|
(12,044
|
)
|
Acquisition of held to maturity investment
(Note 6)
|
|
-
|
|
|
-
|
|
|
(9,000
|
)
|
|
-
|
|
Investment in MobiKwik
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(15,347
|
)
|
Acquisitions, net of cash acquired
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(4,651
|
)
|
Other investing activities
|
|
-
|
|
|
-
|
|
|
(154
|
)
|
|
-
|
|
Net change in settlement assets (Note 4)
|
|
43,222
|
|
|
(165,945
|
)
|
|
280,390
|
|
|
54,827
|
|
Net cash
provided by (used in) investing activities
|
|
9,925
|
|
|
(169,564
|
)
|
|
(29,963
|
)
|
|
15,631
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowings utilized
(Note 10)
|
|
17,726
|
|
|
274
|
|
|
113,157
|
|
|
521
|
|
Repayment of long-term borrowings (Note 10)
|
|
(15,826
|
)
|
|
-
|
|
|
(60,967
|
)
|
|
(28,493
|
)
|
Repayment of bank overdraft
(Note 9)
|
|
(42,650
|
)
|
|
-
|
|
|
(56,993
|
)
|
|
-
|
|
Proceeds from bank overdraft (Note 9)
|
|
9,802
|
|
|
-
|
|
|
42,372
|
|
|
-
|
|
Guarantee fee paid (Note 10)
|
|
(202
|
)
|
|
-
|
|
|
(754
|
)
|
|
(1,145
|
)
|
Proceeds from issue of common stock
|
|
-
|
|
|
45,629
|
|
|
-
|
|
|
45,629
|
|
Acquisition of treasury stock
(Note 11)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(32,081
|
)
|
Dividends paid to non-controlling interest
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(613
|
)
|
Net change in settlement
obligations (Note 4)
|
|
(43,222
|
)
|
|
165,955
|
|
|
(280,390
|
)
|
|
(54,817
|
)
|
Net cash (used in)
provided by financing activities
|
|
(74,372
|
)
|
|
211,858
|
|
|
(243,575
|
)
|
|
(70,999
|
)
|
Effect of exchange rate
changes on cash
|
|
1,478
|
|
|
4,719
|
|
|
4,489
|
|
|
8,025
|
|
Net increase (decrease) in cash, cash
equivalents and
restricted cash
|
|
22,276
|
|
|
68,816
|
|
|
(171,285
|
)
|
|
44,063
|
|
Cash, cash equivalents and
restricted cash beginning of
period
|
|
64,896
|
|
|
198,891
|
|
|
258,457
|
|
|
223,644
|
|
Cash, cash equivalents and restricted cash
end of period (1)
|
$
|
87,172
|
|
$
|
267,707
|
|
$
|
87,172
|
|
$
|
267,707
|
|
See Notes to Unaudited Condensed Consolidated Financial
Statements
(1) Cash, cash equivalents and restricted cash as of March 31,
2017, includes restricted cash of approximately $44.7 million related to the
guarantee issued by FirstRand Bank Limited (acting through its Rand Merchant
Bank division). This cash was placed into an escrow account and was considered
restricted as to use and therefore was classified as restricted cash. The
restriction lapsed upon expiry of the guarantee.
6
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the Unaudited Condensed Consolidated Financial
Statements
for the three and nine months ended March 31, 2018 and
2017
(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 nine months ended March 31, 2018 and 2017, 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, 2017. 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. During the three months ended December 31, 2017, the Company
reclassified redeemable common stock out of total equity because redeemable
common stock is required to be presented outside of permanent equity. The
Company has restated these amounts in its unaudited condensed consolidated
balance sheet as at June 30, 2017 and unaudited condensed consolidated statement
of changes in equity for the nine months ended March 31, 2018. The
reclassification resulted in a decrease in total equity by approximately $107.7
million and an increase in redeemable common stock, presented outside of
permanent equity, of approximately $107.7 million. This reclassification had no
impact on the Companys previously reported consolidated income, comprehensive
income or cash flows.
References to the Company refer
to Net1 and its consolidated subsidiaries, collectively, unless the context
otherwise requires. References to Net1 are references solely to Net 1 UEPS
Technologies, Inc.
Recent accounting pronouncements
adopted
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. The adoption of this guidance
did not have a material impact on the Companys financial statements
disclosures.
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. The adoption of this guidance
did not have a material impact on the Companys financial statements.
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, and has been applied on a prospective basis. The adoption of this
guidance has resulted in the reclassification of current deferred tax assets and
liabilities as non-current deferred tax assets and liabilities in the unaudited
condensed consolidated balance sheet as of March 31, 2018. Prior period current
deferred tax assets have not been reclassified as non-current in the unaudited
condensed consolidated balance sheet as of June 30, 2017.
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. The
adoption of this guidance did not have a material impact on the Companys
financial statements. The Company has elected to continue to estimate the number
of forfeitures when an award is made.
7
1.
|
Basis of Presentation and Summary of Significant
Accounting Policies (continued)
|
Recent accounting pronouncements not
yet adopted as of March 31, 2018
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 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 originally set 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 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. The guidance
requires changes in the fair value of the Companys equity investments, with
certain exceptions, to be recognized through net income rather than other
comprehensive income. 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 include 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 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.
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.
8
1.
|
Basis of Presentation and Summary of Significant
Accounting Policies (continued)
|
Recent accounting pronouncements not
yet adopted as of March 31, 2018 (continued)
In May 2017, the FASB issued
guidance regarding
CompensationStock Compensation (Topic 718): Scope of
Modification Accounting.
The guidance amends the scope of modification
accounting for share-based payment arrangements and provides guidance on the
types of changes to the terms or conditions of share-based payment awards to
which an entity would be required to apply modification accounting under
Accounting Standards Codification 718. Specifically, an entity would not apply
modification accounting if the fair value, vesting conditions, and
classification of the awards are the same immediately before and after the
modification. 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.
2.
|
Pre-funded social welfare grants
receivable
|
Pre-funded social welfare grants
receivable represents primarily amounts pre-funded by the Company to certain
merchants participating in the merchant acquiring system. The April 2018 payment
service commenced on April 3, 2018, but the Company pre-funded certain merchants
participating in the merchant acquiring systems on March 31, 2018. The July 2017
payment service commenced on July 1, 2017, but the Company pre-funded certain
merchants participating in the merchant acquiring systems on the last day of
June 2017.
The Companys inventory comprised
the following category as of March 31, 2018 and June 30, 2017.
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Finished goods
|
$
|
11,808
|
|
$
|
8,020
|
|
|
|
$
|
11,808
|
|
$
|
8,020
|
|
4.
|
Settlement assets and settlement
obligations
|
Settlement assets comprise (1)
cash received from the South African government that the Company holds pending
disbursement to recipient cardholders 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.
5.
|
Fair value of financial
instruments
|
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 manages its exposure
to currency exchange, translation, interest rate, customer concentration, credit
and equity price and liquidity risks as discussed below.
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.
9
5.
|
Fair value of financial instruments
(continued)
|
Fair value of financial instruments
(continued)
Risk management
(continued)
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 lending 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 investments in
cash equivalents and held to maturity investments 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 BB+ (or its equivalent) or better, as determined by
credit rating agencies such as Standard & Poors, Moodys and Fitch Ratings.
Microlending credit risk
The Company is exposed to credit
risk in its microlending activities, which provide unsecured short-term loans to
qualifying customers. The Company manages this risk by performing an
affordability test for each prospective customer and assigning 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 and, consequently, the amount
that 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 would apply 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
would be 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. 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.
10
5.
|
Fair value of financial instruments
(continued)
|
Financial instruments
(continued)
Asset measured at fair value
using significant unobservable inputs investment in Cell C
The Company's Level 3 asset
represents an investment of 75,000,000 class A shares in Cell C (Pty) Limited
(Cell C), a leading mobile telecoms provider in South Africa (refer to Note
6). The Company has designated such shares as available for sale investments.
Cell C shares are not listed on an exchange and there is no readily determinable
market value for the shares. The Company has developed an adjusted EV/EBITDA
multiple valuation model in order to determine the fair value of the Cell C
shares. The primary inputs to the valuation model are Cell Cs adjusted EBITDA
for the 12 months ended December 31, 2017, of ZAR 3.7 billion ($309.0 million,
translated at exchange rates applicable as of March 31, 2018), an EBITDA
multiple of 7.20, Cell Cs net external debt of ZAR 8.2 billion ($691.6 million,
translated at exchange rates applicable as of March 31, 2018) and a
marketability discount of 10% as Cell C is not yet listed. The EBITDA multiple
was determined based on an analysis of Cell Cs peer group, which comprises the
primary mobile operators (Vodacom and MTN) in the South African marketplace. The
fair value of Cell C utilizing the adjusted EV/EBITDA valuation model developed
by the Company is sensitive to the following inputs: (i) the Companys
determination of adjusted EBITDA (ii) the EBITDA multiple used and (iii) the
marketability discount used. Utilization of different inputs, or changes to
these inputs, may result in significant higher or lower fair value measurement.
The fair value of the Cell C
shares as of March 31, 2018, represented approximately 15% of the Companys
total assets, including these shares. The Company expects to hold these shares
for an extended period of time and it is not concerned with short-term equity
price volatility with respect to these shares provided that the underlying
business, economic and management characteristics of the company remain sound.
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 BB+ (or equivalent) 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 Company had no
outstanding foreign exchange contracts as of March 31, 2018 and June 30, 2017,
respectively.
The following table presents the
Companys assets measured at fair value on a recurring basis as of March 31,
2018, according to the fair value hierarchy:
|
|
|
Quoted price in
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
active markets
|
|
|
other
|
|
|
Significant
|
|
|
|
|
|
|
|
for identical
|
|
|
observable
|
|
|
unobservable
|
|
|
|
|
|
|
|
assets
|
|
|
inputs
|
|
|
inputs
|
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in Cell C
|
$
|
-
|
|
$
|
-
|
|
$
|
206,970
|
|
$
|
206,970
|
|
|
Related to insurance
business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents (included in other long-term assets)
|
|
701
|
|
|
-
|
|
|
-
|
|
|
701
|
|
|
Fixed maturity investments
(included in cash and cash equivalents)
|
|
9,230
|
|
|
-
|
|
|
-
|
|
|
9,230
|
|
|
Other
|
|
-
|
|
|
40
|
|
|
-
|
|
|
40
|
|
|
Total
assets at fair value
|
$
|
9,931
|
|
$
|
40
|
|
$
|
206,970
|
|
$
|
216,941
|
|
11
5.
|
Fair value of financial instruments
(continued)
|
Financial instruments
(continued)
The following table presents the
Companys assets measured at fair value on a recurring basis as of June 30,
2017, according to the fair value hierarchy:
|
|
|
Quoted Price
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related to insurance business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
(included in other long-term assets)
|
$
|
627
|
|
$
|
-
|
|
$
|
-
|
|
$
|
627
|
|
|
Fixed maturity
investments (included in cash and cash equivalents)
|
|
5,160
|
|
|
-
|
|
|
-
|
|
|
5,160
|
|
|
Other
|
|
-
|
|
|
37
|
|
|
-
|
|
|
37
|
|
|
Total assets at fair
value
|
$
|
5,787
|
|
$
|
37
|
|
$
|
-
|
|
$
|
5,824
|
|
There have been no transfers in or out of Level 3 during the
three and nine months ended March 31, 2018 and 2017, 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 asset 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.
6.
|
Equity-accounted investments and other long-term
assets
|
Equity-accounted investments
The Companys ownership
percentage in its equity-accounted investments as of March 31, 2018 and June 30,
2017, was as follows:
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
DNI-4PL (Pty) Ltd (DNI)
|
|
49%
|
|
|
-
|
|
|
Bank Frick & Co AG (Bank Frick)
|
|
35%
|
|
|
-
|
|
|
Finbond Group Limited
(Finbond)
|
|
26%
|
|
|
26%
|
|
|
OneFi Limited (formerly KZ One) (OneFi)
|
|
25%
|
|
|
25%
|
|
|
SmartSwitch Namibia (Pty) Ltd
(SmartSwitch Namibia)
|
|
50%
|
|
|
50%
|
|
|
Walletdoc Proprietary Limited (Walletdoc)
|
|
20%
|
|
|
20%
|
|
On July 27, 2017, the Company
subscribed for 44,999,999 ordinary A shares in DNI, representing a 45% voting
and economic interest in DNI, for a subscription price of ZAR 945.0 million
($72.0 million) in cash. On March 9, 2018, the Company subscribed for an
additional 4,000,000 ordinary A shares in DNI for a subscription price of ZAR
89.3 million ($7.5 million), in cash, which increased its voting and economic
interest in DNI as of March 31, 2018, to 49%.
On March 9, 2018, the Company
agreed to subscribe for an additional 6,000,000 ordinary A shares in DNI for an
aggregate subscription price of ZAR 126.0 million ($10.7 million, translated at
exchange rates applicable as of March 31, 2018), which will increase its voting
and economic interest to 55% in DNI. The subscription is subject to certain
conditions, including obtaining South African Competition Commission approval.
On March 9, 2018, the Company provided DNI with an interest-free loan of ZAR
126.0 million ($10.6 million) which is repayable at the earlier of June 30,
2018, or within twenty days of the 6,000,000 ordinary A share subscription
agreement (i) becoming unconditional, (ii) lapsing because the Competition
Commission prohibits the subscription, or (iii) the agreement is cancelled for
any reason. The loan is included in accounts receivable, net, as of March 31,
2018, on the Companys unaudited condensed consolidated balance sheet. As
described in Note 10, on March 9, 2018, the Company obtained financing to
partially fund the acquisition of 4,000,000 ordinary A DNI shares and to provide
the loan to DNI.
12
6.
|
Equity-accounted investments and other long-term
assets (continued)
|
Equity-accounted investments
(continued)
Under the terms of the July 27,
2017, agreement, the Company agreed to pay to DNI an additional amount of up to
ZAR 360.0 million ($30.4 million), in cash, subject to the achievement of
certain performance targets by DNI. In connection with the subscription
agreements executed in March 2018, the Company agreed to increase the total
additional amount from up to ZAR 360.0 million to up to ZAR 380.0 million ($32.1
million) following the purchase of the additional 4,000,000 shares and further
agreed to increase the total additional amount from up to ZAR 380.0 million to
up to ZAR 400.0 million ($33.8 million) if the Company subscribes for the
additional 6,000,000 shares. Therefore the maximum additional amount that is
payable is ZAR 400.0 million if all subscriptions are completed. The Company has
not accrued for any of this contingent consideration as of March 31, 2018. Net1
SA pledged, among other things, its entire equity interest in DNI as security
for the South African facilities described in Note 10. All amounts denominated
in ZAR have been translated at exchange rates applicable as of March 31,
2018.
On October 2, 2017, the Company
acquired a 30% interest in Bank Frick, a fully licensed bank based in Balzers,
Liechtenstein, from the Kuno Frick Family Foundation (Frick Foundation) for
approximately CHF 39.8 million ($40.9 million) in cash. On February 9, 2018, the
Company purchased an additional 5% in Bank Frick from the Frick Foundation for
CHF 10.4 million ($11.1 million) and the Frick Foundation contributed
approximately CHF 3.8 million ($4.1 million) to Bank Frick to facilitate the
development of Bank Fricks Fintech and blockchain businesses. The Company has
an option, exercisable until October 2, 2019, to acquire an additional 35%
interest 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 several
funding opportunities, including for the Companys card issuing and acquiring
and transaction processing activities as well as new opportunities in blockchain
and crypto-currencies. The investment in Bank Frick has the potential to provide
the Company with a stable, long-term and strategic relationship with a
fully-licensed bank.
As of March 31, 2018, the Company
owned 205,483,967 shares in Finbond. Finbond is listed on the Johannesburg Stock
Exchange and its closing price on March 29, 2018, the last trading day of the
quarter, was R4.00 per share. The market value of the Companys holding in
Finbond on March 31, 2018 was ZAR 821.9 million ($69.5 million translated at
exchange rates applicable as of March 31, 2018). On July 13, 2017, the Company
acquired an additional 3.6 million shares in Finbond for approximately ZAR 11.2
million ($0.8 million). On July 17, 2017, the Company, pursuant to its election,
received an additional 4,361,532 shares in Finbond as a capitalization share
issue in lieu of a dividend.
On October 7, 2016, the Company
provided a loan of ZAR 139.2 million ($10.0 million, translated at the foreign
exchange rates applicable on the date of the loan) to Finbond in order to
partially finance Finbonds 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 12.00% . The
LIBOR rate was 2.31175% on March 29, 2018.
The loan was initially set to
mature at the earlier of Finbond concluding a rights offer or February 28, 2017,
but the agreement was subsequently amended to extend the repayment date to on or
before February 28, 2018, or such later date as may be mutually agreed by the
parties in writing. The Company had the right to elect for the loan to be repaid
in either Finbond ordinary shares, including through a rights offering, (in
accordance with an agreed mechanism) or in cash. The Company is required to make
a repayment election within 180 days after the repayment date otherwise the
repayment election will automatically default to repayment in ordinary shares.
Finbond undertook to perform all necessary steps reasonably required to effect
the issuance of shares to settle the repayment of the loan if that option is
elected by the Company.
In March 2018, the parties
amended the agreement to extend the repayment date from February 28, 2018 to
August 31, 2018, and to finalize certain matters related to the rights offering
mechanism and determining the maximum number of shares that Finbond would issue
to parties participating in a rights offering. On March 23, 2018, Finbond
publicly announced that it had commenced a rights offering process and that the
proceeds of the offering would be used to settle certain loans, including the
loan due to the Company. The loan is included in equity accounted investments as
of March 31, 2018, and accounts receivable, net, as of June 30, 2017, on the
Companys unaudited condensed consolidated balance sheet. The rights offering
closed on April 20, 2018. The Company agreed to underwrite the Finbond rights
offer up to an amount of 55,585,514 shares and from April 23, 2018, now owns
261,069,481 Finbond shares, representing approximately 27.6% of Finbonds issued
and outstanding ordinary shares after the rights offering.
The Company provided a credit
facility of up to $10 million in the form of convertible debt to OneFi, of which
$2 million was drawn as of March 31, 2018 and June 30, 2017. In April 2018, an
additional $1.0 million was drawn under the credit facility.
13
6.
|
Equity-accounted investments and other long-term
assets (continued)
|
Equity-accounted investments
(continued)
Summarized below is the movement
in equity-accounted investments during the nine months ended March 31, 2018:
|
|
|
|
|
|
Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DNI
|
|
|
Frick
|
|
|
Finbond
|
|
|
Other
(1)
|
|
|
Total
|
|
|
Investment in equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30,
2017
|
$
|
-
|
|
$
|
-
|
|
$
|
18,961
|
|
$
|
6,742
|
|
$
|
25,703
|
|
|
Acquisition of shares
|
|
79,541
|
|
|
51,949
|
|
|
1,941
|
|
|
-
|
|
|
133,431
|
|
|
Stock-based compensation
|
|
-
|
|
|
-
|
|
|
(207
|
)
|
|
-
|
|
|
(207
|
)
|
|
Comprehensive income (loss):
|
|
5,202
|
|
|
975
|
|
|
874
|
|
|
111
|
|
|
7,162
|
|
|
Other comprehensive loss
|
|
-
|
|
|
-
|
|
|
(227
|
)
|
|
-
|
|
|
(227
|
)
|
|
Equity
accounted earnings (loss)
|
|
5,202
|
|
|
975
|
|
|
1,101
|
|
|
111
|
|
|
7,389
|
|
|
Share of net
income (loss)
|
|
6,868
|
|
|
1,234
|
|
|
1,931
|
|
|
111
|
|
|
10,144
|
|
|
Amortization of acquired intangible assets
|
|
(2,315
|
)
|
|
(342
|
)
|
|
-
|
|
|
-
|
|
|
(2,657
|
)
|
|
Deferred
taxes on acquired intangible assets
|
|
649
|
|
|
83
|
|
|
-
|
|
|
-
|
|
|
732
|
|
|
Dilution resulting from corporate transactions
|
|
-
|
|
|
-
|
|
|
(830
|
)
|
|
-
|
|
|
(830
|
)
|
|
Dividends received
|
|
(1,765
|
)
|
|
(1,946
|
)
|
|
(1,096
|
)
|
|
(400
|
)
|
|
(5,207
|
)
|
|
Foreign currency adjustment
(2)
|
|
7,917
|
|
|
639
|
|
|
2,127
|
|
|
(489
|
)
|
|
10,194
|
|
|
Balance as of March 31,
2018
|
$
|
90,895
|
|
$
|
51,617
|
|
$
|
22,600
|
|
$
|
5,964
|
|
$
|
171,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of June 30, 2017
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
2,159
|
|
$
|
2,159
|
|
|
Transfer from accounts receivable, net
|
|
-
|
|
|
-
|
|
|
11,772
|
|
|
-
|
|
|
11,772
|
|
|
Foreign currency adjustment
(2)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
16
|
|
|
16
|
|
|
Balance as of March 31,
2018
|
$
|
-
|
|
$
|
-
|
|
$
|
11,772
|
|
$
|
2,175
|
|
$
|
13,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
Loans
|
|
|
Total
|
|
|
Carrying amount as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
|
|
|
|
$
|
25,703
|
|
$
|
2,159
|
|
$
|
27,862
|
|
|
March 31, 2018
|
|
|
|
|
|
|
$
|
171,076
|
|
$
|
13,947
|
|
$
|
185,023
|
|
(1) Includes OneFi, SmartSwitch
Namibia and Walletdoc;
(2) The foreign currency
adjustment represents the effects of the fluctuations of the South African rand,
Nigerian naira and Namibian dollar, against the U.S. dollar on the carrying
value.
Other long-term assets
Summarized below is the breakdown
of other long-term assets as of March 31, 2018, and June 30, 2017:
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Investment in 15% of Cell C
(Pty) Limited (Cell C), at fair value
|
$
|
206,970
|
|
$
|
-
|
|
|
Investment in 12% of One MobiKwik Systems
Private Limited (MobiKwik), at cost
|
|
28,391
|
|
|
26,317
|
|
|
Total
equity investments
|
|
235,361
|
|
|
26,317
|
|
|
Investment in 7.625% of Cedar Cellular
Investment 1 (RF) (Pty) Ltd 8.625% notes due in 2022
|
|
9,769
|
|
|
-
|
|
|
Total
held to maturity investments
|
|
9,769
|
|
|
-
|
|
|
Long-term portion of
payments to agents in South Korea amortized over the contract period
|
|
19,447
|
|
|
17,290
|
|
|
Policy
holder assets under investment contracts (Note 8)
|
|
701
|
|
|
627
|
|
|
Reinsurance assets under
insurance contracts Note 8)
|
|
224
|
|
|
191
|
|
|
Other
long-term assets
|
|
5,683
|
|
|
5,271
|
|
|
Total
other long-term assets
|
$
|
271,185
|
|
$
|
49,696
|
|
On August 2, 2017, the Company,
through its subsidiary, Net1 Applied Technologies South Africa Proprietary
Limited (Net1 SA), purchased 75,000,000 class A shares of Cell C for an
aggregate purchase price of ZAR 2.0 billion ($151.0 million) in cash. The
Company funded the transaction through a combination of cash and the facilities
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, 2017.
Net1 SA has pledged, among other things, its entire equity interest in Cell C as
security for the South African facilities described in Note 10 used to partially
fund the acquisition of Cell C.
14
6.
|
Equity-accounted investments and other long-term
assets (continued)
|
Other long-term assets (continued)
The Company has signed a
subscription agreement with MobiKwik, which is Indias largest independent
mobile payments network, with over 65 million users and two million merchants.
Pursuant to the subscription agreement, the Company agreed to make an equity
investment of up to $40.0 million in MobiKwik over a 24 month period. The
Company made an initial $15.0 million investment in August 2016 and a further
$10.6 million investment in June 2017, under this subscription agreement. As of
June 30, 2017, the Company owned approximately 13.5% of MobiKwik. In August
2017, MobiKwik raised additional funding through the issuance of additional
shares to a new shareholder at a 90% premium to the Companys investments and
the Companys percentage ownership was diluted to 12.0%, which also represents
the Companys ownership as of March 31, 2018. In addition, through a technology
agreement, the Companys Virtual Card technology will be integrated across all
MobiKwik wallets in order to provide ubiquity across all merchants in India, and
as part of the Companys continued strategic relationship, a number of our other
products including our digital banking platform, are expected to be deployed by
MobiKwik over the next year.
In December 2017, the Company
purchased, for cash, $9.0 million of notes, with a face value of $20.5 million,
issued by Cedar Cellular Investment 1 (RF) (Pty) Ltd (Cedar Cellular), a Cell
C shareholder, representing 7.625% of the issuance. The investment in the notes
was made in connection with the Cell C investment discussed above. The notes
bear interest semi-annually at 8.625% per annum on the face value and interest
is payable in cash or deferred, at Cedar Cellulars election, for payment on the
maturity date. The notes mature on August 2, 2022. The notes are secured by all
of Cedar Cellulars investment in Cell C (59,000,000 class A shares) and the
fair value of the Cell C shares pledged exceeds the carrying value of the notes
as of March 31, 2018. The notes are listed on The International Stock Exchange.
The Company has elected to treat the investment in the notes as held to maturity
securities.
Summarized below are the
components of the Companys available for sale and held to maturity investments
as of March 31, 2018:
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
|
holding
|
|
|
holding
|
|
|
Carrying
|
|
|
|
|
Cost basis
|
|
|
gains
|
|
|
losses
|
|
|
value
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in Cell C
|
$
|
169,127
|
|
$
|
37,843
|
|
$
|
-
|
|
$
|
206,970
|
|
|
Held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in Cedar
Cellular notes
|
|
9,000
|
|
|
769
|
|
|
-
|
|
|
9,769
|
|
|
Total
|
$
|
178,127
|
|
$
|
38,612
|
|
$
|
-
|
|
$
|
216,739
|
|
The Company had no available for
sale or held to maturity investments as of June 30, 2017.
Contractual maturities of held to
maturity investments
Summarized below are the
contractual maturities of the Companys held to maturity investment as of March
31, 2018:
|
|
|
Cost
|
|
|
Estimated
|
|
|
|
|
basis
|
|
|
fair value
|
|
|
Due in one year or less
|
$
|
-
|
|
$
|
-
|
|
|
Due in one year through five years
|
|
9,000
|
|
|
9,769
|
|
|
Due in five years through ten
years
|
|
-
|
|
|
-
|
|
|
Due after ten years
|
|
-
|
|
|
-
|
|
|
Total
|
$
|
9,000
|
|
$
|
9,769
|
|
7.
|
Goodwill and intangible assets,
net
|
Goodwill
Summarized below is the movement
in the carrying value of goodwill for the nine months ended March 31, 2018:
|
|
|
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
|
Gross value
|
|
|
impairment
|
|
|
value
|
|
|
Balance as of June 30, 2017
|
$
|
188,833
|
|
$
|
-
|
|
$
|
188,833
|
|
|
Impairment of goodwill
|
|
-
|
|
|
(19,865
|
)
|
|
(19,865
|
)
|
|
Foreign
currency adjustment
(1)
|
|
13,566
|
|
|
-
|
|
|
13,566
|
|
|
Balance as of March 31, 2018
|
$
|
202,399
|
|
$
|
(19,865
|
)
|
$
|
182,534
|
|
(1) Represents the effects of
the fluctuations of the South African rand, euro and the Korean won, against the
U.S. dollar on the carrying value.
15
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, 2017
|
$
|
23,131
|
|
$
|
140,570
|
|
$
|
25,132
|
|
$
|
188,833
|
|
|
Impairment of goodwill
|
|
-
|
|
|
(19,865
|
)
|
|
-
|
|
|
(19,865
|
)
|
|
Foreign
currency adjustment
(1)
|
|
2,404
|
|
|
9,155
|
|
|
2,007
|
|
|
13,566
|
|
|
Balance as of March 31, 2018
|
$
|
25,535
|
|
$
|
129,860
|
|
$
|
27,139
|
|
$
|
182,534
|
|
(1) Represents the effects of
the fluctuations of the South African rand, euro and the Korean won, against the
U.S. dollar on the carrying value.
Impairment loss
The Company assesses the carrying
value of goodwill for impairment annually, or more frequently, whenever events
occur and circumstances change indicating potential impairment. The Company
performs its annual impairment test as at June 30 of each year. During the three
and nine months ended March 31, 2018, the Company recognized an impairment loss
of approximately $19.9 million related to goodwill allocated to the
Masterpayment business within its international transaction processing operating
segment as a result of changes to the operating model of Masterpayment. During
the second quarter of fiscal 2018, the Company re-evaluated the operating
performance and ongoing viability of Masterpayments working capital financing
and supply chain solutions offering and determined to exit this portion of its
business. While the Company believed that it could scale this offering in the
medium to long-term by focusing on customers and industries outside
Masterpayments initial target market, this standalone offering did not fit the
Companys strategy of providing payment solutions and working capital to small
and medium-sized merchants. In order to focus on the Companys stated
international strategy, the Company decided to wind-down the traditional working
capital finance book issued to non-payment solutions customers. During the third
quarter of fiscal 2018, the Company evaluated Masterpayments business strategy
and following the wind-down referred to above, it has determined that
Masterpayment is unlikely to deliver the financial results or cash flows
previously anticipated. The Company and two of Masterpayments senior managers
have agreed, by mutual consent, that with effect from the end of March 2018, the
managers terminated their employment with Masterpayment in order to dedicate
themselves to new professional tasks.
In order to determine the amount
of goodwill impairment, the estimated fair value of the Companys Masterpayment
business was allocated to the individual fair value of the assets and
liabilities of Masterpayment as if it had been acquired in a business
combination, which resulted in the implied fair value of the goodwill. The
allocation of the fair value of Masterpayment required the Company to make a
number of assumptions and estimates about the fair value of assets and
liabilities where the fair values were not readily available or observable.
A further deterioration in the
international transaction processing operating segment, or in any other of the
Companys businesses, may lead to additional impairments in future periods.
16
7.
|
Goodwill and intangible assets, net
(continued)
|
Intangible assets, net
Carrying value and amortization
of intangible assets
Summarized below is the carrying
value and accumulated amortization of the intangible assets as of March 31, 2018
and June 30, 2017:
|
|
|
As of March 31, 2018
|
|
|
As of June 30, 2017
|
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
|
carrying
|
|
|
Accumulated
|
|
|
carrying
|
|
|
carrying
|
|
|
Accumulated
|
|
|
carrying
|
|
|
|
|
value
|
|
|
amortization
|
|
|
value
|
|
|
value
|
|
|
amortization
|
|
|
value
|
|
|
Finite-lived intangible
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
$
|
106,620
|
|
$
|
(78,746
|
)
|
$
|
27,874
|
|
$
|
99,209
|
|
$
|
(65,595
|
)
|
$
|
33,614
|
|
|
Software
and unpatented
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
technology
|
|
35,265
|
|
|
(34,242
|
)
|
|
1,023
|
|
|
33,273
|
|
|
(31,112
|
)
|
|
2,161
|
|
|
FTS
patent
|
|
3,240
|
|
|
(3,240
|
)
|
|
-
|
|
|
2,935
|
|
|
(2,935
|
)
|
|
-
|
|
|
Exclusive licenses
|
|
4,506
|
|
|
(4,506
|
)
|
|
-
|
|
|
4,506
|
|
|
(4,506
|
)
|
|
-
|
|
|
Trademarks
|
|
7,493
|
|
|
(5,799
|
)
|
|
1,694
|
|
|
6,972
|
|
|
(4,759
|
)
|
|
2,213
|
|
|
Total
finite-lived intangible assets
|
|
157,124
|
|
|
(126,533
|
)
|
|
30,591
|
|
|
146,895
|
|
|
(108,907
|
)
|
|
37,988
|
|
|
Indefinite-lived intangible
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial institution
license
|
|
837
|
|
|
-
|
|
|
837
|
|
|
776
|
|
|
-
|
|
|
776
|
|
|
Total indefinite-lived
intangible assets
|
|
837
|
|
|
-
|
|
|
837
|
|
|
776
|
|
|
-
|
|
|
776
|
|
|
Total intangible assets
|
$
|
157,961
|
|
$
|
(126,533
|
)
|
$
|
31,428
|
|
$
|
147,671
|
|
$
|
(108,907
|
)
|
$
|
38,764
|
|
Aggregate amortization expense on
the finite-lived intangible assets for the three months ended March 31, 2018 and
2017, was approximately $3.0 million and $3.7 million, respectively. Aggregate
amortization expense on the finite-lived intangible assets for the nine months
ended March 31, 2018 and 2017, was approximately $8.8 million and $10.2 million,
respectively.
Future estimated annual
amortization expense for the next five fiscal years and thereafter, assuming
exchange rates that prevailed on March 31, 2018, 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.
|
Fiscal 2018
|
$
|
12,915
|
|
|
Fiscal 2019
|
|
11,445
|
|
|
Fiscal 2020
|
|
10,727
|
|
|
Fiscal 2021
|
|
4,620
|
|
|
Fiscal 2022
|
|
85
|
|
|
Thereafter
|
|
345
|
|
|
Total
future estimated annual amortization expense
|
$
|
40,137
|
|
8.
|
Reinsurance assets and policyholder liabilities under
insurance and investment contracts
|
Reinsurance assets and policyholder
liabilities under insurance contracts
Summarized below is the movement
in reinsurance assets and policyholder liabilities under insurance contracts
during the nine
|
|
|
Reinsurance
|
|
|
Insurance
|
|
|
|
|
assets
(1)
|
|
|
contracts
(2)
|
|
|
Balance as of June 30, 2017
|
$
|
191
|
|
$
|
(1,611
|
)
|
|
Increase in policyholder
benefits under insurance contracts
|
|
1,276
|
|
|
(7,881
|
)
|
|
Claims
and policyholders benefits under insurance contracts .
|
|
(1,263
|
)
|
|
7,691
|
|
|
Foreign currency
adjustment
(3)
|
|
20
|
|
|
(168
|
)
|
|
Balance as of March 31, 2018
|
$
|
224
|
|
$
|
(1,969
|
)
|
(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.
17
8.
|
Reinsurance assets and policyholder liabilities under
insurance and investment contracts (continued)
|
Reinsurance assets and policyholder
liabilities under insurance contracts (continued)
The Company has agreements with
reinsurance companies in order to limit its losses from certain insurance
contracts, however, if the reinsurer is unable to meet its obligations, the
Company retains the liability.
The Company determines its
reserves for 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 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. The values of matured guaranteed endowments were increased
by late payment interest (net of the asset management fee and allowance for tax
on investment income).
Assets and policyholder liabilities
under investment contracts
Summarized below is the movement
in assets and policyholder liabilities under investment contracts during the
nine months ended March 31, 2018:
|
|
|
|
|
|
Investment
|
|
|
|
|
Assets
(1)
|
|
|
contracts
(2)
|
|
|
Balance as of June 30, 2017
|
$
|
627
|
|
$
|
(627
|
)
|
|
Increase in policyholder
benefits under investment contracts
|
|
9
|
|
|
(9
|
)
|
|
Foreign
currency adjustment
(3)
|
|
65
|
|
|
(65
|
)
|
|
Balance as
of March 31, 2018
|
$
|
701
|
|
$
|
(701
|
)
|
(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
|
Summarized below are the
Companys available short-term facilities and the amounts utilized as of March
31, 2018 and June 30, 2017, all amounts below were translated at the exchange
rates applicable as of the date presented:
|
|
|
March 31, 2018
|
|
|
June 30, 2017
|
|
|
|
|
Available
|
|
|
Utilized
|
|
|
Available
|
|
|
Utilized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank Frick
(1)
|
$
|
10,000
|
|
$
|
3,400
|
|
$
|
-
|
|
$
|
-
|
|
|
Europe:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank Frick
(1)
|
|
-
|
|
|
-
|
|
|
66,579
|
|
|
16,579
|
|
|
South Africa:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nedbank Limited
|
|
33,800
|
|
|
9,136
|
|
|
30,600
|
|
|
10,000
|
|
|
Overdraft facility
(1)
|
|
21,100
|
|
|
-
|
|
|
19,109
|
|
|
-
|
|
|
Indirect and derivative facilities (Note 18)
|
$
|
12,700
|
|
$
|
9,136
|
|
$
|
11,491
|
|
$
|
10,000
|
|
(1) Utilized amount included in
short-term facilities on the unaudited condensed consolidated balance sheets.
United States
On January 29, 2018, the Company
obtained a $10.0 million overdraft facility from Bank Frick. The interest rate
on the facilities is 4.50% plus 3-month US Dollar LIBOR and interest is payable
quarterly commencing on March 31, 2018. The 3-month US Dollar LIBOR rate was
2.31175% on March 29, 2018. The facility has no fixed term, however, it may be
terminated by either party with six weeks written notice. The facility is
secured by a pledge of the Companys investment in Bank Frick. As of March 31,
2018, the Company had utilized approximately $3.4 million of this facility.
18
9.
|
Short-term credit facilities
(continued)
|
Europe
The Company had obtained EUR 40.0
million and CHF 20 million revolving overdraft facilities from Bank Frick during
the year ended June 30, 2017. The Company assigned all claims against amounts
due from Masterpayment customers, which have been financed from the CHF 20
million facility, plus all secondary rights and preferential rights as
collateral for this facility to Bank Frick. Masterpayment was required to open a
primary business account with Bank Frick and this account was pledged to Bank
Frick as collateral for the EUR 40 million facility. Net1 stood as guarantor for
both of these facilities. The facilities were settled in full in January 2018
and were terminated in February 2018. As of June 30, 2017, the Company had
utilized approximately CHF 15.9 million ($16.6 million) of the CHF 20 million
facility and had not utilized any of the EUR 40 million facility. All amounts
have been translated at exchange rates applicable as of June 30, 2017.
South Africa
The aggregate amount of the
Companys short-term South African credit facility with Nedbank Limited was ZAR
400 million ($33.8 million) and consists of (i) a primary amount of up to ZAR
200 million ($16.9 million, and (ii) a secondary amount of up to ZAR 200 million
($16.9 million). The primary amount comprises an overdraft facility of up to ZAR
50 million ($4.2 million) and indirect and derivative facilities of up to ZAR
150 million ($12.7 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 March 31, 2018.
As of March 31, 2018, the
interest rate on the overdraft facility was 8.85% . The Company has ceded its
investment in Cash Paymaster Services Proprietary Limited (CPS), a South
African subsidiary, 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 short-term facility. 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 each of March 31, 2018 and
June 30, 2017, respectively, the Company had not utilized any of its overdraft
facility. As of March 31, 2018, the Company had utilized approximately ZAR 108.0
million ($9.1 million, translated at exchange rates applicable as of March 31,
2018) 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, 2017, the Company had utilized approximately
ZAR 130.5 million ($10.0 million, translated at exchange rates applicable as of
June 30, 2017) of its ZAR 150 million indirect and derivative facilities.
South Africa
The Companys South African
long-term facility agreement 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, 2017. As of March 31, 2018, $75.5 million was
outstanding under the Companys South African long-term facility agreement, and
the carrying amount of the long-term borrowings approximated fair value. On
March 8, 2018, the Company amended its South African long-term facility to
include an additional term loan of up to ZAR 210.0 million (approximately $17.8
million translated at exchange rates applicable as of March 31, 2018). This loan
matures on March 31, 2020. Interest on the ZAR 210 million term loan is payable
on the last day of March, June, September and December of each year and on the
final maturity date based on the Johannesburg Interbank Agreed Rate (JIBAR) in
effect from time to time plus a margin of 2.75% . The JIBAR has been set at
6.867% for the period to June 29, 2018, in respect of the loans provided under
the South African long-term facilities agreement.
On July 26, 2017, the Company
utilized ZAR 1.25 billion (approximately $92.2 million) of its South African
long-term facility to partially fund the acquisition of 15% of Cell C. On March
9, 2018, the Company utilized ZAR 84.0 million (approximately $7.1 million) of
its new ZAR 210 million South African long-term facility to partially fund the
acquisition of a further 4.0% in DNI and the balance of the facility to extend a
ZAR 126.0 million (approximately $10.6 million) loan to DNI (refer to Note 6).
Principal repayments of the
facilities are due in twelve quarterly installments commencing on September 29,
2017 and the Company has made scheduled repayments of ZAR 562.5 million ($44.4
million) during the nine months ended March 31, 2018. The next scheduled
principal payment will be made on June 29, 2018. The amount to be paid will be
either (i) ZAR 324.0 million ($27.4 million) if the Company is unable to proceed
with its acquisition of a further 6% in DNI or (ii) ZAR 213.8 million ($18.1
million) if the Company concludes its investment, all amounts translated at
exchange rates applicable as of March 31, 2018.
The Company paid a non-refundable
origination fee of approximately ZAR 6.3 million ($0.6 million) in August 2017
and a non-refundable origination fee of ZAR 2.4 million ($0.2 million) in March
2018. Interest expense incurred during the three and nine months ended March 31,
2018, was $1.9 million and $5.5 million, respectively. During the three and nine
months ended March 31, 2018, $0.1 million and $0.3 million, respectively, of
prepaid facility fees were amortized.
19
10.
|
Long-term borrowings
(continued)
|
South Korea
The South Korean senior secured
loan facility 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, 2017. On July 29, 2017, the Company utilized approximately KRW
0.3 billion ($0.3 million) of its Facility C revolving credit facility under the
Companys South Korean long-term facility agreement to pay interest due on the
Companys South Korean senior secured loan facility. On October 20, 2017, the
Company made an unscheduled repayment of $16.6 million and settled the full
outstanding balance, including interest, related to these borrowings.
Interest expense incurred during
the three months ended March 31, 2017, was $0.3 million. Interest expense
incurred during the nine months ended March 31, 2018 and 2017, was $0.4 million
and $0.9 million, respectively. Prepaid facility fees amortized during the three
months ended March 31, 2017, was $0.03 million. Prepaid facility fees amortized
during the nine months ended March 31, 2018 and 2017, was $0.1 million and $0.09
million, respectively.
The following table presents a
reconciliation between the number of shares, net of treasury, presented in the
unaudited condensed consolidated statement of changes in equity during the nine
months ended March 31, 2018 and 2017, respectively, and the number of shares,
net of treasury, excluding non-vested equity shares that have not vested during
the nine months ended March 31, 2018 and 2017, respectively:
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Number of shares, net of
treasury:
|
|
|
|
|
|
|
|
Statement of changes in
equity
|
|
56,855,187
|
|
|
57,590,085
|
|
|
Less:
Non-vested equity shares that have not vested (Note 13)
|
|
(934,673
|
)
|
|
(904,356
|
)
|
|
Number of shares, net of treasury excluding
non-vested equity shares that have not vested
|
|
55,920,514
|
|
|
56,685,729
|
|
Common stock repurchases
Executed under share repurchase
authorizations
The Company did not repurchase
any of its shares during the three and nine months ended March 31, 2018, or
during the three months ended March 31, 2017.
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. During the nine months ended March 31, 2017, the
Company repurchased 3,137,609 shares for approximately $31.6 million under its
share repurchase authorizations.
20
12.
|
Accumulated other comprehensive
loss
|
The table below presents the
change in accumulated other comprehensive (loss) income per component during the
nine months ended March 31, 2018:
|
|
|
Nine months
ended
|
|
|
|
|
March 31, 2018
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
net
|
|
|
|
|
|
|
|
|
|
|
unrealized
|
|
|
|
|
|
|
|
Accumulated
|
|
|
income on
|
|
|
|
|
|
|
|
foreign
|
|
|
asset
|
|
|
|
|
|
|
|
currency
|
|
|
available for
|
|
|
|
|
|
|
|
translation
|
|
|
sale, net of
|
|
|
|
|
|
|
|
reserve
|
|
|
tax
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2017
|
$
|
(162,569
|
)
|
$
|
-
|
|
$
|
(162,569
|
)
|
|
Movement in
foreign currency translation reserve related to equity accounted
investment
|
|
(227
|
)
|
|
-
|
|
|
(227
|
)
|
|
Unrealized income on asset available for sale, net of tax of $8,477
.
|
|
-
|
|
|
29,366
|
|
|
29,366
|
|
|
Movement in foreign
currency translation reserve
|
|
59,949
|
|
|
-
|
|
|
59,949
|
|
|
Balance as of March 31, 2018
|
$
|
(102,847
|
)
|
$
|
29,366
|
|
$
|
(73,481
|
)
|
There were no reclassifications
from accumulated other comprehensive loss to comprehensive (loss) income during
the three and nine months ended March 31, 2018 or 2017.
13.
|
Stock-based compensation
|
Options
The following table summarizes
stock option activity for the nine months ended March 31, 2018 and 2017:
|
|
|
|
|
|
|
|
|
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, 2017
|
|
846,607
|
|
|
13.87
|
|
|
3.80
|
|
|
486
|
|
|
|
|
|
Forfeitures
|
|
(37,333
|
)
|
|
11.23
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding March 31, 2018
|
|
809,274
|
|
|
13.99
|
|
|
2.92
|
|
|
427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding June 30, 2016
|
|
2,077,524
|
|
|
15.92
|
|
|
3.65
|
|
|
926
|
|
|
|
|
|
Exercised
|
|
(68,740
|
)
|
|
9.15
|
|
|
|
|
|
882
|
|
|
|
|
|
Expired unexercised
|
|
(474,443
|
)
|
|
22.51
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding March 31,
2017 .
|
|
1,534,341
|
|
|
14.19
|
|
|
3.88
|
|
|
2,150
|
|
|
|
|
No stock options were awarded
during the three and nine months ended March 31, 2018 or 2017. There were no
forfeitures during the three months ended March 31, 2018. During the nine months
ended March 31, 2018, employees forfeited 37,333 stock options. There were no
forfeitures during the three and nine months ended March 31, 2017; however,
during the nine months ended March 31, 2017, 474,443 stock options awarded in
August 2006, expired unexercised.
21
13.
|
Stock-based compensation
|
Stock option and restricted stock
activity (continued)
Options (continued)
These options have an exercise
price range of $7.35 to $24.46.
The following table presents
stock options that are exercisable as of March 31, 2018:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
average
|
|
|
|
|
|
|
|
|
|
|
average
|
|
|
remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
|
exercise
|
|
|
contractual
|
|
|
intrinsic
|
|
|
|
|
Number of
|
|
|
price
|
|
|
term
|
|
|
value
|
|
|
|
|
shares
|
|
|
($)
|
|
|
(in years)
|
|
|
($000)
|
|
|
Exercisable March 31, 2018
|
|
809,274
|
|
|
13.99
|
|
|
2.92
|
|
|
427
|
|
No stock options became
exercisable during the three months ended March 31, 2018 and 2017, respectively.
During the nine months ended March 31, 2018 and 2017, respectively, 105,982 and
154,803 stock options became exercisable. The Company issues new shares to
satisfy stock option exercises.
Restricted stock
The following table summarizes
restricted stock activity for the nine months ended March 31, 2018 and 2017:
|
|
|
Number of
|
|
|
Weighted
|
|
|
|
|
shares of
|
|
|
average grant
|
|
|
|
|
restricted
|
|
|
date fair value
|
|
|
|
|
stock
|
|
|
($000)
|
|
|
Non-vested June 30, 2017
|
|
505,473
|
|
|
11,173
|
|
|
Granted August 2017
|
|
588,594
|
|
|
4,288
|
|
|
Granted March 2018
|
|
22,817
|
|
|
234
|
|
|
Vested August 2017
|
|
(56,250
|
)
|
|
527
|
|
|
Forfeitures
|
|
(30,635
|
)
|
|
358
|
|
|
Forfeitures August and November 2014
awards with market conditions
|
|
(95,326
|
)
|
|
1,133
|
|
|
Non-vested March 31, 2018
|
|
934,673
|
|
|
9,608
|
|
|
|
|
|
|
|
|
|
|
Non-vested June 30, 2016
|
|
589,447
|
|
|
7,622
|
|
|
Granted August 2016
|
|
387,000
|
|
|
4,145
|
|
|
Vested August 2016
|
|
(72,091
|
)
|
|
735
|
|
|
Non-vested March 31,
2017
|
|
904,356
|
|
|
11,142
|
|
The August 2017 grants comprise
(i) 326,000 shares of restricted stock awarded to executive officers and
employees that are subject to time-based vesting, (ii) 210,000 shares of
restricted stock awarded to executive officers that are subject to market and
time-based vesting, and (iii) 52,594 shares of restricted stock awarded to
non-employee directors. The March 2018 grant relates to an award made to the
Companys new Chief Financial Officer. The August 2016 grants comprise 350,000
and 37,000 shares of restricted stock awarded to executive officers and
non-employee directors, respectively.
The 326,000 shares of restricted
stock will only vest if the recipient is employed by the Company on a full-time
basis on August 23, 2020. The 52,594 shares of restricted stock awarded to
non-employee directors will only vest if the recipient is a director on August
23, 2018. The 22,817 shares of restricted stock vest in two tranches, 11,409
will vest on March 1, 2019, and 11,408 will vest on March 1, 2020, subject to
the Chief Financial Officers continued employment.
22
13.
|
Stock-based compensation
|
Stock option and restricted stock
activity (continued)
Restricted stock (continued)
Market Conditions - Restricted
Stock Granted in August 2017
The 210,000 shares of restricted
stock awarded to executive officers in August 2017 are subject to time-based and
performance-based (a market condition) vesting conditions and vest in full only
on the date, if any, that the following conditions are satisfied: (1) the price
of the Companys common stock must equal or exceed certain agreed VWAP levels
(as described below) during a measurement period commencing on the date that it
files its Annual Report on Form 10-K for the fiscal year ended 2020 and ending
on December 31, 2020 and (2) the recipient is employed by the Company on a
full-time basis when the condition in (1) is met. If either of these conditions
is not satisfied, then none of the shares of restricted stock will vest and they
will be forfeited. The $23.00 price target represents an approximate 35%
increase, compounded annually, in the price of the Companys common stock on
Nasdaq over the $9.38 closing price on August 23, 2017. The VWAP levels and
vesting percentages related to such levels are as follows:
|
|
Below $15.00 (threshold)0%
|
|
|
At or above $15.00 and below $19.0033%
|
|
|
At or above $19.00 and below $23.0066%
|
|
|
At or above $23.00100%
|
These 210,000 shares of
restricted stock are effectively forward starting knock-in barrier options with
multi-strike prices of zero. The fair value of these shares of restricted stock
was calculated utilizing a Monte Carlo simulation model which was developed for
the purpose of the valuation of these shares. For each simulated share price
path, the market share price condition was evaluated to determine whether or not
the shares would vest under that simulation. A standard Geometric Brownian
motion process was used in the forecasting of the share price instead of a jump
diffusion model, as the share price volatility was more stable compared to the
highly volatile regime of previous years. Therefore, the simulated share price
paths capture the idiosyncrasies of the observed Company share price
movements.
In scenarios where the shares do
not vest, the final vested value at maturity is zero. In scenarios where vesting
occurs, the final vested value on maturity is the share price on vesting date.
The value of the grant is the average of the discounted vested values. The
Company used an expected volatility of 44.0%, an expected life of approximately
three years, a risk-free rate ranging between 1.275% to 1.657% and no future
dividends in its calculation of the fair value of the restricted stock. The
estimated expected volatility was calculated based on the Companys 30 day VWAP
share price using the exponentially weighted moving average of returns.
Performance Conditions - Restricted
Stock Granted in August 2016
In August 2016 the Company
awarded 350,000 shares of restricted stock to executive officers. In May 2017,
the Company agreed to accelerate the vesting of 200,000 of these shares of
restricted stock granted to the Companys former Chief Executive Officer. The
remaining 150,000 shares continue to be 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.
Performance Conditions - Restricted
Stock Granted in August 2015
In August 2015 the Company
awarded 301,537 shares of restricted stock to executive officers and employees.
These shares of restricted stock 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.
|
23
13.
|
Stock-based compensation
|
Stock option and restricted stock
activity (continued)
Restricted stock (continued)
Performance Conditions - Restricted
Stock Granted in August 2015 (continued)
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.
During the three and nine months
ended March 31, 2017, the Company reversed the stock-based compensation charge
recognized to date related to the 301,537 shares of restricted stock because it
believed that it was unlikely that the 2018 Fundamental EPS target would 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.
Vesting of all non-employee
director shares issued prior to June 30, 2017
Grants of restricted stock to
non-employee directors made during fiscal 2017, as well as those grants made in
prior years, originally vested over a three-year period. After the end of fiscal
2017, the Companys board consulted with Pay Governance, an independent
compensation consultant, and determined that one-year vesting of restricted
stock grants is a more common compensation practice for independent directors
and therefore, amended the terms of outstanding awards to vest one-year after
grant. As a result of this amendment, 61,995 shares of restricted stock held by
the non-employee directors as of June 30, 2017, were fully-vested.
Forfeiture of restricted stock
awarded in August and November 2014 that did not achieve targeted market
conditions
During the nine months ended
March 31, 2018, restricted stock with market conditions awarded in August and
November 2014, were forfeited, because the target market conditions were not
achieved. The stock-based compensation charge related to these awards was not
reversed upon forfeiture because these awards contained market conditions.
The fair value of restricted
stock vesting during the nine months ended March 31, 2018 and 2017,
respectively, was $0.5 million and $0.7 million.
Stock-based compensation charge and
unrecognized compensation cost
The Company recorded a
stock-based compensation charge during each of the three months ended March 31,
2018 and 2017 of $0.6 million, which comprised:
|
|
|
|
|
|
Allocated to cost
|
|
|
|
|
|
|
|
|
|
|
of goods sold, IT
|
|
|
Allocated to
|
|
|
|
|
|
|
|
processing,
|
|
|
selling, general
|
|
|
|
|
Total
|
|
|
servicing and
|
|
|
and
|
|
|
|
|
charge
|
|
|
support
|
|
|
administration
|
|
|
Three months ended March 31,
2018
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation charge
|
$
|
575
|
|
$
|
-
|
|
$
|
575
|
|
|
Total three months ended March 31, 2018
|
$
|
575
|
|
$
|
-
|
|
$
|
575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
2017
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation charge
|
$
|
621
|
|
$
|
-
|
|
$
|
621
|
|
|
Total three months ended March 31, 2017
|
$
|
621
|
|
$
|
-
|
|
$
|
621
|
|
24
13.
|
Stock-based compensation
(continued)
|
Stock-based compensation charge and
unrecognized compensation cost (continued)
The Company recorded a
stock-based compensation charge (reversal) during the nine months ended March
31, 2018 and 2017 of $2.0 million and ($0.07 million), respectively, which
comprised:
|
|
|
|
|
|
of goods sold, IT
|
|
|
Allocated to
|
|
|
|
|
|
|
|
processing,
|
|
|
selling, general
|
|
|
|
|
Total
|
|
|
servicing and
|
|
|
and
|
|
|
|
|
charge
|
|
|
support
|
|
|
administration
|
|
|
Nine months ended March 31,
2018
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation charge
|
$
|
2,052
|
|
$
|
-
|
|
$
|
2,052
|
|
|
Reversal of stock
compensation charge related to stock options forfeited
|
|
(42
|
)
|
|
-
|
|
|
(42
|
)
|
|
Total nine months ended March 31, 2018
|
$
|
2,010
|
|
$
|
-
|
|
$
|
2,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation charge
|
$
|
1,759
|
|
$
|
-
|
|
$
|
1,759
|
|
|
Reversal of stock compensation charge
related to restricted stock
|
|
(1,827
|
)
|
|
-
|
|
|
(1,827
|
)
|
|
Total nine months ended March 31, 2017
|
$
|
(68
|
)
|
$
|
-
|
|
$
|
(68
|
)
|
The stock-based compensation
charges have been allocated to selling, general and administration based on the
allocation of the cash compensation paid to the relevant employees.
As of March 31, 2018, there was
no unrecognized compensation cost related to stock options because all stock
options granted have vested. As of March 31, 2018, the total unrecognized
compensation cost related to restricted stock awards was approximately $4.0
million, which the Company expects to recognize over approximately two years.
This amount excludes the total unrecognized compensation cost as of March 31,
2018, of approximately $3.9 million, related to restricted stock awards that the
Company expects will not vest due to it not achieving the 2018 Fundamental EPS.
As of March 31, 2018, 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 $3.2 million.
As of March 31, 2018 and June 30,
2017, the Company recorded a deferred tax asset of approximately $0.7 million
and $0.9 million, respectively, related to the stock-based compensation charge
recognized related to employees of Net1. As of March 31, 2018, the Company has a
valuation allowance of approximately $0.7 million related to the deferred tax
asset because it does not believe that the stock-based compensation deduction
would be utilized as it does not anticipate generating sufficient taxable income
in the United States. The Company deducts the difference between the market
value on date of exercise by the option recipient and the exercise price from
income subject to taxation in the United States.
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 nine months ended March 31, 2018 or 2017.
Accordingly, the two-class method presented below does not include the impact of
any redemption. The Companys redeemable common stock is described in Note 15 to
the Companys audited consolidated financial statements included in its Annual
Report on Form 10-K for the year ended June 30, 2017.
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 nine months ended March 31, 2018 and 2017, 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.
25
14.
|
Earnings per share
(continued)
|
The calculation of diluted
earnings per share includes the dilutive effect of a portion of the restricted
stock granted to employees in August 2014, November 2014, August 2015, August
2016, August 2017 and March 2018, 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 March 2018, August 2017, 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, 2017.
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
|
|
|
Nine months
ended
|
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
(in thousands
except
|
|
|
(in thousands
except
|
|
|
|
|
percent and
|
|
|
percent and
|
|
|
|
|
per share
data)
|
|
|
per share
data)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable
to Net1
|
$
|
3,009
|
|
$
|
18,392
|
|
$
|
32,114
|
|
$
|
61,665
|
|
|
Undistributed earnings
|
|
3,009
|
|
|
18,392
|
|
|
32,114
|
|
|
61,665
|
|
|
Percent allocated to
common shareholders (Calculation 1)
|
|
98%
|
|
|
98%
|
|
|
98%
|
|
|
98%
|
|
|
Numerator
for earnings per share: basic and diluted
|
$
|
2,962
|
|
$
|
18,064
|
|
$
|
31,597
|
|
$
|
60,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for
basic earnings per share: weighted-average common shares outstanding
|
|
55,828
|
|
|
53,666
|
|
|
55,874
|
|
|
52,054
|
|
|
Effect of
dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
61
|
|
|
169
|
|
|
54
|
|
|
127
|
|
|
Denominator
for diluted earnings per share: adjusted weighted average common shares
outstanding and assumed conversion
|
|
55,889
|
|
|
53,835
|
|
|
55,928
|
|
|
52,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.05
|
|
$
|
0.34
|
|
$
|
0.57
|
|
$
|
1.16
|
|
|
Diluted
|
$
|
0.05
|
|
$
|
0.34
|
|
$
|
0.56
|
|
$
|
1.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Calculation 1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average
common shares outstanding (A)
|
|
55,828
|
|
|
53,666
|
|
|
55,874
|
|
|
52,054
|
|
|
Basic
weighted-average common shares outstanding and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unvested restricted
shares expected to vest (B)
|
|
56,716
|
|
|
54,639
|
|
|
56,788
|
|
|
52,961
|
|
|
Percent
allocated to common shareholders (A) / (B)
|
|
98%
|
|
|
98%
|
|
|
98%
|
|
|
98%
|
|
Options to purchase 288,692 and
351,828 shares of the Companys common stock at prices ranging from $10.59 to
$24.46 per share were outstanding during the three and nine months ended March
31, 2018, but were not included in the computation of diluted earnings per share
because the options exercise price was 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 March 31, 2018.
15.
|
Supplemental cash flow
information
|
The following table presents
supplemental cash flow disclosures for the three and nine months ended March 31,
2018 and 2017:
|
|
|
Three
months ended
|
|
|
Nine months
ended
|
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
Cash received from interest
|
$
|
4,561
|
|
$
|
5,265
|
|
$
|
14,409
|
|
$
|
14,600
|
|
|
Cash paid for interest
|
$
|
2,298
|
|
$
|
435
|
|
$
|
6,716
|
|
$
|
2,007
|
|
|
Cash paid for income taxes
|
$
|
2,276
|
|
$
|
3,631
|
|
$
|
22,925
|
|
$
|
27,698
|
|
26
15.
|
Supplemental cash flow information
(continued)
|
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 nine months ended March 31, 2016.
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, 2017.
The reconciliation of the
reportable segments revenue to revenue from external customers for the three
months ended March 31, 2018 and 2017, is as follows:
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
From
|
|
|
|
|
Reportable
|
|
|
Inter-
|
|
|
external
|
|
|
|
|
Segment
|
|
|
segment
|
|
|
customers
|
|
|
South African transaction
processing
|
$
|
73,508
|
|
$
|
7,429
|
|
$
|
66,079
|
|
|
International transaction processing
|
|
46,240
|
|
|
-
|
|
|
46,240
|
|
|
Financial inclusion and
applied technologies
|
|
59,574
|
|
|
9,172
|
|
|
50,402
|
|
|
Total for the three months ended March
31, 2018
|
$
|
179,322
|
|
$
|
16,601
|
|
$
|
162,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction processing
|
$
|
63,967
|
|
$
|
7,331
|
|
$
|
56,636
|
|
|
International transaction
processing
|
|
41,514
|
|
|
-
|
|
|
41,514
|
|
|
Financial inclusion and applied technologies
|
|
56,881
|
|
|
7,087
|
|
|
49,794
|
|
|
Total for the three
months ended March 31, 2017
|
$
|
162,362
|
|
$
|
14,418
|
|
$
|
147,944
|
|
The reconciliation of the
reportable segments revenue to revenue from external customers for the nine
months ended March 31, 2018 and 2017, is as follows:
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
From
|
|
|
|
|
Reportable
|
|
|
Inter-
|
|
|
external
|
|
|
|
|
Segment
|
|
|
segment
|
|
|
customers
|
|
|
South African transaction
processing
|
$
|
204,093
|
|
$
|
19,755
|
|
$
|
184,338
|
|
|
International transaction processing
|
|
136,447
|
|
|
-
|
|
|
136,447
|
|
|
Financial inclusion and
applied technologies
|
|
168,018
|
|
|
25,108
|
|
|
142,910
|
|
|
Total for the nine months ended March
31, 2018
|
$
|
508,558
|
|
$
|
44,863
|
|
$
|
463,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction processing
|
$
|
181,397
|
|
$
|
18,127
|
|
$
|
163,270
|
|
|
International transaction
processing
|
|
131,704
|
|
|
-
|
|
|
131,704
|
|
|
Financial inclusion and applied technologies
|
|
179,681
|
|
|
19,645
|
|
|
160,036
|
|
|
Total for the nine
months ended March 31, 2017
|
$
|
492,782
|
|
$
|
37,772
|
|
$
|
455,010
|
|
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.
27
16.
|
Operating segments
(continued)
|
The reconciliation of the
reportable segments measure of profit or loss to income before income taxes for
the three and nine months ended March 31, 2018 and 2017, is as follows:
|
|
|
Three
months ended
|
|
|
Nine months
ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
Reportable segments measure
of profit or loss
|
$
|
12,795
|
|
$
|
31,563
|
|
$
|
65,579
|
|
$
|
99,494
|
|
|
Operating income:
Corporate/Eliminations
|
|
(5,231
|
)
|
|
(7,016
|
)
|
|
(16,702
|
)
|
|
(17,177
|
)
|
|
Interest income
|
|
5,154
|
|
|
5,124
|
|
|
14,903
|
|
|
14,489
|
|
|
Interest expense
|
|
(2,426
|
)
|
|
(467
|
)
|
|
(6,872
|
)
|
|
(1,773
|
)
|
|
Income
before income taxes
|
$
|
10,292
|
|
$
|
29,204
|
|
$
|
56,908
|
|
$
|
95,033
|
|
The following tables summarize
segment information that is prepared in accordance with GAAP for the three and
nine months ended March 31, 2018 and 2017:
|
|
|
Three
months ended
|
|
|
Nine months
ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction
processing
|
$
|
73,508
|
|
$
|
63,967
|
|
$
|
204,093
|
|
$
|
181,397
|
|
|
International transaction processing
|
|
46,240
|
|
|
41,514
|
|
|
136,447
|
|
|
131,704
|
|
|
Financial inclusion and
applied technologies
|
|
59,574
|
|
|
56,881
|
|
|
168,018
|
|
|
179,681
|
|
|
Total
|
|
179,322
|
|
|
162,362
|
|
|
508,558
|
|
|
492,782
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South
African transaction processing
|
|
12,719
|
|
|
15,531
|
|
|
38,521
|
|
|
44,451
|
|
|
International transaction
processing
|
|
(14,892
|
)
|
|
1,968
|
|
|
(14,567
|
)
|
|
11,689
|
|
|
Financial
inclusion and applied technologies
|
|
14,968
|
|
|
14,064
|
|
|
41,625
|
|
|
43,354
|
|
|
Subtotal:
Operating segments
|
|
12,795
|
|
|
31,563
|
|
|
65,579
|
|
|
99,494
|
|
|
Corporate/Eliminations
|
|
(5,231
|
)
|
|
(7,016
|
)
|
|
(16,702
|
)
|
|
(17,177
|
)
|
|
Total
|
|
7,564
|
|
|
24,547
|
|
|
48,877
|
|
|
82,317
|
|
|
Depreciation and
amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction
processing
|
|
1,236
|
|
|
1,139
|
|
|
3,476
|
|
|
3,433
|
|
|
International transaction processing
|
|
4,668
|
|
|
5,083
|
|
|
13,681
|
|
|
16,440
|
|
|
Financial inclusion and
applied technologies
|
|
398
|
|
|
365
|
|
|
1,062
|
|
|
1,056
|
|
|
Subtotal: Operating segments
|
|
6,302
|
|
|
6,587
|
|
|
18,219
|
|
|
20,929
|
|
|
Corporate/Eliminations
|
|
3,039
|
|
|
3,703
|
|
|
8,811
|
|
|
10,188
|
|
|
Total
|
|
9,341
|
|
|
10,290
|
|
|
27,030
|
|
|
31,117
|
|
|
Expenditures for long-lived assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South
African transaction processing
|
|
1,794
|
|
|
448
|
|
|
3,171
|
|
|
1,490
|
|
|
International transaction
processing
|
|
1,990
|
|
|
1,309
|
|
|
3,788
|
|
|
6,275
|
|
|
Financial
inclusion and applied technologies
|
|
441
|
|
|
192
|
|
|
842
|
|
|
733
|
|
|
Subtotal:
Operating segments
|
|
4,225
|
|
|
1,949
|
|
|
7,801
|
|
|
8,498
|
|
|
Corporate/Eliminations
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Total
|
$
|
4,225
|
|
$
|
1,949
|
|
$
|
7,801
|
|
$
|
8,498
|
|
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.
28
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 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 nine months
ended March 31, 2018, the tax charge was calculated using the expected effective
tax rate for the year. The Companys effective tax rate for the three and nine
months ended March 31, 2018, was 106.3% and 55.0%, respectively, and was higher
than the South African statutory rate as a result of an impairment loss,
non-deductible expenses (including transaction-related expenditure and
non-deductible interest on our South African long-term facility), the impact of
the changes in U.S. federal statutory tax rates described below and for the nine
months ended March 31, 2018, a valuation allowance provided related to an
allowance for doubtful working capital finance receivables created.
For the three and nine months
ended March 31, 2017, the tax charge was calculated using the expected effective
tax rate for the year. The Companys effective tax rate for the three and nine
months ended March 31, 2017, was 35.0% and 34.0%, 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.
New U.S. Tax Legislation
On December 22, 2017, the Tax
Cuts and Jobs Act (the TCJA), was enacted into law, significantly modifying
U.S. federal tax laws. The TCJA reduces the federal statutory tax rate for
corporations from 35% to 21% effective from January 1, 2018, eliminates
alternative minimum tax for corporations, limits net operating loss
carryforwards (and eliminates carrybacks), limits the deductibility of interest
expense and transitions the system of U.S. international taxation of
corporations from a worldwide tax system to a territorial tax system.
Specifically, the transition to a territorial tax system is not expected to have
a significant impact on the Companys future consolidated effective tax rate as
it generates the majority of its taxable income in tax jurisdictions with tax
rates higher (mainly South Africa, where its income is taxed at 28%, and Korea,
where our income is taxed at 22%) than the new federal statutory tax rate of
21%.
The Company is currently
analyzing the impact of these changes; therefore, an estimate of the full impact
on deferred tax assets and liabilities, income tax expense, net income and other
affected accounts is not yet available. The Company has a June year end and
therefore it will use a blended rate of 28.10% for its tax year ending June 30,
2018, in the U.S. Certain of the Companys deferred tax assets and liabilities
which it expects will be utilized/ reversed during the period ended June 30,
2018, have been re-measured at this blended rate and those deferred taxes that
the Company believes will only be utilized/ reversed in subsequent tax years,
have been remeasured at 21%. The impact of the change in the tax rate on the
Companys deferred taxes included in income tax expense during the nine months
ended March 31, 2018, was $0.3 million. The Company has also provided an
additional valuation allowance of approximately $0.6 million related to net
operating loss carryforwards that it does not believe will be utilized as a
result of the enactment of the TCJA.
The TCJA also requires a U.S.
shareholder of a specified foreign corporation to include a deemed repatriation
of foreign earnings as part of the transition to a territorial tax system;
however, the Company does not currently believe that it has a deemed
repatriation transition tax liability.
Uncertain tax positions
There were no significant changes
in the Companys uncertain tax positions during the three and nine months ended
March 31, 2018. As of March 31, 2018, 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 March 31, 2018 and June 30,
2017, the Company had unrecognized tax benefits of $0.5 million and $0.5
million, respectively, all of which would impact the Companys effective tax
rate. The Company files income tax returns mainly in South Africa, South Korea,
Germany, Hong Kong, India, the United Kingdom, Botswana and in the U.S. federal
jurisdiction. As of March 31, 2018, the Companys South African subsidiaries are
no longer subject to income tax examination by the South African Revenue Service
for periods before June 30, 2013. The Company is subject to income tax in other
jurisdictions outside South Africa, none of which are individually material to
its financial position, statement of cash flows, or results of operations.
29
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 108.0 million ($9.1 million, translated at
exchange rates applicable as of March 31, 2018) and thereby utilizing part of
the Companys short-term facility. The Company in turn has provided nonrecourse,
unsecured counter-guarantees to Nedbank for ZAR 108.0 million ($9.1 million,
translated at exchange rates applicable as of March 31, 2018). The Company pays
commission of between 0.4% per annum to 1.9% 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 March 31, 2018. The maximum potential amount that the Company could
pay under these guarantees is ZAR 108.0 million ($9.1 million, translated at
exchange rates applicable as of March 31, 2018). The guarantees have reduced the
amount available for borrowings under the Companys short-term credit facility
described in Note 9.
Contingencies
Challenge to Payment by SASSA of
Additional Implementation Costs
As the Company previously
disclosed, in June 2014, the Company received approximately ZAR 277.0 million,
excluding VAT, from SASSA, related to the recovery of additional implementation
costs its subsidiary, CPS, incurred during the beneficiary reregistration
process in fiscal 2012 and 2013. After the award of the tender, SASSA requested
that CPS biometrically register all social grant beneficiaries (including child
grant beneficiaries) and collect additional information for each child grant
recipient. CPS agreed to SASSAs request and, as a result, it performed
approximately 11.0 million additional registrations beyond those that it
contracted to register for the quoted service fee. Accordingly, CPS sought
reimbursement from SASSA, supported by a factual findings certificate from an
independent auditing firm. SASSA agreed to pay CPS the ZAR 277.0 million as full
settlement of the additional costs it incurred.
In March 2015, Corruption Watch,
a South African non-profit civil society organization, commenced a legal
proceeding in the High Court of South Africa seeking an order by the Court to
review and set aside the decision of SASSAs Chief Executive Officer to approve
a payment to CPS of ZAR 317.0 million (approximately ZAR 277 million, excluding
VAT) and directing CPS to repay the aforesaid amount, plus interest. Corruption
Watch claimed that there was no lawful basis to make the payment to CPS, and
that the decision was unreasonable and irrational and did not comply with South
African legislation. CPS was named as a respondent in this legal proceeding.
On February 22, 2018, the matter
was heard by the Gauteng Division, Pretoria of the High Court of South Africa
(High Court). On March 23, 2018, the High Court ordered that the June 15, 2012
variation agreement between SASSA and CPS be reviewed and set aside. CPS was
ordered to refund ZAR 317.0 million to SASSA, plus interest from June 2014 to
date of payment. On April 4, 2018, CPS filed an application seeking leave to
appeal the whole order and judgment of the High Court with the High Court
because it believes that the High Court erred in its application of the law
and/or in fact in its findings. On April 25, 2018, the High Court rejected the
application seeking leave to appeal. CPS is in the process of filing an
application seeking leave to appeal the whole order and judgment of the High
Court with the Supreme Court of Appeal. The Company cannot predict whether leave
to appeal will be granted or if granted, how the Supreme Court of Appeal would
rule on the matter.
The Company is subject to a
variety of other insignificant claims and suits that arise from time to time in
the ordinary course of business.
Management currently believes
that the resolution of these other matters, individually or in the aggregate,
will not have a material adverse impact on the Companys financial position,
results of operations or cash flows.
30
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, 2017, 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, 2017. 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 United States
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 Update and Transition
On March 23, 2018, the
Constitutional Court ordered a six-month extension of our current contract with
SASSA, for the payment of grants in cash at pay points only, on the same terms
and conditions as the contract that was due to expire on March 31, 2018.
Accordingly, using available information as of March 31, 2018, we have continued
to pay approximately 1.9 million grant recipients at pay points. While the Court
order was silent regarding the payment of the other 9.1 million grant recipients
who access their grants utilizing PIN or by biometric verification at POS and
ATMs, we have continued to support the bank accounts that underpin these grant
payments, of which there are approximately 1.1 million grant recipients who
receive their grants using their SASSA/Grindrod Bank cards with biometric
verification at ATMs and merchant POS, 5.5 million grant recipients who make use
of their SASSA/Grindrod Bank cards and PIN to access their grants through the
National Payment System and approximately 2.5 million grant recipients who
receive their grants utilizing commercial bank accounts, including our EasyPay
Everywhere, or EPE, bank account. As SASSA is no longer paying us a service fee
for the management of these accounts with effect from April 1, 2018, the grant
recipients themselves now bear the cost for the fees associated with these
accounts. SASSA has indicated that grant recipients will be encouraged to open a
commercial bank account of their choice in the future, including the special
account offered by the South African Post Office, or SAPO, for grant recipients.
SASSA reported in its April 2018 filing with the Constitutional Court that the
planned issuance of the new SASSA/SAPO payment cards had been delayed due to
delays with the procurement process. According to media reports, SAPO
commenced with the rollout of its card issuance program on May 3, 2018.
The Constitutional Court further
ordered that we may approach the National Treasury to investigate and make a
recommendation regarding the price to be paid for our contracted services during
the six-month period. We approached the National Treasury for a price review
shortly after receipt of the Constitutional Court order and on April 30, 2018,
the National Treasury filed their recommendation with the Constitutional Court
proposing fee levels that were materially lower than we had requested, but
significantly higher than the current fee levels.
We believe that National Treasurys recommendation does not take SASSAs stated
plans into account, and does not recognize the need for us to maintain our
infrastructure regardless of the number of beneficiaries paid and therefore we
will ask the Constitutional Court to refer the matter back to National Treasury.
For additional information refer to Item 1A.Risk Factors Unless CPS secures a
guaranteed minimum monthly payment for the services it provides under the SASSA
contract which at least covers its operational costs, CPS will operate at a loss
and may not have the financial resources to continue its business, which would
likely have a material adverse effect on our results of operations, financial
position and cash flows.
SASSA also filed its monthly
progress report with the Constitutional Court on April 30, 2018, stating its
intention to reduce the number of grant recipients at pay points to 800,000 by
the end of September 2018, and to consolidate certain pay points. On April 25,
2018, we, and other bidders, received a notice from SASSA informing us of the
suspension of the tender issued in December 2017 for the appointment of a
service provider to distribute grants in cash at pay points when our contract
expires on September 30, 2018.
31
In an affidavit filed with the
Constitutional Court, the recently appointed Minister of Social Development, Ms.
Susan Shabangu, indicated that she had ordered the suspension of the tender due
to objections received regarding the completeness of the tender document from a
prospective bidder, as well as the fact that the Bid Evaluation Committee did
not have the required skills to evaluate a tender of this nature. Minister
Shabangu also indicated to members of the Portfolio Committee for Social
Development in the South African Parliament that there will be no request for a
further extension of our contract when it expires on September 30, 2018. We
cannot predict when, or if, the tender process will resume.
We are relieved that we finally
have visibility regarding the end of our contract and we look forward to the
successful completion of our contract on September 30, 2018. We are extremely
proud of our achievements of uninterrupted grant delivery to 11.0 million social
grant recipients since the inception of our contract in April 2012, and the
saving of more than ZAR 2.0 billion per annum that our biometric payment
technology realized for government due to the elimination of fraudulent grants.
We intend to focus our resources and technology on the provision of financial
inclusion services to our target market after our contract expires, without the
contractual constraints and challenges we have experienced during the past six
years.
Progress of financial inclusion
initiatives in South Africa
In June 2015, we began the
rollout of EPE, our business-to-consumer, or B2C, offering in South Africa. At
April 30, 2018, we had more than 2.6 million active EPE accounts, compared to
2.3 million at January 31, 2018. EPE is a fully transactional, low cost account
created to serve the needs of South Africas unbanked and under-banked
population, most of whom are social grant 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 biometrically-enabled 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.
In order for us to address the
sizeable opportunity for EPE and related financial inclusion services in South
Africa, in fiscal 2016, we began to expand our brick-and-mortar financial
services branch infrastructure, which supplements our nationwide distribution,
with a biometrically-enabled UEPS/EMV ATM network, and hired a dedicated sales
force. We believe there is further room to expand our physical branch and ATM
infrastructure and our efforts will be supplemented by employing a roaming sales
force equipped with a biometrically-enabled UEPS/EMV card-issuing work station.
In January 2018, we deployed an additional 500 portable card-issuing working
stations and employed 625 temporary staff to achieve this objective. At April
30, 2018, we had 152 branches (January 31, 2018: 152), 1,100 ATMs (January 31,
2018: 1,073), and 2,371 (January 31, 2018: 2,394) dedicated employees, including
the temporary staff.
Our efforts have resulted in an
increased rate in the number of EPE accounts opened, the amount of loans
disbursed and the number of insurance policies sold. We have opened
approximately 335,000 EPE accounts during the last three months and we will have
additional capacity to further increase our activities when our staff members
and infrastructure currently dedicated to the SASSA contract become available
for this initiative when our contract with SASSA ends. During the ten months
since July 1, 2017, we sold approximately 145,000 new policies related to our
simple, low-cost life insurance products, in addition to the free basic life
insurance policy provided with every EPE account opened. On May 2, 2018, we
introduced low-cost mobile telephony and data packages, designed in
collaboration with Cell C and DNI, as part of our lifestyle product offering
and we intend to deploy further relevant products in the near future. We believe
that are we already the market leaders, both in terms of cost and scale, in the
provision of bank accounts, credit and insurance products in the market segments
which we serve.
32
The graph
below presents the growth of the number of EPE cards and Smart Life policies:
Cell C and DNI
In July and August 2017, we made
strategic investments in DNI and Cell C, respectively. Additionally, on March 9,
2018, we increased our voting and economic interest in DNI to 49% through the
subscription for additional shares with a subscription price of ZAR 89.3 million
($7.5 million). We also agreed to subscribe for additional shares in DNI at an
aggregate subscription price of ZAR 126.0 million ($10.7 million, translated at
exchange rates applicable as of March 31, 2018), which will increase our voting
and economic interest in DNI to 55%. This additional subscription is subject to
certain conditions, including obtaining South African Competition Commission
approval. We have already made our submissions to the Competition Commission and
we expect its response by June 30, 2018. If we do not receive approval by that
date, we will not complete the additional subscription, unless the parties agree
to amend the June 30 date.
The investments in Cell C and DNI
are consistent with our approach of leveraging our significant and established
infrastructure, and pursuing strategic acquisition opportunities or partnerships
to gain access to new markets or complementary products. We identified the need
to offer customers a truly bespoke, affordable and comprehensive package that
will go beyond basic telephony. An integrated mobile-based digital product will
therefore likely differentiate the offerings of all the relevant stakeholders in
this transaction, including Net1. The Cell C and DNI investments allow us to
address the needs of the broader South African population through ownership in
the value chain including the network, payment, product, distribution and
hardware. The relationship with Cell C and DNI also has other complementary
benefits to us and these partners. For instance we recently sold one million
subscriber identity module, or SIM, cards to Cell C and have subsequently
received orders for an additional five million SIMs. We have additionally
created new low-cost products relevant for our unbanked and under-banked
customer base in collaboration with DNI and Cell C and launched these during the
first week of May 2018. Our investment in DNI complements our existing
distribution footprint and provides us with access to a further 2,000 employees
who are dedicated to the marketing of our products, mainly in urban and
semi-urban areas.
Refer also Note 6 to our
unaudited condensed consolidated financial statements for additional financial
information regarding Cell C and DNI.
Bank Frick and Finbond
In January 2018, we purchased an
additional 5% in Bank Frick from the Frick Foundation for CHF 10.4 million
($11.1 million), in cash, and the Frick Foundation agreed to contribute
approximately CHF 3.8 million ($4.1 million) to Bank Frick to facilitate the
development of Bank Fricks Fintech and blockchain businesses. Bank Frick
recently reported its 2017 results, posting a 97% net profit growth to CHF 6.3
million. It also became the first bank in the CHF area to issue a certificate
based on crypto-currencies, launched custodial services for professional
crypto-currency investors, and has supported over a dozen initial coin
offerings, or ICOs.The bank has stated that it expects to grow its head count by
50% in 2018 in order to support the expansion of its blockchain offerings as
well as related IT and operational support.
33
We are approaching the final
stages of certification for Finbond to become an issuer of biometrically-enabled
UEPS/EMV cards and expect to commence with related activities during the fourth
quarter of fiscal 2018. Finbond operates an extensive distribution network of
approximately 430 branches across South Africa that will be utilized as issuing
and service points for the biometrically-enabled UEPS/EMV cards. We are also
deploying biometrically-enabled ATMs across the Finbond branch network. In
April 2018, we followed our rights pursuant to a rights offering conducted by
Finbond and we now own 261,069,481 Finbond shares, representing approximately
27.6% of Finbonds issued and outstanding ordinary shares after the rights
offering.
Refer also Note 6 to our
unaudited condensed consolidated financial statements for additional financial
information regarding Bank Frick and Finbond.
International Payments
Group
We completed the re-organization
of our International Payments Group, or IPG, during the third quarter by
consolidating all our e-money licenses and international card issuing, acquiring
and processing activities (excluding South Korea and India) under a single
management structure. IPG made good progress with key product developments
during the quarter, including its unique multicurrency-issuing platform and new
card management system. In addition, IPG is working in close collaboration with
Bank Frick and other specialist departments in the Net1 group to develop bespoke
blockchain-based solutions, including a highly secure but easily accessible
crypto-asset storage solution for crypto-asset investors and exchanges.
India
On April 19, 2018, MobiKwik
launched its virtual MobiKwik Visa Exclusive card utilizing our mobile virtual
card, or MVC technology. As of May 1, 2018 over 10,000 MobiKwik users had signed
up for MVC and transaction volume has already exceeded INR 17.0 million ($0.3
million, translated at exchange rates applicable as of March 31, 2018).
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. We have 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, 2017:
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Business combinations and the recoverability of
goodwill;
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Intangible assets acquired through
acquisitions;
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Deferred taxation;
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Stock-based compensation; and
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Accounts receivable and allowance for doubtful
accounts receivable.
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In addition, we identified the
following policy with respect to the valuation and impairment of marketable
securities as a new critical accounting policy.
Valuation and impairment of
marketable securities
Our investments in
available-for-sale securities are reported at fair value. Unrealized gains and
losses related to changes in the fair value of available-for-sale securities are
recognized in accumulated other comprehensive income, net of tax, in our
condensed consolidated balance sheet. Changes in the fair value of
available-for-sale securities impact our reported net income only when such
securities are sold or an other-than-temporary impairment is recognized.
Realized gains and losses on the sale of securities will be calculated with
reference to its original cost.
We regularly review the carrying
value of our available-for-sale securities to determine whether it is
other-than-temporarily impaired, which would require us to record an impairment
charge in the period in which such determination is made. In making this
determination, we consider, among other things, the duration and extent to which
the fair value of a security is less than its cost; the financial condition of
the issuer and any changes thereto; and our intent to sell, or whether we will
be more likely than not be required to sell, the security before recovery of its
amortized cost basis. Our assessment of whether a security is
other-than-temporarily impaired could change in the future due to new
developments or changes in assumptions related to any particular security, which
would have an adverse impact on our financial condition and operating results.
34
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 unaudited condensed consolidated financial statements.
Recent accounting pronouncements not
yet adopted as of March 31, 2018
Refer to Note 1 to our unaudited
condensed consolidated financial statements for a full description of recent
accounting pronouncements not yet adopted as of March 31, 2018, including the
expected dates of adoption and effects on our financial condition, results of
operations and cash flows.
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
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Three
months ended
|
|
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Nine months
ended
|
|
|
Year ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
2017
|
|
ZAR : $ average exchange rate
|
|
11.9614
|
|
|
13.2272
|
|
|
12.9291
|
|
|
13.7526
|
|
|
13.6147
|
|
Highest ZAR : $ rate during period
|
|
12.4308
|
|
|
13.7630
|
|
|
14.4645
|
|
|
14.8114
|
|
|
14.8114
|
|
Lowest ZAR : $ rate during
period
|
|
11.5526
|
|
|
12.4379
|
|
|
11.5526
|
|
|
12.4379
|
|
|
12.4379
|
|
Rate at end of period
|
|
11.8255
|
|
|
13.4124
|
|
|
11.8255
|
|
|
13.4124
|
|
|
13.0535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KRW : $ average exchange rate
|
|
1,072
|
|
|
1,154
|
|
|
1,104
|
|
|
1,144
|
|
|
1,141
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|
Highest KRW : $ rate during
period
|
|
1,091
|
|
|
1,207
|
|
|
1,156
|
|
|
1,210
|
|
|
1,210
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|
Lowest KRW : $ rate during period
|
|
1,059
|
|
|
1,111
|
|
|
1,059
|
|
|
1,092
|
|
|
1,092
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|
Rate at end of period
|
|
1,061
|
|
|
1,118
|
|
|
1,061
|
|
|
1,118
|
|
|
1,144
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|
35
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 nine months
ended March 31, 2018 and 2017, 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
|
|
|
Nine months
ended
|
|
|
Year ended
|
|
|
March 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
2017
|
|
Income and expense items: $1
= ZAR .
|
|
11.9479
|
|
|
13.2226
|
|
|
12.8934
|
|
|
13.7681
|
|
|
13.6182
|
|
Income and expense items: $1 = KRW
|
|
1,067
|
|
|
1,160
|
|
|
1,099
|
|
|
1,155
|
|
|
1,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet items: $1 = ZAR
|
|
11.8255
|
|
|
13.4124
|
|
|
11.8255
|
|
|
13.4124
|
|
|
13.0535
|
|
Balance sheet items: $1 = KRW
|
|
1,061
|
|
|
1,118
|
|
|
1,061
|
|
|
1,118
|
|
|
1,144
|
|
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 2018 includes the results
of Pros Software and Masterpayment Financial Services (formerly known as C4U
Malta) for the entire period and excludes XeoHealth from November 1, 2017 as a
result of the sale of the business. Fiscal 2017 includes the results of Pros
Software from October 1, 2016, and Masterpayment Financial Services from
November 1, 2016.
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.
36
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.
Third quarter of fiscal 2018
compared to third quarter of fiscal 2017
The following factors had a
significant influence on our results of operations during the third quarter of
fiscal 2018 as compared with the same period in the prior year:
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Growth in insurance and lending businesses:
Continuing volume growth and operating efficiencies in our
insurance and lending businesses during the third quarter of fiscal 2018,
resulted in an improved contribution to our financial inclusion revenue.
However, operating income and operating margin during the third quarter of
fiscal 2018 were adversely impacted by additional costs incurred to expand
the availability of our offering;
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Ongoing contributions from EasyPay Everywhere:
EPE revenue and operating income growth was driven primarily by
ongoing EPE adoption as we further expanded our customer base utilizing
our ATM infrastructure;
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Higher equity-accounted earnings related to DNI and
Bank Frick:
The acquisition of 49% of DNI and 35% of Bank Frick
positively impacted our reported results by approximately $4.4 million,
before amortization of intangible assets, net of deferred taxes;
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Favorable impact from the weakening of the U.S.
dollar against South African Rand:
The U.S. dollar depreciated by
10% against the ZAR and 8% against the KRW during the third quarter of
fiscal 2018 compared with the third quarter of fiscal 2017, which
positively impacted our reported results;
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Non-cash impairment loss related primarily to
Masterpayment intangible assets:
We recorded an impairment loss of
$19.9 million related to Masterpayment and Masterpayment Financial
Services goodwill;
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Higher revenue from Masterpayment and severance
payments:
Masterpayment contributed higher revenues as a result of
an increase in processing activities, particularly related to its
crypto-currency processing launched in December 2017. However, we mutually
agreed with two of Masterpayments senior managers that with effect from
the end of March 2018, the managers terminated their employment with
Masterpayment and we incurred severance costs related to this separation;
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Indirect taxes refund in Korea:
We received
a refund of indirect taxes of approximately $2.5 million during the third
quarter of fiscal 2018 which positively impacted our reported results;
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Regulatory changes in South Korea pertaining to
fees on card transactions:
The impact of changes to regulations
governing the fees that may be charged on card transactions continues to
adversely impact our operating income in South Korea as all parties in the
payment process adapt to the new laws and renegotiate their respective
positions in the marketplace;
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Lower net interest income resulting from strategic
investments:
Interest income was $1.8 million lower as a result of
cash utilized to purchase non-controlling stakes in Cell C, DNI and Bank
Frick, while interest expense increased due to the South African lending
facility we obtained in August 2017 to partially fund our investments; and
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Lower prepaid sales and ad hoc terminal sales:
The number of transacting users purchasing prepaid products
through our mobile channel decreased due to security features introduced
in fiscal 2017.
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37
Consolidated overall results of
operations
This discussion is based on the
amounts 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 March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
$ %
|
|
|
|
$000
|
|
|
$ 000
|
|
|
change
|
|
Revenue
|
|
162,721
|
|
|
147,944
|
|
|
10%
|
|
Cost of goods sold, IT processing, servicing
and support
|
|
77,860
|
|
|
70,912
|
|
|
10%
|
|
Selling, general and
administration
|
|
48,091
|
|
|
42,195
|
|
|
14%
|
|
Depreciation and amortization
|
|
9,341
|
|
|
10,290
|
|
|
(9%
|
)
|
Impairment loss
|
|
19,865
|
|
|
-
|
|
|
|
|
Operating income
|
|
7,564
|
|
|
24,547
|
|
|
(69%
|
)
|
Interest income
|
|
5,154
|
|
|
5,124
|
|
|
1%
|
|
Interest expense
|
|
2,426
|
|
|
467
|
|
|
419%
|
|
Income before income tax
expense
|
|
10,292
|
|
|
29,204
|
|
|
(65%
|
)
|
Income tax expense
|
|
10,941
|
|
|
10,233
|
|
|
7%
|
|
Net (loss) income before
earnings from equity-accounted investments
|
|
(649
|
)
|
|
18,971
|
|
|
(103%
|
)
|
Earnings from equity-accounted investments
|
|
3,960
|
|
|
45
|
|
|
|
|
Net income
|
|
3,311
|
|
|
19,016
|
|
|
(83%
|
)
|
Less net income attributable to
non-controlling interest
|
|
302
|
|
|
624
|
|
|
(52%
|
)
|
Net income attributable to us
|
|
3,009
|
|
|
18,392
|
|
|
(84%
|
)
|
|
|
In South
African Rand
|
|
Table 4
|
|
(U.S. GAAP)
|
|
|
|
Three months ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
ZAR
|
|
|
ZAR
|
|
|
ZAR %
|
|
|
|
000
|
|
|
000
|
|
|
change
|
|
Revenue
|
|
1,944,174
|
|
|
1,956,205
|
|
|
(1%
|
)
|
Cost of goods sold, IT processing, servicing
and support
|
|
930,263
|
|
|
937,642
|
|
|
(1%
|
)
|
Selling, general and
administration
|
|
574,586
|
|
|
557,928
|
|
|
3%
|
|
Depreciation and amortization
|
|
111,606
|
|
|
136,060
|
|
|
(18%
|
)
|
Impairment loss
|
|
237,345
|
|
|
-
|
|
|
nm
|
|
Operating income
|
|
90,374
|
|
|
324,575
|
|
|
(72%
|
)
|
Interest income
|
|
61,579
|
|
|
67,753
|
|
|
(9%
|
)
|
Interest expense
|
|
28,986
|
|
|
6,175
|
|
|
369%
|
|
Income before income tax
expense
|
|
122,967
|
|
|
386,153
|
|
|
(68%
|
)
|
Income tax expense
|
|
130,722
|
|
|
135,307
|
|
|
(3%
|
)
|
Net (loss) income before
earnings from equity-accounted investments
|
|
(7,755
|
)
|
|
250,846
|
|
|
(103%
|
)
|
Earnings from equity-accounted investments
|
|
47,314
|
|
|
595
|
|
|
nm
|
|
Net income
|
|
39,559
|
|
|
251,441
|
|
|
(84%
|
)
|
Less net income attributable to
non-controlling interest
|
|
3,608
|
|
|
8,251
|
|
|
(56%
|
)
|
Net income attributable to us
|
|
35,951
|
|
|
243,190
|
|
|
(85%
|
)
|
In ZAR, the decrease in revenue
was primarily due to lower prepaid airtime sales, which was partially offset by
an improved contribution from Masterpayment, more fees generated from our EPE
and ATM offerings, improved insurance activities, higher KSNET revenue at a more
favorable exchange rate and a modest increase in the number of SASSA
biometrically-enabled UEPS/EMV grant recipients paid.
In ZAR, the decrease in cost of
goods sold, IT processing, servicing and support was primarily due to fewer
prepaid airtime sales, which was partially offset by increases in goods and
services purchased from third parties, lower profitability under CPS contract
with SASSA, higher expenses incurred due to increased usage of the South African
National Payment System by beneficiaries and expenses incurred to operate our
EPE and ATM offerings.
38
The increase in selling, general
and administration expense was primarily due to the impact of October 2017
annual salary increases for our South African employees, an increase in our
allowance for doubtful finance loans receivable resulting from a commensurate
increase in our lending book in the last lending cycle of calendar 2017, as well
as increases in goods and services purchased from third parties. These increases
were partially offset by fewer agent incentive costs paid in Korea due to weaker
trading conditions in fiscal 2018, lower executive remuneration and lower
transaction-related expenditures in the prior year.
Depreciation and amortization
decreased primarily due to an increase in the number of intangible assets that
are fully amortized and tangible assets that are fully depreciated.
During the third quarter of
fiscal 2018, we reviewed for impairment the goodwill identified and recognized
pursuant to the Masterpayment and Masterpayment Financial Services acquisitions
in April 2016 and November 2017, respectively, due to uncertainty surrounding
the timing and amount of future net cash inflows following changes in the
business strategy. As a consequence of this review, we recognized an impairment
loss of approximately $19.9 million related to the entire carrying value of
goodwill acquired.
Our operating income margin for
third quarter of fiscal 2018 and 2017 was 5% and 17% respectively. Operating
income margin excluding the $19.9 million impairment loss would have been 17% in
fiscal 2018. We discuss the components of operating income margin under
Results of operations by operating segment. The decrease was primarily
attributable to the impairment loss, higher cost of goods sold, IT processing,
servicing and support relative to the reduction in revenue.
In ZAR, interest on surplus cash
decreased to $5.2 million (ZAR 61.6 million) from $5.1 million (ZAR 67.8
million), due primarily to the lower average daily ZAR cash balances, partially
offset by interest earned on the loan to Finbond and the listed Cedar Cellular
note.
Interest expense increased to
$2.4 million (ZAR 29.0 million) from $0.5 million (ZAR 6.2 million), due
primarily to interest on the South African facility we obtained to partially
fund our investments in Cell C and DNI and interest on the short-term financing
obtained to finance our working capital requirements, partially offset by the
absence of interest expense on our South Korean debt as a result of its full
repayment in October 2017.
Fiscal 2018 tax expense was $10.9
million (ZAR 130.7 million) compared to $10.2 million (ZAR 135.3 million) in
fiscal 2017. Our effective tax rate for fiscal 2018, was 106.3% and was higher
than the South African statutory rate as a result of the impairment loss,
non-deductible expenses (including transaction-related expenditure and
non-deductible interest on our South African long-term facility) and the impact
of the changes in U.S. federal statutory tax law. Our effective tax rate for
fiscal 2017, was 35.0% and was higher than the South African statutory rate as a
result of non-deductible expenses.
Earnings from equity-accounted
investments increased primarily due to the inclusion of our share of the
earnings of DNI and Bank Frick. The table below presents the relative earnings
(loss) from our equity accounted investments:
Table 5
|
|
Three months ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
$ %
|
|
|
|
$ 000
|
|
|
$ 000
|
|
|
change
|
|
DNI
|
|
3,291
|
|
|
-
|
|
|
nm
|
|
Share of net
income
|
|
3,628
|
|
|
-
|
|
|
nm
|
|
Amortization of intangible assets, net of deferred tax
|
|
(337)
|
|
|
-
|
|
|
nm
|
|
Bank Frick
|
|
653
|
|
|
-
|
|
|
nm
|
|
Share of net income
|
|
747
|
|
|
-
|
|
|
nm
|
|
Amortization of
intangible assets, net of deferred tax
|
|
(94)
|
|
|
-
|
|
|
nm
|
|
Other
|
|
16
|
|
|
45
|
|
|
(64%
|
)
|
Earnings from
equity accounted investments
|
|
3,960
|
|
|
45
|
|
|
nm
|
|
39
Results of operations by operating
segment
The composition of revenue and
the contributions of our business activities to operating income are illustrated
below:
Table 6
|
|
In U.S. Dollars (U.S.
GAAP)
|
|
|
|
Three months ended March 31,
|
|
|
|
2018
|
|
|
% of
|
|
|
2017
|
|
|
% of
|
|
|
%
|
|
Operating Segment
|
|
$ 000
|
|
|
total
|
|
|
$ 000
|
|
|
total
|
|
|
change
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction processing
|
|
73,508
|
|
|
45%
|
|
|
63,967
|
|
|
43%
|
|
|
15%
|
|
International transaction
processing
|
|
46,240
|
|
|
28%
|
|
|
41,514
|
|
|
28%
|
|
|
11%
|
|
Financial inclusion and applied technologies
|
|
59,574
|
|
|
37%
|
|
|
56,881
|
|
|
38%
|
|
|
5%
|
|
Subtotal: Operating segments
|
|
179,322
|
|
|
110%
|
|
|
162,362
|
|
|
109%
|
|
|
10%
|
|
Intersegment
eliminations
|
|
(16,601
|
)
|
|
(10%
|
)
|
|
(14,418
|
)
|
|
(9%
|
)
|
|
15%
|
|
Consolidated
revenue
|
|
162,721
|
|
|
100%
|
|
|
147,944
|
|
|
100%
|
|
|
10%
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction
processing
|
|
12,719
|
|
|
168%
|
|
|
15,531
|
|
|
63%
|
|
|
(18%
|
)
|
International transaction processing
|
|
(14,892
|
)
|
|
(197%
|
)
|
|
1,968
|
|
|
8%
|
|
|
(857%
|
)
|
Financial inclusion and
applied technologies
|
|
14,968
|
|
|
198%
|
|
|
14,064
|
|
|
57%
|
|
|
6%
|
|
Subtotal:
Operating segments
|
|
12,795
|
|
|
169%
|
|
|
31,563
|
|
|
128%
|
|
|
(59%
|
)
|
Corporate/Eliminations
|
|
(5,231
|
)
|
|
(69%
|
)
|
|
(7,016
|
)
|
|
(28%
|
)
|
|
(25%
|
)
|
Consolidated operating income
|
|
7,564
|
|
|
100%
|
|
|
24,547
|
|
|
100%
|
|
|
(69%
|
)
|
Table 7
|
|
In South African Rand (U.S.
GAAP)
|
|
|
|
Three months ended March 31,
|
|
|
|
2018
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
ZAR
|
|
|
% of
|
|
|
ZAR
|
|
|
% of
|
|
|
%
|
|
Operating Segment
|
|
000
|
|
|
total
|
|
|
000
|
|
|
total
|
|
|
change
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction processing
|
|
878,266
|
|
|
45%
|
|
|
845,810
|
|
|
43%
|
|
|
4%
|
|
International transaction
processing
|
|
552,471
|
|
|
28%
|
|
|
548,923
|
|
|
28%
|
|
|
1%
|
|
Financial inclusion and applied technologies
|
|
711,784
|
|
|
37%
|
|
|
752,115
|
|
|
38%
|
|
|
(5%
|
)
|
Subtotal: Operating segments
|
|
2,142,521
|
|
|
110%
|
|
|
2,146,848
|
|
|
109%
|
|
|
-
|
|
Intersegment
eliminations
|
|
(198,347
|
)
|
|
(10%
|
)
|
|
(190,643
|
)
|
|
(9%
|
)
|
|
4%
|
|
Consolidated
revenue
|
|
1,944,174
|
|
|
100%
|
|
|
1,956,205
|
|
|
100%
|
|
|
(1%
|
)
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction
processing
|
|
151,965
|
|
|
168%
|
|
|
205,360
|
|
|
63%
|
|
|
(26%
|
)
|
International transaction processing
|
|
(177,928
|
)
|
|
(197%
|
)
|
|
26,022
|
|
|
8%
|
|
|
(784%
|
)
|
Financial inclusion and
applied technologies
|
|
178,836
|
|
|
198%
|
|
|
185,963
|
|
|
57%
|
|
|
(4%
|
)
|
Subtotal:
Operating segments
|
|
152,873
|
|
|
169%
|
|
|
417,345
|
|
|
128%
|
|
|
(63%
|
)
|
Corporate/Eliminations
|
|
(62,499
|
)
|
|
(69%
|
)
|
|
(92,770
|
)
|
|
(28%
|
)
|
|
(33%
|
)
|
Consolidated operating income
|
|
90,374
|
|
|
100%
|
|
|
324,575
|
|
|
100%
|
|
|
(72%
|
)
|
South African transaction processing
The increase in segment revenue
was primarily due to the continued growth in the number of EPE accounts as well
as higher transaction revenue as a result of increased usage of our ATMs.
Operating income decreased however, primarily due to an increase in
inter-segment charges, the impact of annual salary increases granted to our
South African employees in October 2017, increases in goods and services
purchased from third parties and declining profitability at CPS given the fact
that its monthly fee per grant recipient has been fixed for the last six years.
Our operating income margin for
the third quarter of fiscal 2018 and 2017 was 17% and 24%, respectively. This is
a reflection of the declining profitability of the CPS operation given the fee
per grant recipient has remained fixed over the full term of the SASSA contract
to March 31, 2018.
International transaction-based activities
Segment revenue was higher during
the third quarter of fiscal 2018 due to an increase in processing activities,
particularly related to Masterpayments crypto-currency processing launched in
December 2017. Operating income during the third quarter of fiscal 2018 was
adversely impacted by the impairment loss, lower operating income generated in
Korea as a result of the impact on us of changes to regulations governing the
fees that may be charged on card transactions and severance payments to
Masterpayment managers, partially offset by an ad hoc refund of indirect taxes
of $2.5 million in Korea.
40
Operating (loss) income margin
for the third quarter of fiscal 2018 and 2017 was (32%) and 5%, respectively.
Excluding the impairment loss and the indirect taxes refund received, segment
operating income and margin were $2.4 million and 5% respectively.
Financial inclusion and applied
technologies
In ZAR, segment revenue decreased
primarily due to fewer prepaid airtime and other value added services sales,
partially offset by increased volumes in our insurance and lending businesses,
and an increase in inter-segment revenues. Operating income was also impacted by
these factors as well as an increase in the allowance for doubtful finance loans
receivable resulting from a commensurate increase in our lending book.
Operating income margin for the
Financial inclusion and applied technologies segment was 25% during each of the
third quarter of fiscal 2018 and 2017, respectively, and was impacted by fewer
low margin prepaid product sales, improved revenues from our insurance
businesses and an increase in inter-segment revenues, offset by annual salary
increases granted to our South African employees.
Corporate/Eliminations
Our corporate expenses generally
include acquisition-related intangible asset amortization; expenses incurred
related to acquisitions and investments pursued; 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;
and elimination entries.
Our corporate expenses have
decreased primarily due to lower transaction-related expenditures and lower
executive compensation, which was partially offset by a modest increase in ZAR
denominated goods and services purchased from third parties and directors fees.
Year to date fiscal 2018 compared to
year to date fiscal 2017
The following factors had a
significant influence on our results of operations during the year to date
fiscal 2018 as compared with the same period in the prior year:
|
|
Growth in insurance businesses:
Volume
growth and operating efficiencies in our insurance businesses during the
year to date fiscal 2018, resulted in an improved contribution to our
financial inclusion revenue and operating income. The significant growth
in our South African lending book resulted in a substantial increase in
the allowance for doubtful finance loans receivable, 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:
EPE revenue and operating income growth was driven primarily by
ongoing EPE adoption as we further expanded our customer base utilizing
our ATM infrastructure;
|
|
|
Higher equity-accounted earnings related to DNI:
The acquisition of 49% of DNI and 35% of Bank Frick positively
impacted our reported results by approximately $8.1 million, before
amortization of intangible assets, net of deferred taxes;
|
|
|
Favorable impact from the weakening of the U.S.
dollar against South African Rand:
The U.S. dollar depreciated by
6% against the ZAR and 5% against the KRW during the year to date fiscal
2018 compared with fiscal 2017, which positively impacted our reported
results;
|
|
|
Non-cash impairment loss related primarily to
Masterpayment intangible assets:
We recorded an impairment loss of
$19.9 million related to Masterpayment and Masterpayment Financial
Services goodwill;
|
|
|
Higher revenue from Masterpayment, severance
payments and allowance for credit losses:
Masterpayment
contributed higher revenues as a result of an increase in processing
activities, particularly related to its crypto-currency processing
launched in December 2017. We mutually agreed with two of Masterpayments
senior managers that with effect from the end of March 2018, the managers
terminated their employment with Masterpayment and we incurred severance
costs related to this separation. An allowance for credit losses related
to doubtful working capital finance receivables of $7.8 million was
created. A valuation allowance has been provided for any potential tax
benefit from this event as it is unlikely that this amount would be
utilized for taxation purposes;
|
|
|
Lower net interest income resulting from
investments in Cell C, DNI and Bank Frick:
Interest income was
$4.9 million lower as a result of cash utilized to purchase
non-controlling stakes in Cell C, DNI and Bank Frick, while interest
expense increased due to the South African lending facility we obtained in
August 2017 to partially fund our investments;
|
|
|
Indirect taxes refund in Korea:
We received
a refund of indirect taxes of approximately $2.5 million during the year
to date fiscal 2018 which positively impacted our reported results;
|
|
|
Regulatory changes in South Korea pertaining to
fees on card transactions:
The impact of changes to regulations
governing the fees that may be charged on card transactions continues to
adversely impact our revenues and operating income in South Korea as all
parties in the payment process adapt to the new laws and renegotiate their
respective positions in the marketplace; and
|
|
|
Lower prepaid sales and ad hoc terminal sales:
The number of transacting users purchasing prepaid products
through our mobile channel decreased due to security features introduced
in fiscal 2017. In addition, our results were adversely impacted by fewer
ad hoc terminal sales.
|
41
Consolidated overall results of
operations
This discussion is based on the
amounts 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 8
|
|
(U.S. GAAP)
|
|
|
|
Nine months ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
$ %
|
|
|
|
000
|
|
|
000
|
|
|
change
|
|
Revenue
|
|
463,695
|
|
|
455,010
|
|
|
2%
|
|
Cost of goods sold, IT processing, servicing
and support
|
|
226,506
|
|
|
219,210
|
|
|
3%
|
|
Selling, general and
administration
|
|
141,417
|
|
|
122,366
|
|
|
16%
|
|
Depreciation and amortization
|
|
27,030
|
|
|
31,117
|
|
|
(13%
|
)
|
Impairment loss
|
|
19,865
|
|
|
-
|
|
|
nm
|
|
Operating income
|
|
48,877
|
|
|
82,317
|
|
|
(41%
|
)
|
Interest income
|
|
14,903
|
|
|
14,489
|
|
|
3%
|
|
Interest expense
|
|
6,872
|
|
|
1,773
|
|
|
288%
|
|
Income before income tax
expense
|
|
56,908
|
|
|
95,033
|
|
|
(40%
|
)
|
Income tax expense
|
|
31,280
|
|
|
32,320
|
|
|
(3%
|
)
|
Net income before earnings
from equity-accounted investments
|
|
25,628
|
|
|
62,713
|
|
|
(59%
|
)
|
Earnings from equity-accounted investments
|
|
7,389
|
|
|
778
|
|
|
850%
|
|
Net income
|
|
33,017
|
|
|
63,491
|
|
|
(48%
|
)
|
Less net income attributable to
non-controlling interest
|
|
903
|
|
|
1,826
|
|
|
(51%
|
)
|
Net income attributable to us
|
|
32,114
|
|
|
61,665
|
|
|
(48%
|
)
|
|
|
In South
African Rand
|
|
Table 9
|
|
(U.S. GAAP)
|
|
|
|
Nine months ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
ZAR
|
|
|
ZAR
|
|
|
ZAR %
|
|
|
|
000
|
|
|
000
|
|
|
change
|
|
Revenue
|
|
5,978,605
|
|
|
6,264,623
|
|
|
(5%
|
)
|
Cost of goods sold, IT processing, servicing
and support
|
|
2,920,432
|
|
|
3,018,105
|
|
|
(3%
|
)
|
Selling, general and
administration
|
|
1,823,346
|
|
|
1,684,748
|
|
|
8%
|
|
Depreciation and amortization
|
|
348,509
|
|
|
428,422
|
|
|
(19%
|
)
|
Impairment loss
|
|
256,127
|
|
|
-
|
|
|
nm
|
|
Operating income
|
|
630,191
|
|
|
1,133,348
|
|
|
(44%
|
)
|
Interest income
|
|
192,150
|
|
|
199,486
|
|
|
(4%
|
)
|
Interest expense
|
|
88,603
|
|
|
24,411
|
|
|
263%
|
|
Income before income tax
expense
|
|
733,738
|
|
|
1,308,423
|
|
|
(44%
|
)
|
Income tax expense
|
|
403,306
|
|
|
444,985
|
|
|
(9%
|
)
|
Net income before earnings
from equity-accounted investments
|
|
330,432
|
|
|
863,438
|
|
|
(62%
|
)
|
Earnings from equity-accounted investments
|
|
95,269
|
|
|
10,712
|
|
|
789%
|
|
Net income
|
|
425,701
|
|
|
874,150
|
|
|
(51%
|
)
|
Less net income attributable to
non-controlling interest
|
|
11,643
|
|
|
25,141
|
|
|
(54%
|
)
|
Net income attributable to us
|
|
414,058
|
|
|
849,009
|
|
|
(51%
|
)
|
In ZAR, the 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 an improved contribution from Masterpayment and
Transact 24, more fees generated from our EPE and ATM offerings, improved
insurance activities, and an increase in the number of SASSA
biometrically-enabled UEPS/EMV grant recipients 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
increases in goods and services purchased from third parties, higher expenses
incurred due to increased usage of the South African National Payment System by
beneficiaries, and higher expenses incurred to operate our EPE and ATM
offerings.
42
Our selling, general and
administration expense increased primarily due to an allowance for doubtful
working capital finance receivables of $7.8 million, the impact of October 2017
annual salary increases for our South African employees, an increase in our
allowance for doubtful finance loans receivable, and an increase in goods and
services purchased from third parties. These increases were partially offset by
fewer agent incentive costs paid in Korea due to weaker trading conditions in
fiscal 2018, lower executive remuneration and fewer transaction related expenses
in fiscal 2018. Fiscal 2017 includes $1.8 million related to the reversal of
stock-based compensation charges related to awards of restricted stock with
performance conditions which we believe will not be achieved.
Depreciation and amortization
decreased primarily due to an increase in the number of intangible assets that
are fully amortized and tangible assets that are fully depreciated.
During the year to date fiscal
2018, we recognized an impairment loss of approximately $19.9 million related to
the entire carrying value of goodwill acquired in the Masterpayment and
Masterpayment Financial Services acquisitions. Refer also Third quarter of
fiscal 2018 compared to third quarter of fiscal 2017 Consolidated overall
results of operations.
Our operating income margin for
year to date fiscal 2018 and 2017 was 11% and 18% respectively. Excluding the
$7.8 million valuation allowance and the $19.9 million impairment loss, fiscal
2018 operating income margin would have been 17%. We discuss the components of
operating income margin under Results of operations by operating segment. The
decrease was primarily attributable to higher cost of goods sold, IT processing,
servicing and support relative to the reduction in revenue.
In ZAR, interest on surplus cash
decreased to $14.9 million (ZAR 192.2 million) from $14.5 million (ZAR 199.5
million), due primarily to lower average daily ZAR cash balances, partially
offset by interest earned on the loan to Finbond and the listed Cedar Cellular
note.
Interest expense increased to
$6.9 million (ZAR 88.6 million) from $1.8 million (ZAR 24.4 million), due
primarily to interest on the South African facility we obtained to partially
fund our investment in Cell C and DNI, somewhat offset by the reduced interest
expense in our South Korean operations following the repayment of the South
Korean debt in October 2017.
Fiscal 2018 tax expense was $31.3
million (ZAR 403.3 million) compared to $32.3 million (ZAR 445.0 million) in
fiscal 2017. Our effective tax rate for fiscal 2018, was 55.0% and was higher
than the South African statutory rate as a result of the impairment loss, a
valuation allowance provided related to an allowance for doubtful working
capital finance receivables created, non-deductible expenses (including
transaction-related expenditure and non-deductible interest on our South African
long-term facility) and the impact of the changes in U.S. federal statutory tax
law. Our effective tax rate for fiscal 2017, was 34.0% 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.
Earnings from equity-accounted
investments increased significantly primarily due to the inclusion of our share
of the earnings of DNI and Bank Frick and an increase, in USD, in 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. The table below presents the relative earnings (loss) from our equity
accounted investments:
Table 10
|
|
Nine months ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
$ %
|
|
|
|
$ 000
|
|
|
$ 000
|
|
|
change
|
|
DNI
|
|
5,202
|
|
|
-
|
|
|
nm
|
|
Share of net
income
|
|
6,868
|
|
|
-
|
|
|
nm
|
|
Amortization of intangible assets, net of deferred tax
|
|
(1,666)
|
|
|
-
|
|
|
nm
|
|
Bank Frick
|
|
975
|
|
|
-
|
|
|
nm
|
|
Share of net income
|
|
1,234
|
|
|
-
|
|
|
nm
|
|
Amortization of
intangible assets, net of deferred tax
|
|
(259)
|
|
|
-
|
|
|
nm
|
|
Finbond
|
|
1,101
|
|
|
930
|
|
|
18%
|
|
Other
|
|
111
|
|
|
(152
|
)
|
|
(173%
|
)
|
Earnings from equity accounted investments
|
|
7,389
|
|
|
778
|
|
|
850%
|
|
43
Results of operations by operating
segment
The composition of revenue and the
contributions of our business activities to operating income are illustrated
below:
Table 11
|
|
In U.S. Dollars (U.S.
GAAP)
|
|
|
|
Nine months ended March 31,
|
|
|
|
2018
|
|
|
% of
|
|
|
2017
|
|
|
% of
|
|
|
%
|
|
Operating Segment
|
|
$ 000
|
|
|
total
|
|
|
$ 000
|
|
|
total
|
|
|
change
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction processing
|
|
204,093
|
|
|
44%
|
|
|
181,397
|
|
|
40%
|
|
|
13%
|
|
International transaction
processing
|
|
136,447
|
|
|
29%
|
|
|
131,704
|
|
|
29%
|
|
|
4%
|
|
Financial inclusion and applied technologies
|
|
168,018
|
|
|
36%
|
|
|
179,681
|
|
|
39%
|
|
|
(6%
|
)
|
Subtotal: Operating segments
|
|
508,558
|
|
|
109%
|
|
|
492,782
|
|
|
108%
|
|
|
3%
|
|
Intersegment
eliminations
|
|
(44,863
|
)
|
|
(9%
|
)
|
|
(37,772
|
)
|
|
(8%
|
)
|
|
19%
|
|
Consolidated
revenue
|
|
463,695
|
|
|
100%
|
|
|
455,010
|
|
|
100%
|
|
|
2%
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction
processing
|
|
38,521
|
|
|
79%
|
|
|
44,451
|
|
|
54%
|
|
|
(13%
|
)
|
International transaction processing
|
|
(14,567
|
)
|
|
(30%
|
)
|
|
11,689
|
|
|
14%
|
|
|
(225%
|
)
|
Financial inclusion and
applied technologies
|
|
41,625
|
|
|
85%
|
|
|
43,354
|
|
|
53%
|
|
|
(4%
|
)
|
Subtotal:
Operating segments
|
|
65,579
|
|
|
134%
|
|
|
99,494
|
|
|
121%
|
|
|
(34%
|
)
|
Corporate/Eliminations
|
|
(16,702
|
)
|
|
(34%
|
)
|
|
(17,177
|
)
|
|
(21%
|
)
|
|
(3%
|
)
|
Consolidated operating income
|
|
48,877
|
|
|
100%
|
|
|
82,317
|
|
|
100%
|
|
|
(41%
|
)
|
Table 12
|
|
In South African Rand (U.S.
GAAP)
|
|
|
|
Nine months ended March 31,
|
|
|
|
2018
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
ZAR
|
|
|
% of
|
|
|
ZAR
|
|
|
% of
|
|
|
%
|
|
Operating Segment
|
|
000
|
|
|
total
|
|
|
000
|
|
|
total
|
|
|
change
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction processing
|
|
2,631,453
|
|
|
44%
|
|
|
2,497,492
|
|
|
40%
|
|
|
5%
|
|
International transaction
processing
|
|
1,759,266
|
|
|
29%
|
|
|
1,813,314
|
|
|
29%
|
|
|
(3%
|
)
|
Financial inclusion and applied technologies
|
|
2,166,323
|
|
|
36%
|
|
|
2,473,866
|
|
|
39%
|
|
|
(12%
|
)
|
Subtotal: Operating segments
|
|
6,557,042
|
|
|
109%
|
|
|
6,784,672
|
|
|
108%
|
|
|
(3%
|
)
|
Intersegment
eliminations
|
|
(578,437
|
)
|
|
(9%
|
)
|
|
(520,049
|
)
|
|
(8%
|
)
|
|
11%
|
|
Consolidated
revenue
|
|
5,978,605
|
|
|
100%
|
|
|
6,264,623
|
|
|
100%
|
|
|
(5%
|
)
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction
processing
|
|
496,667
|
|
|
79%
|
|
|
612,006
|
|
|
54%
|
|
|
(19%
|
)
|
International transaction processing
|
|
(187,818
|
)
|
|
(30%
|
)
|
|
160,935
|
|
|
14%
|
|
|
(217%
|
)
|
Financial inclusion and
applied technologies
|
|
536,688
|
|
|
85%
|
|
|
596,902
|
|
|
53%
|
|
|
(10%
|
)
|
Subtotal:
Operating segments
|
|
845,537
|
|
|
134%
|
|
|
1,369,843
|
|
|
121%
|
|
|
(38%
|
)
|
Corporate/Eliminations
|
|
(215,346
|
)
|
|
(34%
|
)
|
|
(236,495
|
)
|
|
(21%
|
)
|
|
(9%
|
)
|
Consolidated operating income
|
|
630,191
|
|
|
100%
|
|
|
1,133,348
|
|
|
100%
|
|
|
(44%
|
)
|
South African transaction processing
The increase in segment revenue
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. Operating
income decreased primarily due to an increase in inter-segment charges, the
impact of annual salary increases granted to our South African employees in
October 2017 and increases in goods and services purchased from third parties,
partially offset by 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 year to date fiscal 2018 and 2017 was 19% and 25%, respectively. This is a
reflection of the declining profitability of the CPS operation given the fee per
grant recipient has remained fixed over the full term of the SASSA contract to
March 31, 2018.
44
International transaction-based
activities
Segment revenue was higher during
the third quarter of fiscal 2018 due to an increase in processing activities,
particularly related to Masterpayments crypto-currency processing launched in
December 2017, partially offset by the ongoing impact of regulatory changes in
South Korea on KSNETs revenue. Operating income during the year to date fiscal
2018 was lower due to the impairment loss, an allowance for doubtful working
capital finance receivable of $7.8 million and a decrease in revenue at KSNET,
partially offset by an ad hoc refund of indirect taxes of $2.5 million in
Korea.
Operating income margin for the
year to date fiscal 2018 and 2017 was (11%) and 9%, respectively. Excluding the
Mastertrading allowance for doubtful working capital finance receivables, the
impairment loss and the indirect taxes refund received, segment operating income
and margin were $10.6 million and 8% respectively. Operating income and margin
for the year to date 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 was finalized and was $12.5 million and 9%
after adjusting for this refund.
Financial inclusion and applied
technologies
Financial inclusion and applied
technologies revenue decreased primarily due to fewer prepaid airtime and other
value added services sales, as well as lower ad hoc terminal sales, partially
offset by increased volumes in our insurance businesses, and an increase in
inter-segment revenues. Operating income was also impacted by these factors as
well as an increase in the allowance for doubtful finance loans receivable
resulting from a commensurate increase in our lending book compared with last
year.
Operating income margin for the
Financial inclusion and applied technologies segment was 25% and 24% during the
year to date fiscal 2018 and 2017, respectively, and has increased primarily due
to fewer low margin prepaid product sales, improved revenues from our insurance
businesses and an increase in inter-segment revenues, offset by fewer ad hoc
terminal sales, annual salary increases granted to our South African employees
and the increase in the allowance for credit losses.
Corporate/Eliminations
Our corporate expenses have
decreased primarily due to lower executive compensation, fewer
transaction-related expenditures and a $0.5 million profit related to the sale
of XeoHealth, partially offset by higher stock-based compensation charges,
directors fees and a modest increase in U.S. dollar denominated goods and
services purchased from third parties. Our corporate expenses for the year to
date fiscal 2017, included the reversal of $1.8 million of stock-based
compensation charges.
Liquidity and Capital Resources
At March 31, 2018, our cash and
cash equivalents were $87.2 million and comprised mainly ZAR-denominated
balances of ZAR 528.3 million ($44.7 million), KRW-denominated balances of KRW
32.7 billion ($30.8 million), U.S. dollar-denominated balances of $4.7 million,
and other currency deposits, primarily Botswana pula, of $7.0 million, all
amounts translated at exchange rates applicable as of March 31, 2018. The
decrease in our cash balances from June 30, 2017, was primarily due to our
investments in DNI, Bank Frick, Cell C and a $9 million listed note, scheduled
repayments of our South African long-term debt, unscheduled repayment of our
Korean debt in full, repayment of our short-term facilities, growth in our South
African lending book, and capital expenditures, which was partially offset by
cash generated by 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 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, and capital
expenditures, as well as acquisitions and strategic investments, through
internally generated cash and our financing facilities. 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.
We have a short-term South
African credit facility with Nedbank of ZAR 400 million ($33.8 million), which
consists of (i) a primary amount of up to ZAR 200 million, and (ii) a secondary
amount of up to ZAR 200 million. 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 include letters of guarantee, letters of credit and
forward exchange contracts. As of March 31, 2018, we had used none of the
overdraft and ZAR 108.0 million ($9.1 million, translated at exchange rates
applicable as of March 31, 2018) 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.
45
We have a short-term U.S.
dollar-denominated overdraft facility with Bank Frick of $10.0 million. As of
March 31, 2018, we had utilized approximately $3.4 million of this facility The
interest rate on the facility is 4.50% plus 3 month US Dollar LIBOR and interest
is payable on a quarterly basis. The 3 month US Dollar LIBOR rate was 2.31175%
on March 29, 2018. The facility has no fixed term, however, it may be terminated
by either party with six weeks written notice.
As of March 31, 2018, we had
outstanding long-term debt, net of deferred fees, of ZAR 892.3 million
(approximately $75.5 million translated at exchange rates applicable as of March
31, 2018) under our South African facilities, comprising (i) ZAR 412.5 million
under Facility A, (ii) ZAR 275.0 under Facility B and ZAR 210.0 million under
Facility D. Interest due on the facility is based on the Johannesburg Interbank
Agreed Rate, or JIBAR, in effect from time to time plus a margin of (i) 2.25%
for the Facility A loan, (ii) 3.5% for the Facility B loan, (iii) 2.25% for the
Facility C loan and (iv) 2.75% for the Facility D loan. The JIBAR rate has been
set at 6.867% for the period to June 29, 2018. Principal repayments on the
outstanding Facility A and Facility B loans are due in five quarterly
installments which comprise a ZAR 187.5 million payment in June 2018 and four
payments of ZAR 125.0 million each thereafter. Principal repayment on the
Facility C loan is to be determined by the Lenders based on the date of the
repayment of any borrowings under the Facility A loan. Principal repayments on
the Facility D loan are due in eight installments, commencing in June 2018 and
are (i) ZAR 135.5 million for the first installment in June 2018 and ZAR 10.5
million for the remaining seven installments if we are unable to complete our
acquisition of a further 6% in DNI or (ii) ZAR 26.3 million per quarter if we
complete the investment. Voluntary prepayments are permitted without early
repayment fees or penalties.
Cash flows from operating activities
Third quarter
Net cash provided by operating
activities for the third quarter of fiscal 2018 was $85.2 million (ZAR 1.0
billion) compared to $21.8 million (ZAR 288.3 million) for the third quarter of
fiscal 2017. Excluding the impact of interest received, interest paid on our
Korean and South Africa debt and taxes presented in the table below, the
increase relates primarily to the receipt of certain working capital loans
outstanding, offset partially by the expansion of our South African lending book
and weaker trading activity during fiscal 2018 compared to 2017.
During the third quarter of
fiscal 2018, we paid South African tax of $1.3 million (ZAR 14.5 million)
related to our 2018 tax year in South Africa. We also paid taxes totaling $1.2
million in other tax jurisdictions, primarily South Korea. During the third
quarter of fiscal 2017, we paid South African tax of $0.4 million (ZAR 5.4
million) related to our 2017 tax year in South Africa and $0.4 million (ZAR 5.6
million) related to prior years. We also paid taxes totaling $2.8 million in
other tax jurisdictions, primarily South Korea.
Taxes paid during the third quarter of fiscal 2018 and 2017
were as follows:
Table 13
|
|
Three months ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
$
|
|
|
$
|
|
|
ZAR
|
|
|
ZAR
|
|
|
|
000
|
|
|
000
|
|
|
000
|
|
|
000
|
|
First provisional payments
|
|
1,228
|
|
|
417
|
|
|
14,546
|
|
|
5,410
|
|
Taxation paid related to prior years
|
|
2
|
|
|
437
|
|
|
29
|
|
|
5,644
|
|
Taxation refunds received
|
|
(158
|
)
|
|
-
|
|
|
(1,919
|
)
|
|
-
|
|
Total South
African taxes paid
|
|
1,072
|
|
|
854
|
|
|
12,656
|
|
|
11,054
|
|
Foreign taxes
paid
|
|
1,204
|
|
|
2,777
|
|
|
14,234
|
|
|
35,871
|
|
Total
tax paid
|
|
2,276
|
|
|
3,631
|
|
|
26,890
|
|
|
46,925
|
|
Year to date
Net cash provided by operating
activities for the year to date of fiscal 2018 was $97.8 million (ZAR 1.3
billion) compared to cash provided by operating activities of $91.4 million (ZAR
1.3 billion) for the year to date of fiscal 2017. Excluding the impact of
interest received, interest paid on our Korean and South Africa debt and taxes
presented in the table below, the increase relates primarily to the receipt of
certain working capital loans outstanding, offset partially by the expansion of
our South African lending book and weaker trading activity during fiscal 2018
compared to 2017.
During the year to date of fiscal
2018, we paid South African tax of $17.7 million (ZAR 231.2 million) related to
our 2018 tax year in South Africa. During the year to date of fiscal 2018, we
made an additional tax payment of $1.9 million (ZAR 25.3 million) related to our
2017 tax year in South Africa and received a refund of approximately $0.4
million (ZAR 5.2 million) related to taxes overpaid in previous tax years in
South Africa. We also paid taxes totaling $3.7 million in other tax
jurisdictions, primarily South Korea. During the year to date fiscal 2017, we
paid South African tax of $18.2 million (ZAR 252.0 million) related to our 2017
tax year and $1.6 million (ZAR 22.4 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 year to date
fiscal 2017. We also paid taxes totaling $7.8 million in other tax
jurisdictions, primarily South Korea.
46
Taxes paid during the
year to date of fiscal 2018 and 2017 were as follows:
Table 14
|
|
Nine months ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
$
|
|
|
$
|
|
|
ZAR
|
|
|
ZAR
|
|
|
|
000
|
|
|
000
|
|
|
000
|
|
|
000
|
|
First provisional payments
|
|
17,739
|
|
|
18,192
|
|
|
231,200
|
|
|
251,968
|
|
Taxation paid related to prior years
|
|
1,921
|
|
|
1,624
|
|
|
25,256
|
|
|
22,365
|
|
Taxation refunds received
|
|
(409
|
)
|
|
(1,369
|
)
|
|
(5,211
|
)
|
|
(18,878
|
)
|
Dividend withholding taxation
|
|
-
|
|
|
1,471
|
|
|
-
|
|
|
21,300
|
|
Total South African taxes paid
|
|
19,251
|
|
|
19,918
|
|
|
251,245
|
|
|
276,755
|
|
Foreign taxes paid
|
|
3,674
|
|
|
7,780
|
|
|
48,510
|
|
|
105,748
|
|
Total
tax paid
|
|
22,925
|
|
|
27,698
|
|
|
299,755
|
|
|
382,503
|
|
Cash flows from investing
activities
Third quarter
Cash used in investing activities
for the third quarter of fiscal 2018 includes capital expenditure of $4.2
million (ZAR 50.5 million), primarily for the acquisition of data processing
computer equipment and payment processing terminals in Korea and ATMs in South
Africa. We also paid approximately $11.1 million for an additional 5% interest
in Bank Frick, provided a $10.6 million (ZAR 126.0 million) loan to DNI and paid
$7.5 million (ZAR 89.3 million) for an additional 4% interest in DNI.
Cash used in investing activities
for the third quarter of fiscal 2017 includes capital expenditure of $1.9
million (ZAR 25.8 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 $2.0 million loan to
OneFi, the holding company of our Nigerian investment.
Year to date
Cash used in investing activities
for the year to date of fiscal 2018 includes capital expenditure of $7.8 million
(ZAR 100.6 million), primarily for the acquisition of data processing computer
equipment and payment processing terminals in Korea and ATMs in South Africa. We
also paid approximately $151.0 million (ZAR 2.0 billion) for a 15% interest in
Cell C, $79.5 million (ZAR 1.0 billion) for a 49% interest in DNI, $51.9 million
for a 35% interest in Bank Frick, provided a $10.6 million (ZAR 126.0 million)
loan to DNI and paid $9.0 million for a 7.625% interest in a listed note.
Cash used in investing activities
for the year to date fiscal 2017 includes capital expenditure of $8.5 million
(ZAR 117.0 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; provided a $2.0 million
loan to OneFi and paid approximately $2.9 million and $1.7 million,
respectively, net of cash received, to acquire 100% of each of Masterpayment
Financial Services and Pros Softwares ordinary shares.
Cash flows from financing activities
Third quarter
During the third quarter of
fiscal 2018, we made a scheduled South African debt facility payment of $17.7
million (ZAR 187.5 million) and also utilized this facility to partially fund
our additional investment in DNI. We also utilized $9.8 million of our overdraft
facilities and repaid $42.6 million of these facilities.
During the third quarter of
fiscal 2017, we sold five million shares of our common stock for $45.0 million
and received approximately $0.6 million from the exercise of stock options. We
also utilized approximately $0.3 million of our Korean borrowings to pay
quarterly interest due.
Year to date
During the year to date fiscal
2018, we utilized approximately $113.2 million (ZAR 1.46 billion) of our South
African facility to partially fund our investments in Cell C and DNI and
utilized approximately $0.3 million of our Korean facility to pay a portion of
our quarterly interest due. We made accumulated scheduled South African debt
facility payments of $44.4 million (ZAR 562.5 million) and made a $16.6 million
payment to settle our outstanding South Korean debt facility in full. We also
utilized $42.4 million of our overdraft facilities and repaid $57.0 million of
these facilities.
47
During the year to date fiscal
2017, we sold five million shares of our common stock for $45.0 million and
received approximately $0.6 million from the exercise of stock options. We also
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 utilized
approximately $0.5 million of our Korean borrowings to pay quarterly interest
due. 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.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Capital Expenditures
We expect capital spending for
the fourth quarter of fiscal 2018 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 capital expenditures for the
third quarter of fiscal 2018 and 2017 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 March 31, 2018, of
$0.5 million related mainly to the procurement of ATMs. We expect to fund these
expenditures through internally generated funds.