We have audited the accompanying consolidated balance sheets of Net 1 UEPS Technologies, Inc. and subsidiaries (the “Company”) as of June 30, 2016 and 2015, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended June 30, 2016. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated
financial statements present fairly, in all material respects, the financial
position of Net 1 UEPS Technologies, Inc. and subsidiaries as of June 30, 2016
and 2015, and the results of their operations and their cash flows for each of
the three years in the period ended June 30, 2016 in conformity with accounting
principles generally accepted in the United States of America.
We have also audited, in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the Company's internal control over financial reporting as of
June 30, 2016, based on the criteria established in
Internal Control
Integrated Framework (2013)
issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated August 25, 2016
expressed an unqualified opinion on the Company's internal control over
financial reporting.
National Executive: *LL Bam Chief Executive Officer *TMM Jordan Deputy Chief Executive Officer *MJ Jarvis Chief Operating Officer *GM Pinnock Audit *N Sing Risk Advisory *NB Kader Tax TP Pillay Consulting S Gwala BPaas *K Black Clients & Industries *JK Mazzocco Talent & Transformation *MJ Comber Reputation & Risk *TJ Brown Chairman of the Board
1.
|
DESCRIPTION OF BUSINESS AND BASIS OF
PRESENTATION
|
Description of
Business
Net 1 UEPS Technologies, Inc.
(Net1 and collectively with its consolidated subsidiaries, the Company) was
incorporated in the State of Florida on May 8, 1997. The Company provides
payment solutions and transaction processing services across a wide range of
industries and in various geographies. It has developed and markets a smart-card
based alternative payment system for the unbanked and underbanked populations of
developing economies. Its universal electronic payment system (UEPS) uses
biometrically secure smart cards that operate in real-time but offline, which
allows users to enter into transactions at any time with other card holders in
even the most remote areas. The Company also develops and provides secure
transaction technology solutions and services, and offers transaction
processing, financial and on-line real-time healthcare management solutions in
the United States. The Companys technology is widely used in South Africa
today, where it distributes pension and welfare payments to recipient
cardholders in South Africa, provides financial services, processes debit and
credit card payment transactions on behalf of retailers through its EasyPay
system, processes value-added services such as bill payments and prepaid
electricity for the major bill issuers and local councils in South Africa,
processes third-party and associated payroll payments for employees and provides
mobile telephone top-up transactions for the major South African mobile
carriers. Through KSNET, the Company offers card processing, payment gateway
(PG) and banking value-added network services (VAN) in South Korea. The
Company has expanded its card issuing and acquiring capabilities through the
acquisition of Transact24 in Hong Kong. The Companys Masterpayment subsidiary
in Germany provides value added payment services to online retailers across
Europe.
Basis of presentation
The accompanying consolidated
financial statements include subsidiaries over which Net1 exercises control and
have been prepared in accordance with accounting principles generally accepted
in the United States of America (GAAP). During the year ended June 30, 2016,
the Company identified a balance sheet misclassification between current assets
and long-term assets. The Company has restated these amounts in its consolidated
balance sheet as of June 30, 2015, and has decreased its accounts receivable,
net of allowances, and increased its other long-term assets by approximately
$27.4 million. This restatement has no impact on the Companys previously
reported consolidated income, comprehensive income or cash flows.
2.
|
SIGNIFICANT ACCOUNTING
POLICIES
|
Principles of
consolidation
The financial statements of
entities which are controlled by Net1, referred to as subsidiaries, are
consolidated. Inter-company accounts and transactions are eliminated upon
consolidation.
The Company, if it is the primary
beneficiary, consolidates entities which are considered to be variable interest
entities (VIE). The primary beneficiary is considered to be the entity that
will absorb a majority of the entity's expected losses, receive a majority of
the entity's expected residual returns, or both. No entities were required to be
consolidated in terms of these requirements during the years ended June 30,
2016, 2015 and 2014.
Business combinations
The Company accounts for its
business acquisitions under the acquisition method of accounting. The total
value of the consideration paid for acquisitions is allocated to the underlying
net assets acquired, based on their respective estimated fair values. The
Company uses a number of valuation methods to determine the fair value of assets
and liabilities acquired, including discounted cash flows, external market
values, valuations on recent transactions or a combination thereof, and believes
that it uses the most appropriate measure or a combination of measures to value
each asset or liability.
Use of estimates
The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-10
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2016, 2015 and 2014
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
2.
|
SIGNIFICANT ACCOUNTING POLICIES
(continued)
|
Translation of foreign
currencies
The primary functional currency
of the Company is the South African Rand (ZAR) and its reporting currency is
the U.S. dollar. The Company also has consolidated entities which have other
currencies, primarily South Korean won (KRW), as their functional currency.
Assets and liabilities are translated at the exchange rates in effect at the
balance sheet date. Revenues and expenses are translated at average rates for
the period. Translation gains and losses are reported in accumulated other
comprehensive income in total equity.
Foreign exchange transactions are
translated at the spot rate ruling at the date of the transaction. Monetary
items are translated at the closing spot rate at the balance sheet date.
Transactional gains and losses are recognized in selling, general and
administration expense on the Companys consolidated statement of operations for
the period.
Cumulative translation adjustment
are released into net income only if the sale or transfer results in the
complete or substantially complete liquidation of the foreign entity in which
the subsidiary or group of assets had resided.
Allowance for doubtful
accounts receivable
Allowance
for doubtful finance loans receivable
The Company regularly reviews the
ageing of outstanding amounts due from borrowers and adjusts the allowance based
on managements estimate of the recoverability of the finance loans receivable.
The Company writes off finance loans receivable and related service fees if a
borrower is in arrears with repayments for more than three months or dies.
Allowance
for doubtful accounts receivable
A specific provision is
established where it is considered likely that all or a portion of the amount
due from customers renting point of sale (POS) equipment, receiving support
and maintenance or transaction services or purchasing licenses from the Company
will not be recovered. Non-recoverability is assessed based on a review by
management of the ageing of outstanding amounts, the location of the customer
and the payment history in relation to those specific amounts.
Inventory
Inventory is valued at the lower
of cost and market value. Cost is determined on a first-in, first-out basis and
includes transport and handling costs.
Equity-accounted
investments
The Company uses the equity
method to account for investments in companies when it has significant influence
but not control over the operations of the equity-accounted company. Under the
equity method, the Company initially records the investment at cost and then
adjusts the carrying value of the investment to recognize the proportional share
of the equity-accounted companys net income or loss. In addition, when an
investment qualifies for the equity method (as a result of an increase in the
level of ownership interest or degree of influence), the cost of acquiring the
additional interest in the investee is added to the current basis of the
Companys previously held interest and the equity method would be applied
subsequently from the date on which the Company obtains the ability to exercise
significant influence over the investee. Any unrealized holding gains or losses
in accumulated other comprehensive income related to an available for sale
security that becomes eligible for the equity method are recognized in earnings
as of the date on which the investment qualifies for the equity method. The
Company does not recognize cumulative losses in excess of its investment or
loans in an equity-accounted investment except if it has an obligation to
provide additional financial support. Dividends received from an
equity-accounted investment reduce the carrying value of the Companys
investment.
Leasehold improvement
costs
Costs incurred in the adaptation
of leased properties to serve the requirements of the Company are capitalized
and amortized over the shorter of the estimated useful life of the asset and the
remaining term of the lease.
F-11
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2016, 2015 and 2014
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
2.
|
SIGNIFICANT ACCOUNTING POLICIES
(continued)
|
Property, plant and
equipment
Property, plant and equipment are
shown at cost less accumulated depreciation. Property, plant and equipment are
depreciated on the straight-line basis at rates which are estimated to amortize
the assets to their anticipated residual values over their useful lives. Within
the following asset classifications, the expected economic lives are
approximately:
|
Computer equipment
|
3 to 8 years
|
|
Office equipment
|
2 to 10 years
|
|
Vehicles
|
3 to 8 years
|
|
Furniture and fittings
|
3 to 10 years
|
|
Buildings and structures
|
8 to 30 years
|
|
Plant and equipment
|
5 to 10 years
|
The gain or loss arising on the
disposal or retirement of an asset is determined as the difference between the
sales proceeds and the carrying amount of the asset and is recognized in income.
Goodwill
Goodwill represents the excess of
the purchase price of an acquired enterprise over the fair values of the
identifiable assets acquired and liabilities assumed. The Company tests for
impairment of goodwill on an annual basis and at any other time if events or
circumstances change that would more likely than not reduce the fair value of
the reporting unit goodwill below its carrying amount.
Circumstances that could trigger
an impairment test include but are not limited to: a significant adverse change
in the business climate or legal factors; an adverse action or assessment by a
regulator; unanticipated competition; loss of key personnel; the likelihood that
a reporting unit or significant portion of a reporting unit will be sold or
otherwise disposed; and results of testing for recoverability of a significant
asset group within a reporting unit.
If the carrying amount of the
reporting unit goodwill exceeds the implied fair value of that goodwill, an
impairment loss is recorded in the statement of operations. Measurement of the
fair value of a reporting unit is based on one or more of the following fair
value measures: the amount at which the unit as a whole could be bought or sold
in a current transaction between willing parties; present value techniques of
estimated future cash flows; or valuation techniques based on multiples of
earnings or revenue, or a similar performance measure.
Intangible assets
Intangible assets are shown at
cost less accumulated amortization. Intangible assets are amortized over the
following useful lives:
|
Customer relationships
|
1 to 15 years
|
|
Software and unpatented technology
|
3 to 5 years
|
|
FTS patent
|
10 years
|
|
Exclusive licenses
|
7 years
|
|
Trademarks
|
3 to 20 years
|
|
Customer databases
|
3 years
|
Intangible assets are
periodically evaluated for recoverability, and those evaluations take into
account events or circumstances that warrant revised estimates of useful lives
or that indicate that impairment exists.
F-12
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2016, 2015 and 2014
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
2.
|
SIGNIFICANT ACCOUNTING POLICIES
(continued)
|
Policy reserves and
liabilities
Reserves
for future policy benefits and claims payable
The Company determines its
reserves for future policy benefits under its life insurance products using a
model which estimates claims incurred that have not been reported at the balance
sheet date. This model includes best estimate assumptions of experience plus
prescribed margins, as required in the markets in which these products are
offered, namely South Africa. The best estimate assumptions include those
assumptions related to mortality, morbidity and claim reporting delays, and the
main assumptions used to calculate the reserve for future policy benefits
include (i) mortality and morbidity assumptions reflecting the companys most
recent experience and (ii) claim reporting delays reflecting Company specific
and industry experience. 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).
Deposits
on investment contracts
For the Companys
interest-sensitive life contracts, liabilities approximate the policyholders
account value. For deferred annuities, the fixed option on variable annuities,
guaranteed investment contracts and other investment contracts, the liability is
the policyholders account value.
Reinsurance contracts
held
The Company enters into
reinsurance contracts with reinsurers under which the Company is compensated for
the entire amount or a portion of losses arising on one or more of the insurance
contracts it issues.
The expected benefits to which
the Company is entitled under its reinsurance contracts held are recognized as
reinsurance assets. These assets consist of short-term balances due from
reinsurers (classified within accounts receivable, net) as well as long-term
receivables (classified within other long-term assets) that are dependent on the
present value of expected claims and benefits arising net of expected premiums
payable under the related reinsurance contracts. Amounts recoverable from or due
to reinsurers are measured consistently with the amounts associated with the
reinsured contracts and in accordance with the terms of each reinsurance
contract.
Reinsurance assets are assessed
for impairment at each balance sheet date. If there is reliable objective
evidence that amounts due may not be recoverable, the Company reduces the
carrying amount of the reinsurance asset to its recoverable amount and
recognizes that impairment loss in its condensed consolidated statement of
operations.
Reinsurance premiums are
recognized when due for payment under each reinsurance contract.
Redeemable common stock
Common stock that is redeemable
(1) at a fixed or determinable price on a fixed or determinable date, (2) at the
option of the holder, or (3) upon the occurrence of an event that is not solely
within the control of Company is presented outside of total Net1 equity (i.e.
permanent equity). Redeemable common stock is initially recognized at issuance
date fair value and the Company does not adjust the issuance date fair value if
redemption is not probable. The Company re-measures the redeemable common stock
to the maximum redemption amount at the balance sheet date once redemption is
probable. Reduction in the carrying amount of the redeemable common stock is
only appropriate to the extent that the Company has previously recorded
increases in the carrying amount of the redeemable equity instrument as the
redeemable common stock may be not be carried at an amount that is less the
initial amount reported outside of permanent equity.
Redeemable common stock is
reclassified as permanent equity when presentation outside permanent equity is
no longer required (if, for example, a redemption feature lapses, or there is a
modification of the terms of the instrument). The existing carrying amount of
the redeemable common stock is reclassified to permanent equity at the date of
the event that caused the reclassification and prior period consolidated
financial statements are not adjusted.
F-13
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2016, 2015 and 2014
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
2.
|
SIGNIFICANT ACCOUNTING POLICIES
(continued)
|
Sales taxes
Revenue and expenses are
presented net of sales, use and value added taxes, as the case may be.
Revenue
recognition
The Company recognizes revenue
when:
|
|
there is persuasive evidence of an agreement or
arrangement;
|
|
|
delivery of products has occurred or services
have been rendered;
|
|
|
the sellers price to the buyer is fixed or
determinable; and
|
|
|
collectability is reasonably assured.
|
The Companys principal revenue
streams and their respective accounting treatments are discussed below:
Fees
Pension
and welfare and South African participating merchants
The Company provides a welfare
benefit distribution service to the South African Social Security Agency
(SASSA). Fee income received for these services is recognized in the statement
of operations when distributions have been made to the recipient cardholders.
Recipient cardholders are able to
load their welfare grants at merchants enrolled in the Companys participating
merchant system in certain provinces. There is no charge to the recipient
cardholder to load the grant onto a smart card at the merchant location,
however, a fee is charged to the merchant for purchases made at the merchant
using the smart card. A fee is also charged to the merchant when the recipient
cardholder makes a cash withdrawal. Fee income received for these services is
recognized in the statement of operations when the transaction occurs.
Fees
related to management of card issuance programs and utilization of ATMs
The Company manages card issuance
programs and owns ATMs in South Africa from which it generates fee revenue. Fee
revenue generated from card issuance programs includes interchange and other
miscellaneous fees, which are recorded when cardholder transact at either a POS
or an ATM. Fee revenue generated from utilization of ATMs includes cash
withdrawal, balance enquiry, insufficient funds and other miscellaneous ATM fees
which are recorded when an ATM user performs a transaction at an ATM.
Card
VAN, banking VAN and payment gateway
Card VAN services consist of
services relating to authorization of credit card transactions including
transmission of transaction details (authorization service), and collection of
receipts associated with the credit card transactions (collection service).
With its authorization service, the Company connects credit card companies with
merchants online when a customer uses his/her credit card via terminals
installed at merchants sites and the Companys central processing server for
approval of credit card transactions. Immediately after approval of credit card
transactions, the Company transmits details of the transactions to credit card
companies online for processing payments. Collection service captures the
transaction data and gathers receipts as documented evidence and provides them
to credit card companies upon request. The Company earns service fees based on
the number of transactions processed for credit card companies when services are
rendered in accordance with the contracts entered into between credit card
companies and the Company. The Company bills for its service charges to credit
card companies each month. Each service could be provided either individually or
collectively, based on terms of contracts.
F-14
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2016, 2015 and 2014
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
2.
|
SIGNIFICANT ACCOUNTING POLICIES
(continued)
|
Revenue recognition
(continued)
Fees
(continued)
Card
VAN, banking VAN and payment gateway (continued)
The Company charges commission
fees to credit card companies for the authorization service provided based on
the number of approvals transferred. The right to receive a service fee is due
once a credit card transaction has been approved and details of the transaction
are transmitted by the Company. Therefore, revenues from the authorization
service are recognized when the credit card transactions are authorized and
details of the transactions are transmitted. The Company earns a collection
service fee once it has provided settled funds to the credit card companies.
Therefore, revenue from the collection service is recognized when the Company
collects the receipts and provides them to the card companies.
For multiple-element
arrangements, the Company has identified two deliverables. The first deliverable
is the authorization service, and the second deliverable is the collection
service. The Company evaluates each deliverable in an arrangement to determine
whether it represents a separate unit of accounting. A deliverable constitutes a
separate unit of accounting when it has standalone value and there are no
customer-negotiated refunds or return rights for the delivered elements. If the
arrangement includes a customer-negotiated refund or return right relative to
the delivered item and the delivery and performance of the undelivered item is
considered probable and substantially in the Company's control, the delivered
element constitutes a separate unit of accounting. In instances when the
aforementioned criteria are not met, the deliverable is combined with the
undelivered elements and the allocation of the arrangement consideration and
revenue recognition is determined for the combined unit as a single unit.
Allocation of the consideration is determined at arrangement inception on the
basis of each unit's relative selling price. In such circumstances, the Company
uses a hierarchy to determine the selling price to be used for allocating
revenue to deliverables: (i) vendor-specific objective evidence of fair value
(VSOE), (ii) third-party evidence of selling price (TPE), and (iii) best
estimate of the selling price (ESP).
VSOE generally exists only when
the Company sells the deliverable separately and is the price actually charged
by the Company for that deliverable. ESPs reflect the Companys best estimates
of what the selling prices of elements would be if they were sold regularly on a
stand-alone basis. Because the Company has neither VSOE nor TPE for the two
deliverables, the allocation of revenue has been based on the Companys ESPs.
Amounts allocated to the authorization and the collection service are recognized
at the time of service, provided the other conditions for revenue recognition
have been met.
The Companys process for
determining its ESP for deliverables without VSOE or TPE considers multiple
factors that may vary depending upon the unique facts and circumstances related
to each deliverable. Key factors considered by the Company in developing the
ESPs include prices charged by the Company, historical pricing practices and
controls, range of prices for various customers and the nature of the services.
Consideration is also given to market conditions such as competitor pricing
strategies and market perception.
Banking VAN is a division
supporting a companys fund management business (large payment transfers,
collections, etc.) by relaying financial transactions between client companies
and financial institutions. Financial transactions between two or more business
enterprises, or between business enterprises and their customers, are conducted
through the transaction-processing network established between the Company and
the banks. Revenue from the banking VAN service is recognized when the service
is rendered by the Company.
With its PG service, the Company
provides the Internet-based settlement service between an on-line shopping mall
and a credit card company when a customer uses his/her credit card, debit card
or on-line payment to pay for goods or services. The Company receives fees for
carrying out settlements for electronic transactions. Revenue from the PG
service is recognized when the service is rendered by the Company.
Microlending
service fee
The Company provides short-term
loans to customers in South Africa and charges and recognizes monthly service
fee revenue under the contractual terms of the loan. The monthly service fee
amount is fixed upon initiation and does not change over the term of the loan.
F-15
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2016, 2015 and 2014
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
2.
|
SIGNIFICANT ACCOUNTING POLICIES
(continued)
|
Revenue recognition
(continued)
Fees
(continued)
Other
fees and commissions
The Company provides an automated
payment collection service to third parties, for which it charges monthly fees.
These fees are recognized in the statement of operations as the underlying
services are performed. The Company provides medical-related claims
adjudication, reconciliation and settlement services (medical-related claim
service) to customers, for which it charges fees. These fees are recognized in
the statement of operations as the underlying services are performed. The
Company sells prepaid electricity and recognizes a commission in its statement
of operations once the prepaid electricity token has been delivered to the
customer.
Contract
variations fees
The Company records additional
revenue from variations to contracts for the provision of welfare benefits, if:
|
|
there is persuasive evidence of an agreement;
|
|
|
collectability is reasonably assured; and
|
|
|
all material terms and conditions of the
agreement have been adhered to.
|
Hardware
and prepaid airtime voucher sales
Revenue from hardware and airtime
voucher sales is recognized when risk of loss has transferred to the customer
and there are no unfulfilled Company obligations that affect the customers
final acceptance of the arrangement. Any cost of warranties and remaining
obligations that are inconsequential or perfunctory are accrued when the
corresponding revenue is recognized.
The Company buys terminals from
manufacturers, and subsequently sells them through its agencies. Revenue is
recognized when significant risks and rewards of ownership of terminals have
passed to the buyer, usually on delivery of the terminals to the buyer.
To the extent that sales of
hardware are made in an arrangement that includes software that is more than
incidental, the Company considers post-contract maintenance and technical
support or other future obligations which could impact the timing and amount of
revenue recognized.
Software
Revenue from licensed software is
recognized on a subscription basis over the period that the client is entitled
to use the license. Revenue from the sale of software is recognized if all
revenue recognition criteria have been met. Post-contract maintenance and
technical support in respect of software is generally negotiated and sold as a
separate service and is recognized over the period such items are delivered.
Systems
implementation projects
The Company undertakes smart card
system implementation projects. The hardware and software installed in these
projects are in the form of customized systems, which ordinarily involve
modification to meet the customers specifications. Software delivered under
such arrangements is available to the customer permanently, subject to the
payment of annual license fees. Revenue for such arrangements is recognized
under the percentage of completion method, save for annual license fees, which
are recognized in the period to which they relate. Up-front and interim payments
received are recorded as client deposits until customer acceptance.
F-16
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2016, 2015 and 2014
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
2.
|
SIGNIFICANT ACCOUNTING POLICIES
(continued)
|
Revenue recognition
(continued)
Systems
implementation projects (continued)
The Companys customer
arrangements may have multiple deliverables. Generally, the Companys multiple
element arrangements fall within the scope of specific accounting standards that
provide guidance regarding the separation of elements in multiple-deliverable
arrangements and the allocation of consideration among those elements. If not,
the Company unbundles multiple element arrangements into separate units of
accounting when the delivered element(s) has stand-alone value and fair value of
the undelivered element(s) exists.
Terminal
rental income
The Company leases terminals to
merchants participating in its merchant acquiring system. Operating rental
income is recognized monthly on a straight-line basis in accordance with the
lease agreement.
Other
income
Revenue from service and
maintenance activities is charged to customers on a time-and-materials basis and
is recognized in the statement of operations as services are delivered to
customers.
Research and development
expenditure
Research and development
expenditure is charged to net income in the period in which it is incurred.
During the years ended June 30, 2016, 2015 and 2014, the Company incurred
research and development expenditures of $2.3 million, $2.4 million and $2.2
million, respectively.
Computer software
development
Product development costs in
respect of software intended for sale to licensees are expensed as incurred
until technological feasibility is attained. Technological feasibility is
attained when the Companys software has completed system testing and has been
determined to be viable for its intended use. The time between the attainment of
technological feasibility and completion of software development is generally
short with immaterial amounts of development costs incurred during this
period.
Costs in respect of the
development of software for the Companys internal use are expensed as incurred,
except to the extent that these costs are incurred during the application
development stage. All other costs including those incurred in the project
development and post-implementation stages are expensed as incurred.
Income taxes
The Company provides for income
taxes using the asset and liability method. This approach recognizes the amount
of taxes payable or refundable for the current year, as well as deferred tax
assets and liabilities for the future tax consequence of events recognized in
the financial statements and tax returns. Deferred income taxes are adjusted to
reflect the effects of changes in tax laws or enacted tax rates.
The Company measured its South
African income taxes and deferred income taxes for the years ended June 30,
2016, 2015 and 2014, using the enacted statutory tax rate in South Africa of
28%.
As of June 30, 2016, the Company
intends to permanently reinvest its non-U.S. undistributed earnings of $414.2
million in those non-U.S. jurisdictions. Accordingly, the Company has not
recognized a deferred tax liability related to future distributions of these
undistributed earnings. It is not practicable for the Company to estimate the
amount of unrecognized deferred tax liability because of the complexities of the
calculations involved. The Company will be required to record a tax charge if it
is no longer able to permanently reinvest its undistributed earnings. This may
result in an increase in the Companys effective tax rate in future periods.
F-17
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2016, 2015 and 2014
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
2.
|
SIGNIFICANT ACCOUNTING POLICIES
(continued)
|
Income taxes (continued)
In establishing the appropriate
deferred tax asset valuation allowances, the Company assesses the realizability
of its deferred tax assets, and based on all available evidence, both positive
and negative, determines whether it is more likely than not that the deferred
tax assets or a portion thereof will be realized.
Reserves for uncertain tax
positions are recognized in the financial statements for positions which are not
considered more likely than not of being sustained based on the technical merits
of the position on audit by the tax authorities. For positions that meet the
more likely than not standard, the measurement of the tax benefit recognized in
the financial statements is based upon the largest amount of tax benefit that,
in managements judgement, is greater than 50% likely of being realized based on
a cumulative probability assessment of the possible outcomes.
The Companys policy is to
include interest related to unrecognized tax benefits in interest expense and
penalties in selling, general and administration in the consolidated statements
of operations.
Stock-based compensation
Stock-based compensation
represents the cost related to stock-based awards granted. The Company measures
equity-based stock-based compensation cost at the grant date, based on the
estimated fair value of the award, and recognizes the cost as an expense on a
straight-line basis (net of estimated forfeitures) over the requisite service
period. In respect of awards with only service conditions that have a graded
vesting schedule, the Company recognizes compensation cost on a straight-line
basis over the requisite service period for the entire award. The forfeiture
rate is estimated using historical trends of the number of awards forfeited
prior to vesting. The expense is recorded in the statement of operations and
classified based on the recipients respective functions.
The Company records deferred tax
assets for awards that result in deductions on the Companys income tax returns,
based on the amount of compensation cost recognized and the Companys statutory
tax rate in the jurisdiction in which it will receive a deduction. Differences
between the deferred tax assets recognized for financial reporting purposes and
the actual tax deduction reported on the Companys income tax return are
recorded in additional paid-in capital (if the tax deduction exceeds the
deferred tax asset) or in the statement of operations (if the deferred tax asset
exceeds the tax deduction and no additional paid-in capital exists from previous
awards).
Equity instruments issued
to third parties
Equity instruments issued to
third parties represents the cost related to equity instruments granted. The
Company measures this cost at the grant date, based on the estimated fair value
of the award, and recognizes the cost as an expense on a straight-line basis
(net of estimated forfeitures) over the requisite service period. The forfeiture
rate is estimated based on the Companys expectation of the number of awards
that will be forfeited prior to vesting.
The Company records deferred tax
assets for equity instrument awards that result in deductions on the Companys
income tax returns, based on the amount of equity instrument cost recognized and
the Companys statutory tax rate in the jurisdiction in which it will receive a
deduction. Differences between the deferred tax assets recognized for financial
reporting purposes and the actual tax deduction reported on the Companys income
tax return are recorded in the statement of operations.
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.
F-18
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2016, 2015 and 2014
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
2.
|
SIGNIFICANT ACCOUNTING POLICIES
(continued)
|
Settlement assets and
settlement obligations (continued)
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.
During fiscal 2016, and in prior financial years, certain bank accounts, cash in transit and funds in preparation for immediate access by grant beneficiaries, as well as the corresponding obligation to grant beneficiaries, were not included in settlement assets and obligations, primarily due to the reservation of ownership clause in the Company’s agreement with SASSA and the assumption of total risk over the cash by the cash transfer service providers. In the course of the annual consideration of the Company’s accounting practices and in the context of the increased and more diversified payment delivery channels arising from the Company’s ATM and point of sale roll out, the Company has decided that its presentation would be enhanced by including these gross amounts in settlement assets and obligations. The Company has accordingly restated its balance sheet as of June 30, 2015, to record an increase in settlement assets and obligations of $30.5 million. The Company has also restated its consolidated statement of cash flows, and accordingly, it has increased its cash flows used in investing activities and increased its cash flows provided by financing activities by $21.3 million, respectively, during the year ended June 30, 2015, and decreased its cash flows used in investing activities and decreased its cash flows used in financing activities by $12.4 million, respectively, during the year ended June 30, 2014, all balances translated at the average rate applicable during the year ended June 30, 2015 and 2014, respectively. The inclusion of these accounts did not impact on cash and cash equivalents reported nor did it impact on the Company’s current assets before settlement assets and current liabilities before settlement obligations.
Recent accounting
pronouncements adopted
In March 2016, the FASB issued
guidance regarding
Investments Equity Method and Joint Ventures:
Simplifying the Transition to the Equity Method of Accounting
. The guidance
simplifies the equity method of accounting by eliminating the requirement to
retrospectively apply the equity method to an investment that subsequently
qualifies for such accounting as a result of an increase in the level of
ownership interest or degree of influence. Consequently, when an investment
qualifies for the equity method (as a result of an increase in the level of
ownership interest or degree of influence), the cost of acquiring the additional
interest in the investee would be added to the current basis of the investors
previously held interest and the equity method would be applied subsequently
from the date on which the investor obtains the ability to exercise significant
influence over the investee. The guidance further requires that unrealized
holding gains or losses in accumulated other comprehensive income related to an
available for sale security that becomes eligible for the equity method be
recognized in earnings as of the date on which the investment qualifies for the
equity method. Early adoption is permitted. The guidance is effective for the
Company beginning July 1, 2017, however the Company has early adopted the
guidance, effective April 1, 2016. The adoption of this guidance did not have a
material impact on the Companys financial statements.
Recent accounting
pronouncements not yet adopted as of June 30, 2016
In May 2014, the FASB issued
guidance regarding
Revenue from Contracts with Customers
. This guidance
requires an entity to recognize revenue when a customer obtains control of
promised goods or services in an amount that reflects the consideration to which
the entity expects to receive in exchange for those goods or services. In
addition, the standard requires disclosure of the nature, amount, timing, and
uncertainty of revenue and cash flows arising from contracts with customers. The
guidance was 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 Company expects that this guidance may have a material
impact on its financial statements and is currently evaluating the impact of
this guidance on its financial statements on adoption.
In August 2014, the FASB issued
guidance regarding
Disclosure of Uncertainties about an Entitys Ability to
Continue as a Going Concern
. This guidance requires an entity to perform
interim and annual assessments of its ability to continue as a going concern
within one year of the date that its financial statements are issued. An entity
must provide certain disclosures if conditions or events raise substantial doubt
about the entitys ability to continue as a going concern. The guidance is
effective for the Company beginning July 1, 2017. Early adoption is permitted.
The Company is currently assessing the impact of this guidance on its financial
statements disclosure.
F-19
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2016, 2015 and 2014
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
2.
|
SIGNIFICANT ACCOUNTING POLICIES
(continued)
|
Recent accounting
pronouncements not yet adopted as of June 30, 2016 (continued)
In February 2015, the FASB issued
guidance regarding
Amendments to the Consolidation Analysis
. This
guidance amends both the variable interest entity and voting interest entity
consolidation models. The requirement to assess an entity under a different
consolidation model may change previous consolidation conclusions. The guidance
is effective for the Company beginning July 1, 2016. Early adoption is
permitted. The Company is currently assessing the impact of this guidance on its
financial statements disclosure.
In July 2015, the FASB issued
guidance regarding
Simplifying the Measurement of Inventory
. This
guidance requires entities to measure most inventory at the lower of cost and
net realizable value, thereby simplifying the current guidance under which an
entity must measure inventory at the lower of cost or market (market in this
context is defined as one of three different measures). The guidance will not
apply to inventories that are measured by using either the last-in, first-out
(LIFO) method or the retail inventory method (RIM). The guidance is
effective for the Company beginning July 1, 2017. Early adoption is permitted.
The Company is currently assessing the impact of this guidance on its financial
statements disclosure.
In November 2015, the FASB issued
guidance regarding
Balance Sheet Classification of Deferred Taxes
. This
guidance requires that deferred tax liabilities and assets are to be classified
as non-current in a classified statement of financial position. The current
requirement that deferred tax liabilities and assets of a tax-paying component
of an entity be offset and presented as a single amount is not affected by the
amendments in this update. This guidance is effective for the Company beginning
July 1, 2017, with early adoption permitted on a prospective or retrospective
basis. The Company is currently assessing the impact of this guidance on its
financial statements disclosures.
In January 2016, the FASB issued
guidance regarding
Recognition and Measurement of Financial Assets and
Financial Liabilities
. The guidance primarily affects the accounting for
equity investments, financial liabilities under the fair value option and the
presentation and disclosure requirements for financial instruments. In addition,
the guidance clarifies the valuation allowance assessment when recognizing
deferred tax assets resulting from unrealized losses on available-for-sale debt
securities. This guidance is effective for the Company beginning July 1, 2018,
and early adoption is not permitted, with certain exceptions. The amendments are
required to be applied by means of a cumulative-effect adjustment on the balance
sheet as of the beginning of the fiscal year of adoption. The Company is
currently assessing the impact of this guidance on its financial statements
disclosure.
In February 2016, the FASB issued
guidance regarding
Leases
. The guidance increases transparency and
comparability among organizations by requiring the recognition of lease assets
and lease liabilities on the balance sheet. The amendments to current lease
guidance includes the recognition of assets and liabilities by lessees for those
leases currently classified as operating leases. The guidance also requires
disclosures to meet the objective of enabling users of financial statements to
assess the amount, timing, and uncertainty of cash flows arising from leases.
This guidance is effective for the Company beginning July 1, 2019. Early
adoption is permitted. The Company expects that this guidance may have a
material impact on its financial statements and is currently evaluating the
impact of this guidance on its financial statements on adoption.
In March 2016, the FASB issued
guidance regarding
Improvements to Employee Share-Based Payment
Accounting
. The guidance simplifies several aspects of the accounting for
employee share-based payment transactions for both public and nonpublic
entities, including the accounting for income taxes, forfeitures, and statutory
tax withholding requirements, as well as classification in the statement of cash
flows. This guidance is effective for the Company beginning July 1, 2017. Early
adoption is permitted. The Company is currently assessing the impact of this
guidance on its financial statements disclosure.
In June 2016, the FASB issued
guidance regarding
Measurement of Credit Losses on Financial Instruments
.
The guidance replaces the incurred loss impairment methodology in current GAAP
with a methodology that reflects expected credit losses and requires
consideration of a broader range of reasonable and supportable information to
inform credit loss estimates. For trade and other receivables, loans, and other
financial instruments, a 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.
F-20
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2016, 2015 and 2014
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
The cash paid, net of cash
received related to the Companys various acquisitions during the years ended
June 30, 2016, 2015 and 2014 are summarized in the table below:
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Transact24 Limited
(Transact24)
|
$
|
1,666
|
|
$
|
-
|
|
$
|
-
|
|
|
Masterpayment AG (Masterpayment)
|
|
14,101
|
|
|
-
|
|
|
-
|
|
|
Total cash paid, net of
cash received
|
$
|
15,767
|
|
$
|
-
|
|
$
|
-
|
|
2016
acquisitions
Transact24
Limited
On January 20, 2016, the Company
acquired the remaining 56% of the issued and outstanding ordinary shares of
Transact24 for $3.0 million in cash and through the issue of 391,645 shares of
the Companys common stock with an aggregate issue date fair value of
approximately $4.0 million. Transact24 is a specialist Hong Kong-based payment
services company and is now a wholly-owned subsidiary. The Company acquired
approximately 44% of Transact24 in May 2015. Philip Meyer, Managing Director of
Transact24 and an industry veteran in the international payments and transaction
processing industries, has become an executive officer of the Company.
The Company elected to settle
part of the purchase price in shares in order to appropriately align the T24
management team with the Company and its global strategy. The parties have
agreed that 50% of the Companys shares issued in the transaction are
contractually restricted as to resale until after June 30, 2016, and the
remaining 50% of the shares are so restricted until after June 30, 2017.
Masterpayment
AG
In April 2016, the Company acquired a 60% interest in Masterpayment AG (“Masterpayment”), a specialist payment services processor based in Munich, Germany for approximately $9.4 million and paid a contractually agreed EBITDA earn-out of $5.4 million in June 2016, for a total purchase consideration of $14.8 million. Masterpayment provides payment and acquiring services for all major European debit and credit cards; and invoicing for online retail, digital goods and content. Masterpayment currently has a client portfolio of approximately 5,000 registered merchants.
The final purchase price
allocation of Transact24 and Masterpayment acquisitions, translated at the
foreign exchange rates applicable on the date of acquisition, is provided in the
table below:
|
|
|
Transact24
|
|
|
Masterpayment
|
|
|
Total
|
|
|
Cash and cash equivalents
|
$
|
1,334
|
|
$
|
665
|
|
$
|
1,999
|
|
|
Accounts receivable
|
|
2,019
|
|
|
765
|
|
|
2,784
|
|
|
Property, plant and
equipment, net
|
|
154
|
|
|
18
|
|
|
172
|
|
|
Deferred tax assets
|
|
1,070
|
|
|
-
|
|
|
1,070
|
|
|
Intangible assets (Note 9)
|
|
4,974
|
|
|
9,428
|
|
|
14,402
|
|
|
Goodwill (Note 9)
|
|
6,024
|
|
|
17,084
|
|
|
23,108
|
|
|
Accounts payables and other
payables
|
|
(1,898
|
)
|
|
(1,114
|
)
|
|
(3,012
|
)
|
|
Deferred tax liabilities
|
|
(1,243
|
)
|
|
(2,236
|
)
|
|
(3,479
|
)
|
|
Fair value of assets and liabilities on acquisition
|
|
12,434
|
|
|
24,610
|
|
|
37,044
|
|
|
Less: fair value
of equity-accounted investment, comprising:
|
|
(5,471
|
)
|
|
-
|
|
|
(5,471
|
)
|
|
Less: gain on re-measurement of previously held
interest
|
|
(1,908
|
)
|
|
-
|
|
|
(1,908
|
)
|
|
Less: carrying value at the acquisition date
|
|
(3,563
|
)
|
|
-
|
|
|
(3,563
|
)
|
|
Less: fair value attributable to controlling interests on
acquisition date .
|
|
-
|
|
|
(9,844
|
)
|
|
(9,844
|
)
|
|
Total purchase price
|
$
|
6,963
|
|
|
14,766
|
|
$
|
21,729
|
|
|
Add:
carrying value of non-controlling interests acquired
|
|
|
|
|
9,867
|
|
|
|
|
|
Add: adjustment to Net1 equity
(Note 14)
|
|
|
|
|
1,322
|
|
|
|
|
|
Cash paid for non-controlling interest (Note 14)
|
|
|
|
|
11,189
|
|
|
|
|
|
Total consideration paid for Masterpayment
|
|
|
|
$
|
25,955
|
|
|
|
|
F-21
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2016, 2015 and 2014
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
2016 acquisitions
(continued)
Pro forma results of operations
have not been presented because the effect of the Transact24 and Masterpayment
acquisitions, individually and in the aggregate, were not material to the
Company. During the year ended June 30, 2016, the Company incurred
acquisition-related expenditure of $0.2 million related to these acquisitions.
Since the closing of the Transact24 acquisition, it has contributed revenue and
net income of $3.8 million and $0.03 million, respectively, for the year ended
June 30, 2016. Since the closing of the Masterpayment acquisition, it has
contributed revenue and net loss, after acquired intangible asset amortization,
net of taxation, non-controlling interest, of $2.4 million and $0.04 million,
respectively, for the year ended June 30, 2016.
2015
acquisitions
None.
2014
acquisitions
None.
4.
|
PRE-FUNDED SOCIAL WELFARE GRANTS
RECEIVABLE
|
Pre-funded social welfare grants
receivable represents amounts pre-funded by the Company to certain merchants
participating in the merchant acquiring system. The July 2016 payment service
commenced on July 1, 2016, but the Company pre-funded certain merchants
participating in the merchant acquiring systems in the last two days of June
2016. The July 2015 payment service commenced on July 1, 2015, but the Company
pre-funded certain merchants participating in the merchant acquiring systems in
the last two days of June 2015.
5.
|
ACCOUNTS RECEIVABLE, net and FINANCE LOANS RECEIVABLE,
net
|
Accounts receivable, net
|
|
2016
|
|
|
|
2015
(1)
|
|
Accounts receivable, trade,
net
|
$
|
57,563
|
|
|
$
|
67,399
|
|
Accounts receivable, trade,
gross
|
|
59,232
|
|
|
|
69,355
|
|
Allowance for
doubtful accounts receivable, end of year
|
|
1,669
|
|
|
|
1,956
|
|
Beginning of year
|
|
1,956
|
|
|
|
1,313
|
|
Reversed to statement of operations
|
|
(68)
|
|
|
|
(61)
|
|
Charged to statement of operations
|
|
388
|
|
|
|
1,580
|
|
Utilized
|
|
(361)
|
|
|
|
(654)
|
|
Foreign currency adjustment
|
|
(246)
|
|
|
|
(222)
|
|
Current portion of payments
to agents in South Korea amortized over the contract period
|
|
26,572
|
|
|
|
25,998
|
|
Payments to agents in South Korea amortized over the contract period
|
|
52,469
|
|
|
|
53,431
|
|
Less:
Payments to agents in South Korea amortized over the contract period
included in other long-term assets (Note 1)
|
|
25,897
|
|
|
|
27,433
|
|
Other receivables
|
|
23,670
|
|
|
|
27,938
|
|
Total accounts receivable, net
|
$
|
107,805
|
|
|
$
|
121,335
|
|
(1) Receivables from the sale of prepaid products of $18,448
as of June 30, 2015, have been reclassified from Other receivables to Accounts
receivable, trade, gross.
F-22
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2016, 2015 and 2014
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
5.
|
ACCOUNTS RECEIVABLE, net and FINANCE LOANS RECEIVABLE,
net (continued)
|
Accounts receivable, net
(continued)
Receivables from customers
renting POS equipment from the Company are included in accounts receivable,
trade, and are stated net of an allowance for certain amounts that the Companys
management has identified may be unrecoverable. Accounts receivable, trade, also
includes amounts due from customers from the sale of hardware, software licenses
and SIM cards and provision of transaction processing services. During the years
ended June 30, 2016 and 2014, the Company recorded a bad debt expense of $1.2
million and $0.6 million, respectively. The Company did not record a bad debt
expense during the year ended June 30, 2015.
Finance loans receivable,
net
|
|
|
2016
|
|
|
|
2015
|
|
|
Finance loans receivable,
gross
|
$
|
41,503
|
|
|
$
|
44,600
|
|
|
Allowance for doubtful finance loans
receivable, end of year
|
|
4,494
|
|
|
|
4,227
|
|
|
Beginning of year
|
|
4,227
|
|
|
|
3,083
|
|
|
Charged to
statement of operations
|
|
2,113
|
|
|
|
3,392
|
|
|
Utilized
|
|
(1,105
|
)
|
|
|
(1,705
|
)
|
|
Foreign currency
adjustment
|
|
(741
|
)
|
|
|
(543
|
)
|
|
Total finance loans receivable,
net
|
$
|
37,009
|
|
|
$
|
40,373
|
|
The Company did not expense any
unrecoverable finance loans receivable during the year ended June 30, 2016, 2015
and 2014, respectively, because these loans were written off directly against
the allowance for doubtful finance loans receivable.
The Companys inventory as of
June 30, 2016 and 2015, is presented in the table below:
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Finished goods
|
$
|
10,004
|
|
$
|
12,979
|
|
|
|
$
|
10,004
|
|
$
|
12,979
|
|
7.
|
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 seeks to reduce its
exposure to currencies other than the South African rand through a policy of
matching, to the extent possible, assets and liabilities denominated in those
currencies. In addition, the Company uses financial instruments in order to
economically hedge its exposure to exchange rate and interest rate fluctuations
arising from its operations. The Company is also exposed to equity price and
liquidity risks as well as credit risks.
F-23
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2016, 2015 and 2014
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
7.
|
FAIR VALUE OF FINANCIAL
INSTRUMENTS
|
Fair value of financial
instruments
Risk
management (continued)
Currency
exchange risk
The Company is subject to
currency exchange risk because it purchases inventories that it is required to
settle in other currencies, primarily the euro and U.S. dollar. The Company has
used forward contracts in order to limit its exposure in these transactions to
fluctuations in exchange rates between the South African rand, on the one hand,
and the U.S. dollar and the euro, on the other hand.
Translation
risk
Translation risk relates to the
risk that the Companys results of operations will vary significantly as the
U.S. dollar is its reporting currency, but it earns most of its revenues and
incurs most of its expenses in ZAR. The U.S. dollar to ZAR exchange rate has
fluctuated significantly over the past three years. As exchange rates are
outside the Companys control, there can be no assurance that future
fluctuations will not adversely affect the Companys results of operations and
financial condition.
Interest
rate risk
As a result of its normal
borrowing and leasing activities, the Companys operating results are exposed to
fluctuations in interest rates, which it manages primarily through regular
financing activities. The Company generally maintains limited investment in cash
equivalents and has occasionally invested in marketable securities.
Credit
risk
Credit risk relates to the risk
of loss that the Company would incur as a result of non-performance by
counterparties. The Company maintains credit risk policies with regard to its
counterparties to minimize overall credit risk. These policies include an
evaluation of a potential counterpartys financial condition, credit rating, and
other credit criteria and risk mitigation tools as the Companys management
deems appropriate.
With respect to credit risk on
financial instruments, the Company maintains a policy of entering into such
transactions only with South African and European financial institutions that
have a credit rating of BBB or better, as determined by credit rating agencies
such as Standard & Poors, Moodys and Fitch Ratings.
UEPS-based
microlending credit risk
The Company is exposed to credit
risk in its UEPS-based microlending activities, which provides unsecured
short-term loans to qualifying customers. The Company manages this risk by
performing an affordability test for each prospective customer and assigns a
creditworthiness score, which takes into account a variety of factors such as
other debts and total expenditures on normal household and lifestyle expenses.
Equity
price and liquidity risk
Equity price risk relates to the
risk of loss that the Company would incur as a result of the volatility in the
exchange-traded price of equity securities that it holds and the risk that it
may not be able to liquidate these securities. The market price of these
securities may fluctuate for a variety of reasons, consequently, the amount the
Company may obtain in a subsequent sale of these securities may significantly
differ from the reported market value.
Liquidity risk relates to the
risk of loss that the Company would incur as a result of the lack of liquidity
on the exchange on which these securities are listed. The Company may not be
able to sell some or all of these securities at one time, or over an extended
period of time without influencing the exchange traded price, or at all.
F-24
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2016, 2015 and 2014
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
7.
|
FAIR VALUE OF FINANCIAL INSTRUMENTS
(continued)
|
Financial instruments
Fair value is defined as the
price that would be received upon sale of an asset or paid upon transfer of a
liability in an orderly transaction between market participants at the
measurement date and in the principal or most advantageous market for that asset
or liability. The fair value should be calculated based on assumptions that
market participants would use in pricing the asset or liability, not on
assumptions specific to the entity. In addition, the fair value of liabilities
should include consideration of non-performance risk including the Companys own
credit risk.
Fair value measurements and
inputs are categorized into a fair value hierarchy which prioritizes the inputs
into three levels based on the extent to which inputs used in measuring fair
value are observable in the market. Each fair value measurement is reported in
one of the three levels which is determined by the lowest level input that is
significant to the fair value measurement in its entirety.
These levels are:
|
|
Level 1 inputs are based upon unadjusted quoted prices
for identical instruments traded in active markets.
|
|
|
|
|
|
Level 2 inputs are based upon quoted prices for similar
instruments in active markets, quoted prices for identical or similar
instruments in markets that are not active, and model-based valuation
techniques for which all significant assumptions are observable in the
market or can be corroborated by observable market data for substantially
the full term of the assets or liabilities.
|
|
|
|
|
|
Level 3 inputs are generally unobservable and 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.
|
The following section describes
the valuation methodologies the Company uses to measure financial assets and
liabilities at fair value.
Investments in common
stock
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.
Asset measured at fair
value using significant unobservable inputs investment in Finbond Group
Limited (Finbond)
During the year ended June 30,
2016, the Company determined that it was able to exert significant influence on
Finbond due to its representation on the board of directors (from April 2016)
and the level of its shareholding. Accordingly, the Company has recognized its
investment in Finbond using the equity method from April 1, 2016. Up until this
date, the Company had no rights to participate in the financial, operating, or
governance decisions made by Finbond. The Company also had no participation on
Finbonds board of directors whether through contractual agreement or otherwise.
Consequently, the Company had concluded that it did not have significant
influence over Finbond and therefore equity accounting was not appropriate up
until March 31, 2016, and Finbond was carried as an available for sale asset up
until that date. The Companys ownership interest in Finbond as of June 30,
2016, was approximately 26% (representing 197,522,435 shares of common stock).
In March 2016, Finbond completed a rights offering in which the Company acquired
an additional 40,733,723 shares for approximately $8.9 million.
F-25
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2016, 2015 and 2014
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
7.
|
FAIR VALUE OF FINANCIAL INSTRUMENTS
(continued)
|
Financial instruments
(continued)
Asset
measured at fair value using significant unobservable inputs investment in
Finbond Group Limited (Finbond) (continued)
The Companys Level 3 asset as of June 30, 2015, represented
an investment of 156,788,712 shares of common stock of Finbond, which are
exchange-traded equity securities. Finbonds shares are traded on the
Johannesburg Stock Exchange (JSE) and the Company has designated such shares
as available for sale investments. The Company had concluded that the market for
Finbond shares was not active and consequently had employed alternative
valuation techniques in order to determine the fair value of such stock. Finbond
issues financial products and services under a mutual banking licence and also
has a microlending offering. In determining the fair value of Finbond, the
Company considered amongst other things Finbonds historical financial
information (including its most recent public accounts), press releases issued
by Finbond and its published net asset value. The Company believed that the best
indicator of fair value of Finbond is its published net asset value and used
this value to determine the fair value.
The fair value of these
securities as of June 30, 2015, represented approximately 1% of the Companys
total assets, including these securities. The Company expects to hold these
securities for an extended period of time and it is not concerned with
short-term equity price volatility with respect to these securities 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 BBB or better. The Company uses quoted prices in
active markets for similar assets and liabilities to determine fair value (level
2). The Company has no derivatives that require fair value measurement under
level 1 or 3 of the fair value hierarchy.
The Companys outstanding foreign
exchange contracts are as follows:
As of June 30, 2016
|
|
|
Fair market
|
|
|
Notional amount
|
Strike price
|
value price
|
Maturity
|
|
EUR 573,765.00
|
ZAR 15.9587
|
ZAR 16.3393
|
July 20, 2016
|
|
EUR 554,494.50
|
ZAR 16.0643
|
ZAR 16.4564
|
August 19, 2016
|
|
EUR 465,711.00
|
ZAR 16.1798
|
ZAR 16.582
|
September 20, 2016
|
|
EUR 393,675.00
|
ZAR 16.2911
|
ZAR 16.7017
|
October 20, 2016
|
|
EUR 302,368.50
|
ZAR 16.4085
|
ZAR 16.8301
|
November 21, 2016
|
As of June 30, 2015
|
|
|
Fair market
|
|
|
Notional amount
|
Strike price
|
value price
|
Maturity
|
|
EUR 526,263.00
|
ZAR 15.1145
|
ZAR 13.6275
|
July 20, 2015
|
|
EUR 526,263.00
|
ZAR 15.2025
|
ZAR 13.7062
|
August 20, 2015
|
|
EUR 526,263.00
|
ZAR 15.2944
|
ZAR 13.7898
|
September 21, 2015
|
|
EUR 526,263.00
|
ZAR 15.3809
|
ZAR 13.8683
|
October 20, 2015
|
|
EUR 509,516.00
|
ZAR 15.4728
|
ZAR 13.9540
|
November 20, 2015
|
|
EUR 529,865.00
|
ZAR 15.5654
|
ZAR 14.0397
|
December 21, 2015
|
|
EUR 526,663.00
|
ZAR 15.6625
|
ZAR 14.1239
|
January 20, 2016
|
F-26
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2016, 2015 and 2014
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
7.
|
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,
2016, according to the fair value hierarchy:
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related to insurance business
(included in other long-term assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
533
|
|
$
|
-
|
|
$
|
-
|
|
$
|
533
|
|
|
Foreign exchange contracts
|
|
-
|
|
|
62
|
|
|
-
|
|
|
62
|
|
|
Other
|
|
-
|
|
|
37
|
|
|
-
|
|
|
37
|
|
|
Total assets at
fair value
|
$
|
533
|
|
$
|
99
|
|
$
|
-
|
|
$
|
632
|
|
The following table presents the
Companys assets and liabilities measured at fair value on a recurring basis as
of June 30, 2015, according to the fair value hierarchy:
|
|
|
Price in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related to insurance business (included
in other long-term assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
1,640
|
|
$
|
-
|
|
$
|
-
|
|
$
|
1,640
|
|
|
Investment in Finbond (available
for sale assets included in other long-term assets)
|
|
-
|
|
|
-
|
|
|
7,488
|
|
|
7,488
|
|
|
Other
|
|
-
|
|
|
1,259
|
|
|
-
|
|
|
1,259
|
|
|
Total assets at
fair value
|
$
|
1,640
|
|
$
|
1,259
|
|
$
|
7,488
|
|
$
|
10,387
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
$
|
-
|
|
$
|
452
|
|
$
|
-
|
|
$
|
452
|
|
|
Total liabilities at fair value
|
$
|
-
|
|
$
|
452
|
|
$
|
-
|
|
$
|
452
|
|
Changes in the Companys
investment in Finbond (Level 3 that are measured at fair value on a recurring
basis) were insignificant during the years ended June 30, 2016 and 2015,
respectively. During the year ended June 30, 2016, the Company determined that
it was able to exert significant influence on Finbond and transferred the
carrying value as of April 1, 2016, to equity-accounted investments. There have
been no transfers in or out of Level 3 during the years ended June 30, 2015.
F-27
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2016, 2015 and 2014
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
7.
|
FAIR VALUE OF FINANCIAL INSTRUMENTS
(continued)
|
Financial instruments
(continued)
Trade,
finance loans and other receivables
Trade, finance loans and other
receivables originated by the Company are stated at cost less allowance for
doubtful accounts receivable. The fair value of trade, finance loans and other
receivables approximate their carrying value due to their short-term nature.
Trade
and other payables
The fair values of trade and other payables approximates their
carrying amounts, due to their short-term nature.
Assets
and liabilities measured at fair value on a nonrecurring basis
The Company measures its assets
at fair value on a nonrecurring basis when they are deemed to be
other-than-temporarily impaired. The Company has no liabilities that are
measured at fair value on a nonrecurring basis. The Company reviews the carrying
values of its assets when events and circumstances warrant and considers all
available evidence in evaluating when declines in fair value are
other-than-temporary. The fair values of the Companys assets are determined
using the best information available, and may include quoted market prices,
market comparables, and discounted cash flow projections. An impairment charge
is recorded when the cost of the assets exceeds its fair value and the excess is
determined to be other-than-temporary. The Company has not recorded any
impairment charges during the reporting periods presented herein. The Company
owns 25% of One Credit Limited and has provided it a credit facility of up to
$10 million in the form of convertible debt, none of which had been utilized as
of June 30, 2016 and 2015, respectively.
8.
|
PROPERTY, PLANT AND EQUIPMENT,
net
|
Summarized below is the cost,
accumulated depreciation and carrying amount of property, plant and equipment as
of June 30, 2016 and 2015:
|
|
|
2016
|
|
|
2015
|
|
|
Cost:
|
|
|
|
|
|
|
|
Land
|
$
|
851
|
|
$
|
869
|
|
|
Building and
structures
|
|
467
|
|
|
477
|
|
|
Computer equipment
|
|
130,998
|
|
|
121,033
|
|
|
Furniture and
office equipment
|
|
7,262
|
|
|
6,295
|
|
|
Motor vehicles
|
|
15,368
|
|
|
17,660
|
|
|
Plant and
equipment
|
|
-
|
|
|
-
|
|
|
|
|
154,946
|
|
|
146,334
|
|
|
Accumulated depreciation:
|
|
|
|
|
|
|
|
Land
|
|
-
|
|
|
-
|
|
|
Building and
structures
|
|
151
|
|
|
134
|
|
|
Computer equipment
|
|
81,423
|
|
|
75,681
|
|
|
Furniture and
office equipment
|
|
5,048
|
|
|
4,901
|
|
|
Motor vehicles
|
|
13,347
|
|
|
13,298
|
|
|
Plant and
equipment
|
|
-
|
|
|
-
|
|
|
|
|
99,969
|
|
|
94,014
|
|
|
Carrying amount:
|
|
|
|
|
|
|
|
Land
|
|
851
|
|
|
869
|
|
|
Building and
structures
|
|
316
|
|
|
343
|
|
|
Computer equipment
|
|
49,575
|
|
|
45,352
|
|
|
Furniture and
office equipment
|
|
2,214
|
|
|
1,394
|
|
|
Motor vehicles
|
|
2,021
|
|
|
4,362
|
|
|
Plant and
equipment
|
|
-
|
|
|
-
|
|
|
|
$
|
54,977
|
|
$
|
52,320
|
|
F-28
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2016, 2015 and 2014
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
9.
|
GOODWILL AND INTANGIBLE ASSETS,
net
|
Goodwill
Summarized below is the movement
in the carrying value of goodwill for the years ended June 30, 2016, 2015 and
2014:
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
|
value
|
|
|
impairment
|
|
|
value
|
|
|
Balance as of July 1, 2013
|
$
|
218,558
|
|
$
|
(42,752
|
)
|
$
|
175,806
|
|
|
Loss on liquidation of Net1
Universal Electronic Technologies
(Austria) GmbH and associated entities
(Net1 UTA) (Note 19)
|
|
(44,445
|
)
|
|
44,445
|
|
|
-
|
|
|
Foreign currency
adjustment
(1)
|
|
12,463
|
|
|
(1,693
|
)
|
|
10,770
|
|
|
Balance as of June 30, 2014
|
|
186,576
|
|
|
-
|
|
|
186,576
|
|
|
Foreign currency
adjustment
(1)
|
|
(20,139
|
)
|
|
-
|
|
|
(20,139
|
)
|
|
Balance as of June 30, 2015
|
|
166,437
|
|
|
-
|
|
|
166,437
|
|
|
Acquisition of
Transact24 (Note 3)
|
|
6,024
|
|
|
-
|
|
|
6,024
|
|
|
Acquisition of Masterpayment
(Note 3)
|
|
17,084
|
|
|
-
|
|
|
17,084
|
|
|
Foreign currency
adjustment
(1)
|
|
(10,067
|
)
|
|
-
|
|
|
(10,067
|
)
|
|
Balance as of June 30, 2016
|
$
|
179,478
|
|
$
|
-
|
|
$
|
179,478
|
|
(1) the foreign currency adjustment represents the effects of
the fluctuations between the South African rand, Euro and the Korean won, and
the U.S. dollar on the carrying value.
Goodwill associated with the
acquisition of Transact24 and Masterpayment represents the excess of cost over
the fair value of acquired net assets. The Transact24 and Masterpayment goodwill
is not deductible for tax purposes. See Note 3 for the allocation of the
purchase price to the fair value of acquired net assets. Transact24 and
Masterpayment have both been allocated to the Companys International
transaction processing operating segment.
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 of June 30 of each year. The results of
our impairment tests during the year ended June 30, 2016 and 2015, indicated
that the fair value of the Companys reporting units exceeded their carrying
values and therefore the Companys reporting units were not at risk of potential
impairment.
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, 2014
|
$
|
28,517
|
|
$
|
128,427
|
|
$
|
29,632
|
|
$
|
186,576
|
|
|
Foreign currency
adjustment
(1)
|
|
(3,938
|
)
|
|
(12,908
|
)
|
|
(3,293
|
)
|
|
(20,139
|
)
|
|
Balance as of June 30, 2015
|
|
24,579
|
|
|
115,519
|
|
|
26,339
|
|
|
166,437
|
|
|
Acquisition of Transact24 (Note
3)
|
|
-
|
|
|
6,024
|
|
|
-
|
|
|
6,024
|
|
|
Acquisition of
Masterpayment (Note 3)
|
|
-
|
|
|
17,084
|
|
|
-
|
|
|
17,084
|
|
|
Foreign currency
adjustment
(1)
|
|
(4,154
|
)
|
|
(2,442
|
)
|
|
(3,471
|
)
|
|
(10,067
|
)
|
|
Balance as of June 30, 2016
|
$
|
20,425
|
|
$
|
136,185
|
|
$
|
22,868
|
|
$
|
179,478
|
|
(1) the foreign currency adjustment represents the effects of
the fluctuations between the South African rand, Euro and the Korean won, and
the U.S. dollar on the carrying value.
F-29
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2016, 2015 and 2014
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
9.
|
GOODWILL AND INTANGIBLE ASSETS, net
(continued)
|
Intangible assets, net
Summarized below is the fair
value of intangible assets acquired, translated at the exchange rate applicable
as of the relevant acquisition dates, and the weighted-average amortization
period:
|
|
|
|
|
|
Weighted-
|
|
|
|
|
Fair value as
|
|
|
Average
|
|
|
|
|
of acquisition
|
|
|
Amortization
|
|
|
|
|
date
|
|
|
period (in years)
|
|
|
Finite-lived intangible
asset:
|
|
|
|
|
|
|
|
Transact24 customer
relationships
|
$
|
3,749
|
|
|
5
|
|
|
Masterpayment
customer relationships
|
|
6,595
|
|
|
5
|
|
|
Transact24 software and
unpatented technology
|
|
1,225
|
|
|
3
|
|
|
Masterpayment
software and unpatented technology
|
|
1,765
|
|
|
3
|
|
|
Masterpayment trademarks
|
$
|
1,068
|
|
|
5
|
|
The Company recognized a deferred
tax liability of approximately $3.5 million related to the acquisition of the
Transact24 and Masterpayment intangible assets during the year ended June 30,
2016.
The Company assesses the carrying
value of intangible assets for impairment whenever events occur or circumstances
change indicating that the carrying amount of the intangible asset may not be
recoverable. No intangible assets have been impaired during the years ended June
30, 2016, 2015 and 2014, respectively.
Summarized below is the carrying
value and accumulated amortization of intangible assets as of June 30, 2016 and
2015:
|
|
|
As of June 30, 2016
|
|
|
|
|
|
As of June 30, 2015
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
|
carrying
|
|
|
Accumulated
|
|
|
carrying
|
|
|
carrying
|
|
|
Accumulated
|
|
|
carrying
|
|
|
|
|
value
|
|
|
amortization
|
|
|
value
|
|
|
value
|
|
|
amortization
|
|
|
value
|
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
(1)
|
|
94,529
|
|
$
|
(51,557
|
)
|
$
|
42,972
|
|
$
|
88,109
|
|
$
|
(45,312
|
)
|
$
|
42,797
|
|
|
Software and unpatented
technology
(1)
|
|
31,452
|
|
|
(28,791
|
)
|
|
2,661
|
|
|
29,964
|
|
|
(28,323
|
)
|
|
1,641
|
|
|
FTS patent
|
|
2,592
|
|
|
(2,592
|
)
|
|
-
|
|
|
3,119
|
|
|
(3,119
|
)
|
|
-
|
|
|
Exclusive licenses
|
|
4,506
|
|
|
(4,506
|
)
|
|
-
|
|
|
4,506
|
|
|
(4,506
|
)
|
|
-
|
|
|
Trademarks
(1)
|
|
6,685
|
|
|
(3,762
|
)
|
|
2,923
|
|
|
6,094
|
|
|
(3,408
|
)
|
|
2,686
|
|
|
Total finite-lived intangible assets .
|
$
|
139,764
|
|
$
|
(91,208
|
)
|
$
|
48,556
|
|
$
|
131,792
|
|
$
|
(84,668
|
)
|
$
|
47,124
|
|
(1) Includes the trademarks acquired in the Masterpayment acquisition as well
as the customer relationships and software and unpatented technology acquired as part of the
Transact24 and Masterpayment acquisition in January 2016 and April 2016,
respectively.
Amortization expense charged for
the years to June 30, 2016, 2015 and 2014 was $11.2 million, $19.4 million, and
$16.6 million, respectively.
Future estimated annual
amortization expense for the next five fiscal years, assuming exchange rates
prevailing on June 30, 2016, is presented in the table below. Actual
amortization expense in future periods could differ from this estimate as a
result of acquisitions, changes in useful lives, exchange rate fluctuations and
other relevant factors.
|
2017
|
$
|
11,919
|
|
|
2018
|
|
11,305
|
|
|
2019
|
|
10,686
|
|
|
2020
|
|
9,986
|
|
|
2021
|
|
4,315
|
|
|
Thereafter
|
$
|
345
|
|
F-30
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2016, 2015 and 2014
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
10.
|
REINSURANCE ASSETS AND POLICY HOLDER LIABILITIES
UNDER INSURANCE AND INVESTMENT CONTRACTS
|
Assets and policy holder
liabilities under investment contracts
Summarized below is the movement
in assets and policy holder liabilities under investment contracts during the
years ended June 30, 2016 and 2015:
|
|
|
|
|
|
Investment
|
|
|
|
|
Assets
(1)
|
|
|
contracts
(2)
|
|
|
Balances acquired on July 1,
2014
|
$
|
688
|
|
$
|
(688
|
)
|
|
Foreign currency adjustment
(3)
|
|
(95
|
)
|
|
95
|
|
|
Balance as of
June 30, 2015
|
$
|
593
|
|
$
|
(593
|
)
|
|
Increase in policy holder benefits under
investment contracts
|
|
35
|
|
|
(35
|
)
|
|
Foreign currency
adjustment
(3)
|
|
(100
|
)
|
|
100
|
|
|
Balance as of June 30, 2016
|
$
|
528
|
|
$
|
(528
|
)
|
(1) Included in other long-term assets;
(2) Included in other long-term liabilities;
(3) The foreign currency
adjustment 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.
Reinsurance assets and
policy holder liabilities under insurance contracts
Summarized below is the movement
in reinsurance assets and policy holder liabilities under insurance contracts
during the years ended June 30, 2016 and 2015:
|
|
|
Reinsurance
|
|
|
Insurance
|
|
|
|
|
assets
(1)
|
|
|
contracts
(2)
|
|
|
Balances acquired on July 1,
2014
|
$
|
21,062
|
|
$
|
(21,478
|
)
|
|
Claims and policyholders benefits under
insurance contracts
|
|
30
|
|
|
(55
|
)
|
|
Transfer to
reinsurer
(3)
|
|
(18,000
|
)
|
|
18,000
|
|
|
Foreign currency adjustment
(4)
|
|
(2,909
|
)
|
|
2,966
|
|
|
Balance as of
June 30, 2015
|
|
183
|
|
|
(567
|
)
|
|
Increase in policy holder benefits under
insurance contracts
|
|
463
|
|
|
(1,408
|
)
|
|
Claims and policyholders
benefits under insurance contracts
|
|
(444
|
)
|
|
801
|
|
|
Foreign currency adjustment
(4)
|
|
(31
|
)
|
|
96
|
|
|
Balance as of
June 30, 2016
|
$
|
171
|
|
$
|
(1,078
|
)
|
(1) Included in other long-term assets;
(2) Included in other long-term liabilities;
(3) Smart Life has agreed
to transfer certain fully reinsured policies to the reinsurer pursuant to
conditions imposed by the South African Financial Service Board to uplift the
suspension of its life insurance license.
(4) The foreign currency
adjustment represents the effects of the fluctuations between the ZAR against
the U.S. dollar.
The Company has agreements with
reinsurance companies in order to limit its losses from large insurance
contracts, however, if the reinsurer is unable to meet its obligations, the
Company retains the liability.
F-31
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2016, 2015 and 2014
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
Summarized below is the breakdown
of other payables as of June 30, 2016 and 2015:
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Accruals
|
$
|
12,588
|
|
$
|
14,484
|
|
|
Provisions
|
|
10,461
|
|
|
17,015
|
|
|
Other
|
|
7,981
|
|
|
9,361
|
|
|
Value-added tax payable
|
|
5,022
|
|
|
3,327
|
|
|
Payroll-related payables
|
|
992
|
|
|
1,008
|
|
|
Participating merchants settlement obligation
|
|
435
|
|
|
400
|
|
|
|
$
|
37,479
|
|
$
|
45,595
|
|
12.
|
SHORT-TERM FACILITIES
|
South Africa
The aggregate amount of the
Companys short-term South African credit facility with Nedbank Limited is up to
ZAR 400 million ($27.1 million) and consists of (i) a primary amount of up to
ZAR 200 million ($13.5 million), which is immediately available, and (ii) a
secondary amount of up to ZAR 200 million($13.5 million), which is not
immediately available (all amounts denominated in ZAR and translated at exchange
rates applicable as of June 30, 2016). The primary amount comprises an overdraft
facility of up to ZAR 50 million ($3.4 million) and indirect and derivative
facilities of up to ZAR 150 million ($10.1 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 June 30,
2016). As of June 30, 2016, the interest rate on the overdraft facility was
9.35% . The Company has ceded its investment in Cash Paymaster Services
Proprietary Limited (CPS), a wholly owned 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.
F-32
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2016, 2015 and 2014
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
12.
|
SHORT-TERM FACILITIES
(continued)
|
South Africa
(continued)
As of each of June 30, 2016 and
2015, respectively, the Company had not utilized any of its overdraft facility.
As of June 30, 2016, the Company had utilized approximately ZAR 131.1 million
($8.9 million, translated at exchange rates applicable as of June 30, 2016) of
its ZAR 150 million indirect and derivative facilities to obtain foreign
exchange contracts from the bank and 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 24). As of
June 30, 2015, the Company had utilized approximately ZAR 139.6 million ($11.4
million, translated at exchange rates applicable as of June 30, 2015) of its ZAR
150 million indirect and derivative facilities.
South Korea
The Company obtained a one year
KRW 10 billion short-term overdraft facility from Hana Bank, a South Korean
bank, in January 2014. The facility expires annually and was again renewed in
January 2016 for one more year and now expires in January 2017. As of June 30,
2016, the interest rate on the overdraft facility was 3.31% . The Company has
ceded the warehouse it owns in South Korea as security for its repayment
obligations under the facility. As of each of June 30, 2016 and 2015,
respectively, the Company had not utilized any of its KRW 10.0 billion ($8.7
million, translated at exchange rates applicable as of June 30, 2016) overdraft
facility.
In October 2013, the Company
refinanced its long-term South Korean credit facility and signed a new five-year
senior secured facilities agreement (the Facilities Agreement) with a
consortium of South Korean banks. The Facilities Agreement provides for three
separate facilities to the Companys wholly owned subsidiary, Net1 Applied
Technologies Korea (Net1 Korea): a Facility A loan of up to KRW 60.0 billion
($52.0 million), a Facility B loan of up to KRW 15 billion ($13.0 million) and a
Facility C revolving credit facility of up to KRW 10.0 billion ($8.7 million)
(all facilities denominated in KRW and translated at exchange rates applicable
as of June 30, 2016).
The Facility A and B loans were
fully drawn on October 29, 2013, and used to repay KRW 75.0 billion ($70.6
million) of the KRW 92.4 billion ($87.0 million) loan outstanding under the
Companys refinanced South Korean credit facility. The remaining outstanding KRW
17.4 billion ($16.4 million) balance of that facility was paid from cash on hand
on October 29, 2013. In addition, the Company drew KRW 1.1 billion ($1.0
million) of the revolving credit facility on October 29, 2013, to pay fees and
expenses related to the Facilities Agreement and drew approximately KRW 2.2
billion ($2.1 million) during the last six months of the year ended June 30,
2014, to pay interest due under the Facilities Agreement.
The Company drew approximately
KRW 2.5 billion ($2.1 million) and KRW 4.0 billion ($3.8 million) during the
year ended June 30, 2016 and 2015, respectively, to pay interest due under the
Facilities Agreement. The carrying value as of June 30, 2016, was $51.8 million.
As of June 30, 2016, the carrying amount of the long-term borrowings
approximated its fair value.
Interest on the loans and
revolving credit facility is payable quarterly and is based on the South Korean
CD rate in effect from time to time plus a margin of 3.10% for the Facility A
loan and Facility C revolving credit facility; and a margin of 2.90% for the
Facility B loan. The CD rate was 1.61% on June 30, 2016, and therefore the
interest rate in effect as of June 30, 2016, for the Facility A loan and
Facility C revolving credit facility was 4.71% . A commitment fee of 0.3% is
payable on any un-drawn and un-cancelled amount of the revolving credit
facility.
F-33
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2016, 2015 and 2014
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
13.
|
LONG-TERM BORROWINGS (continued)
|
The Company paid facilities fees
of approximately KRW 0.9 billion ($0.9 million) on October 29, 2013, and
amortized approximately $0.1 million, $0.2 million and $0.3 million of these
fees during the years ended June 30, 2016, 2015 and 2014, respectively. The
Company has expensed the remaining prepaid facility fees related to the
Companys refinanced South Korean credit facility of approximately $0.4 million
during the year ended June 30, 2014. Total interest expense related to the new
and refinanced facilities during the year ended June 30, 2016, 2015 and 2014,
was $2.6 million, $3.6 million and $4.8 million, respectively.
The Facility A loan is repayable
in three scheduled annual installments of KRW 10 billion, and the first
scheduled payment of $8.7 million was made on April 29, 2016, and the second and
third payment are due in April 2017 and 2018, with a final installment of KRW 30
billion due at the maturity date (October 29, 2018). The Facility B loan was
repaid in full on October 29, 2014. The Facility C revolving credit facility is
repayable in full on the maturity date. Prepayment of the revolving credit
facility may be withdrawn at any time up to three months before the maturity
date.
The loans under the Facilities
Agreement are secured by a pledge by Net1 Korea of its entire equity interest in
KSNET and a pledge by the immediate parent of Net1 Korea (also one of the
Companys subsidiaries) of its entire equity interest in Net1 Korea. The
Facilities Agreement contains customary covenants that require Net1 Korea to
maintain agreed leverage and debt service coverage ratios and restricts Net1
Koreas ability to make certain distributions with respect to its capital stock,
prepay other debt, encumber its assets, incur additional indebtedness, or engage
in certain business combinations. The loans under the Facilities Agreement are
without recourse to, and the covenants and other agreements contained therein do
not apply to, the Company or any of the Companys subsidiaries (other than Net1
Korea).
Common stock
Holders of shares of Net1s
common stock are entitled to receive dividends and other distributions when
declared by Net1s board of directors out of legally available funds. Payment of
dividends and distributions is subject to certain restrictions under the Florida
Business Corporation Act, including the requirement that after making any
distribution Net1 must be able to meet its debts as they become due in the usual
course of its business.
Upon voluntary or involuntary
liquidation, dissolution or winding up of Net1, holders of common stock share
ratably in the assets remaining after payments to creditors and provision for
the preference of any preferred stock according to its terms. There are no
pre-emptive or other subscription rights, conversion rights or redemption or
scheduled installment payment provisions relating to shares of common stock. All
of the outstanding shares of common stock are fully paid and non-assessable.
Each holder of common stock is
entitled to one vote per share for the election of directors and for all other
matters to be voted on by shareholders. Holders of common stock may not cumulate
their votes in the election of directors, and are entitled to share equally and
ratably in the dividends that may be declared by the board of directors, but
only after payment of dividends required to be paid on outstanding shares of
preferred stock according to its terms. The shares of Net1 common stock are not
subject to redemption.
F-34
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2016, 2015 and 2014
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
14.
|
COMMON STOCK (continued)
|
Common stock (continued)
The Companys number of shares,
net of treasury, presented in the consolidated balance sheets and consolidated
statement of changes in equity includes participating non-vested equity shares
(specifically contingently returnable shares) as described below in Note 18
Amended and Restated Stock Incentive PlanRestricted StockGeneral Terms of
Awards. The following table presents reconciliation between the number of
shares, net of treasury, presented in the consolidated statement of changes in
equity and the number of shares, net of treasury, excluding non-vested equity
shares that have not vested during the years ended June 30, 2016, 2015 and 2014:
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares, net of
treasury:
|
|
|
|
|
|
|
|
|
|
|
Statement of
changes in equity common stock
|
|
55,271,954
|
|
|
46,679,565
|
|
|
47,819,299
|
|
|
Less: Non-vested
equity shares that have not vested as of end of year (Note 18)
|
|
589,447
|
|
|
341,529
|
|
|
385,778
|
|
|
Number
of shares, net of treasury excluding non-vested
equity shares that have
not vested
|
|
54,682,507
|
|
|
46,338,036
|
|
|
47,433,521
|
|
Redeemable
common stock issued pursuant to transaction with the IFC Investors
Holders of redeemable common
stock have all the rights of enjoyed by holders of common stock, however,
holders of redeemable common stock have additional contractual rights. On April
11, 2016, the Company entered into a Subscription Agreement (the Subscription
Agreement) with International Finance Corporation, IFC African, Latin American
and Caribbean Fund, LP, IFC Financial Institutions Growth Fund, LP, and Africa
Capitalization Fund, Ltd. (collectively, the IFC Investors). Under the
Subscription Agreement, the IFC Investors purchased, and the Company sold in the
aggregate, approximately 9.98 million shares of the Companys common stock, par
value $0.001 per share, at a price of $10.79 per share, for gross proceeds to
the Company of approximately $107.7 million. The Company has accounted for these
9.98 million shares as redeemable common stock as a result of the put option
discussed below.
The Company has entered into a
Policy Agreement with the IFC Investors (the Policy Agreement). The material
terms of the Policy Agreement are described below.
Board
Rights
For so long as the IFC Investors
in aggregate beneficially own shares representing at least 5% of the Companys
common stock, the IFC Investors will have the right to nominate one director to
the Companys board of directors. For so long as the IFC Investors in aggregate
beneficially own shares representing at least 2.5% of the Companys common
stock, the IFC Investors will have the right to appoint an observer to the
Companys board of directors at any time when they have not designated, or do
not have the right to designate, a director.
F-35
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2016, 2015 and 2014
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
14.
|
COMMON STOCK (continued)
|
Redeemable
common stock issued pursuant to transaction with the IFC Investors (continued)
Registration
Rights
The Company has agreed to grant certain registration rights to the IFC Investors for the resale of their shares of the Company’s common stock, including filing a resale shelf registration statement and taking certain actions to facilitate resales thereunder.
Put
Option
Each Investor will have the
right, upon the occurrence of specified triggering events, to require the
Company to repurchase all of the shares of its common stock purchased by the IFC
Investors pursuant to the Subscription Agreement (or upon exercise of their
preemptive rights discussed below). Events triggering this put right relate to
(1) the Company being the subject of a governmental complaint alleging, a court
judgment finding or an indictment alleging that the Company (a) engaged in
specified corrupt, fraudulent, coercive, collusive or obstructive practices; (b)
entered into transactions with targets of economic sanctions; or (c) failed to
operate its business in compliance with anti-money laundering and anti-terrorism
laws; or (2) the Company rejecting a bona fide offer to acquire all of its
outstanding Common Stock at a time when it has in place or implements a
shareholder rights plan, or adopting a shareholder rights plan triggered by a
beneficial ownership threshold of less than twenty percent. The put price per
share will be the higher of the price per share paid by the IFC Investors
pursuant to the Subscription Agreement (or paid when exercising their preemptive
rights) and the volume weighted average price per share prevailing for the 60
trading days preceding the triggering event, except that with respect a put
right triggered by rejection of a bona fide offer, the put price per share will
be the highest price offered by the offeror. The Company believes that the put
option has no value and, accordingly, has not recognized the put option in its
consolidated financial statements.
Preemptive
Rights
For so long as the IFC Investors
hold in aggregate 5% of the outstanding shares of common stock of the Company,
each Investor will have the right to purchase its pro-rata share of new
issuances of securities by the Company, subject to certain exceptions.
Common stock
repurchases
Executed
under share repurchase authorizations
During November and December
2015, the Company repurchased an aggregate of 749,213 shares of its common stock
for approximately $11.2 million under its share repurchase authorization that
was approved on August 21, 2013. On February 3, 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. During February and June 2016, the Company repurchased
an aggregate of 1,677,491 shares for approximately $15.9 million under its
replenished share repurchase authorization which resulted in a total of
2,426,704 shares repurchased for approximately $27.1 million under its various
share repurchase authorizations.
The share repurchase
authorization will be used at managements discretion, subject to limitations
imposed by SEC Rule 10b-18 and other legal requirements and subject to price and
other internal limitations established by the Board. Repurchases will be funded
from the Companys available cash. Share repurchases may be made through open
market purchases, privately negotiated transactions, or both. There can be no
assurance that the Company will purchase any shares or any particular number of
shares. The authorization may be suspended, terminated or modified at any time
for any reason, including market conditions, the cost of repurchasing shares,
liquidity and other factors that management deems appropriate. The Company did
not repurchase any of its shares during the years ended June 30, 2015 and 2014,
under this authorization.
F-36
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2016, 2015 and 2014
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
14.
|
COMMON STOCK (continued)
|
Common stock
repurchases (continued)
Executed
under share repurchase authorizations (continued)
On June 29, 2016, the Company
adopted a Rule 10b5-1 plan for the purpose of repurchasing approximately $50
million of its common stock. The 10b5 Plan was established in connection with
the $100 million share repurchase program approved on February 3, 2016. A plan
under Rule 10b5-1 allows a company to repurchase its shares at times when it
otherwise might be prevented from doing so under insider trading laws or because
of self-imposed trading blackout periods. A broker selected by the Company has
the authority under the terms and limitations specified in the 10b5-1 Plan to
repurchase shares on the Companys behalf in accordance with the terms thereof.
Other
repurchases
During the year ended June 30,
2015, the Company entered into a Subscription and Sale of Shares Agreement with
Business Venture Investments No 1567 Proprietary Limited (RF) (BVI), one of
the Companys BEE partners, in preparation for any new potential SASSA tender.
Pursuant to the agreement: (i) the Company repurchased BVIs remaining 1,837,432
shares of the Companys common stock for approximately ZAR 97.4 million in cash
($9.2 million translated at exchange rates prevailing as of August 27, 2014) and
(ii) BVI subscribed for new ordinary shares of Cash Paymaster Services (Pty) Ltd
(CPS) representing approximately 12.5% of CPS ordinary shares outstanding
after the subscription for ZAR 15.0 million in cash (approximately $1.4 million
translated at exchange rates prevailing as of August 27, 2014). In connection
with transactions described above, the CPS shareholder agreement that was
negotiated as part of the original December 2013 Relationship Agreement became
effective. In addition, during the year ended June 30, 2014, the Company
repurchased 2,428,122 shares for approximately $24.9 million as described below
under December 2013 Black Economic Empowerment transactionsSalient terms of
the BEE Relationship Agreements.
December
2013 Black Economic Empowerment transactions
On December 10, 2013, the Company
entered into definitive agreements relating to two Black Economic Empowerment
(BEE) transactions. On April 16, 2014, the Company implemented these
transactions and issued 4,400,000 shares of its common stock to its BEE partners
after all the agreed conditions had been satisfied. On June 6, 2014, the Company
repurchased approximately 2.4 million of these shares of common stock and the
BEE partners used the proceeds from the repurchase to settle their obligations
due to the South African subsidiary of the Company, as described below.
Furthermore, as discussed above under Common stock repurchasesOther
repurchases, the Company acquired BVIs remaining 1,837,432 shares of Company
common stock pursuant to a transaction concluded during the year ended June 30,
2015.
Salient
terms of the BEE Relationship Agreements
Pursuant to Relationship
Agreements between the Company and its BEE partners, the Company sold an
aggregate of 4,400,000 shares of its common stock (BEE shares), which are
contractually restricted as to resale as described below, for a purchase price
of ZAR 60.00 per share. This price represented 75% of the closing price of the
Companys common stock on the JSE on December 6, 2013, the date the Company
completed final negotiation of the terms of these BEE transactions. In South
Africa, it is customary for BEE equity investment transactions in companies,
including publicly-traded companies, to be priced at a substantial discount to
the fair value or current trading price of the subject companys shares. The 25%
discount was negotiated between the parties on an arms length basis and took
into account a number of factors reflecting the lack of liquidity of the BEE
shares due to the contractual provisions described below.
The Relationship Agreements
provided for the entire purchase price for the BEE shares to be financed through
a five-year loan to be extended to each of the BEE partners by a South African
subsidiary of the Company. The obligations of the BEE partners under the loans
were several, and not joint. Each of the BEE partners granted the lender a
security interest in all the BEE shares purchased by such BEE partner to secure
the repayment of its loan. The principal amount of the loans made by the
subsidiary was contributed by Net1 to the equity capital of the subsidiary. As a
result of the making of the loans, the net cash position of the Company after
the sale of the BEE shares remained unchanged.
F-37
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2016, 2015 and 2014
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
14.
|
COMMON STOCK (continued)
|
December 2013
Black Economic Empowerment transactions (continued)
Salient
terms of the BEE Relationship Agreements (continued)
The loans bore interest at a rate
equal to the Johannesburg Interbank Rate plus 300 basis points. Interest on the
loans was payable semi-annually in arrears on January 1 and July 1 of each year.
10% of the outstanding principal amount of the loans was payable on each of the
first and second anniversaries of the date of issuance of the BEE shares, 15% of
the outstanding principal amount of the loans was payable on each of the third
and fourth anniversaries of the date of issuance of the BEE shares and the
remaining outstanding principal amount of the loans was payable on the fifth
anniversary of the date of issuance of the BEE shares. Further, the entire
outstanding principal amount of the loans was payable if the price of the
Companys common stock on the JSE equals or exceeds ZAR 120.00 per share at any
time during term of the loans. The loans to the BEE partners did not provide
that they were recourse only to the BEE shares. Nevertheless, the Company
expected that the sole source of repayment of the loans will be proceeds from
the sale of its shares by the BEE partners from time to time, in open market or
in privately negotiated transactions.
Upon the occurrence of certain
trigger events with respect to a BEE partner, the BEE shares held by that BEE
partner may be repurchased by the Company or one of its designees. These trigger
events include the following:
|
|
failure by the BEE partner to pay any amount
due on its loan (including interest) to the lender (in this case, the
Companymay repurchase only that number of shares which would
raise sufficient funds to settle any amount due and unpaid);
|
|
|
any other breach by the BEE partner (or in certain
circumstances its shareholders) of any provision of the Relationship
Agreement, including without limitation, its failure to maintain its BEE
status;
|
|
|
the Companys common stock trades at or below ZAR 60.00
on the JSE or at or below the equivalent trading price on Nasdaq;
|
|
|
the occurrence of certain insolvency events or
liquidation proceedings affecting the BEE partner; or
|
|
|
the BEE partner fails to satisfy any judgment or
arbitration award granted or made against it within 7 days.
|
If the trigger event involved a
failure by a BEE partner to pay any amount due on its loan, then the repurchase
price is the volume-weighted average price of the Companys common stock on the
Nasdaq for the period of 30 trading days prior to the trigger event (30-day
VWAP). In the case of other trigger events, the repurchase price is the lower
of the 30-day VWAP or ZAR 60.00 per share.
The Companys share price
exceeded ZAR 120.00 on June 4, 2014 and all outstanding amounts then became due
and payable. The BEE partners were unable to pay all outstanding amounts due on
June 5, 2014, and accordingly a trigger event occurred. The Company purchased a
total of 2,428,122 shares of its common stock, at the determined VWAP of
ZAR109.98, from the BEE partners. The BEE partners used the proceeds from the
sale of these shares in order to settle all outstanding amounts due to the South
African subsidiary of the Company.
The BEE shares are contractually
restricted as to resale for a period of five years from the date of issuance,
with the exception of periodic sales which would have been made to fund the
repayment of principal and interest on the loans if they had not been repaid in
full in June 2014. In addition, the Company may call the BEE shares then owned
by the BEE partners, either in exchange for a minority interest in CPS or for a
cash payment equal to the 30-day VWAP. Further, after the fifth anniversary of
the date of issuance of the BEE shares, the Company will have a right of first
refusal on the shares owned by the BEE partners.
Acquisition of
non-controlling interests
During the year ended June 30,
2016, the Company acquired all of the issued share capital of Masterpayment and
Smart Life that it did not previously own for approximately $11.2 million and
$0.001 million, respectively, in cash. During the year ended June 30, 2014, the
Company acquired all of the issued share capital of KSNET, Inc. that it did not
previously own for approximately $2.0 million in cash. These transactions were
accounted for as an equity transaction with a non-controlling interest and
accordingly, no gain or loss was recognized in the Companys consolidated
statement of operations. The carrying amount of the respective non-controlling
interest was adjusted to reflect the change in ownership interest in each of
Masterpayment, Smart Life and KSNET. During the years ended June 30, 2016 and
2014, the difference between the fair value of the consideration paid and the
amount by which the non-controlling interest was adjusted, of $1.3 million and
$1.5 million, respectively, was recognized in total Net1 equity.
F-38
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2016, 2015 and 2014
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
15.
|
ACCUMULATED OTHER COMPREHENSIVE (LOSS)
INCOME
|
The table below presents the
change in accumulated other comprehensive (loss) income per component during
years ended June 30, 2016, 2015 and 2014:
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
unrealized
|
|
|
|
|
|
|
|
Accumulated
|
|
|
income (loss)
|
|
|
|
|
|
|
|
Foreign
|
|
|
on asset
|
|
|
|
|
|
|
|
currency
|
|
|
available for
|
|
|
|
|
|
|
|
translation
|
|
|
sale, net of
|
|
|
|
|
|
|
|
reserve
|
|
|
tax
|
|
|
Total
|
|
|
|
|
000
|
|
|
000
|
|
|
000
|
|
|
Balance as of July 1, 2013
|
$
|
(101,188
|
)
|
$
|
330
|
|
$
|
(100,858
|
)
|
|
Movement in foreign currency
translation reserve
|
|
13,552
|
|
|
-
|
|
|
13,552
|
|
|
Release of foreign
currency translation reserve related to sale/ liquidation of businesses
|
|
4,277
|
|
|
-
|
|
|
4,277
|
|
|
Unrealized gain on asset available for
sale, net of tax of $112
|
|
-
|
|
|
288
|
|
|
288
|
|
|
Balance as of June 30, 2014
|
|
(83,359
|
)
|
|
618
|
|
|
(82,741
|
)
|
|
Movement in foreign currency
translation reserve
|
|
(56,862
|
)
|
|
-
|
|
|
(56,862
|
)
|
|
Unrealized gain on
asset available for sale, net of tax of $97
|
|
-
|
|
|
422
|
|
|
422
|
|
|
Balance as of June 30, 2015
|
|
(140,221
|
)
|
|
1,040
|
|
|
(139,181
|
)
|
|
Movement in foreign
currency translation reserve
|
|
(49,479
|
)
|
|
-
|
|
|
(49,479
|
)
|
|
Unrealized gain on asset available for
sale, net of tax of $159
|
|
-
|
|
|
692
|
|
|
692
|
|
|
Release of gain on
asset available for sale, net of taxes of $444
|
|
-
|
|
|
(1,732
|
)
|
|
(1,732
|
)
|
|
Balance as of June 30, 2016
|
$
|
(189,700
|
)
|
$
|
-
|
|
$
|
(189,700
|
)
|
The Company released a gain of
approximately $2.2 million from its accumulated net unrealized income (loss) on
asset available for sale, net of tax, to selling, general and administration
expense and related taxes of $0.4 million to income tax expense on its
consolidated statement of operations during the year ended June 30, 2016, as a
result of change in accounting for Finbond to the equity method (see also Note
7). There were no other reclassifications from accumulated other comprehensive
loss to comprehensive (loss) income during the year ended June 30, 2016. There
were no reclassifications from accumulated other comprehensive loss to
comprehensive (loss) income during the year ended June 30, 2015. The Company
released a net loss of $4.3 million from its foreign currency translation
reserve to selling, general and administration expense on its consolidated
statement of operations during the year ended June 30, 2014, as a result of the
sale and liquidation of certain subsidiaries (see also Note 19). There were no
other reclassifications from accumulated other comprehensive loss to
comprehensive (loss) income during the year ended June 30, 2014.
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services rendered
comprising mainly fees and commissions
|
$
|
514,847
|
|
$
|
536,046
|
|
$
|
518,297
|
|
|
Loan-based fees received
|
|
47,117
|
|
|
62,235
|
|
|
33,560
|
|
|
Sale of goods comprising
mainly hardware and software sales
|
|
28,785
|
|
|
27,698
|
|
|
29,799
|
|
|
|
$
|
590,749
|
|
$
|
625,979
|
|
$
|
581,656
|
|
Services rendered comprising
mainly fees and commissions for the year ended June 30, 2014, includes a
once-off receipt of $26.6 million related to the recovery of additional
implementation costs incurred during the beneficiary re-registration process
during the years ended June 30, 2013 and 2012. During the years ended June 30,
2016, 2015 and 2014, the Company did not recognize any revenue using the
percentage of completion method.
F-39
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2016, 2015 and 2014
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
17.
|
EQUITY INSTRUMENTS ISSUED PURSUANT TO BEE
TRANSACTIONS
|
2014 transactions
On April 16, 2014, the Company
issued 4,400,000 shares of its common stock pursuant to the BEE transactions
discussed in Note 14. The charge related to the equity instruments issued
pursuant to the BEE transactions was determined to be approximately $11.3
million and was expensed in full during the year ended June 30, 2014, because
the BEE partners owned the shares on the issue date. This was a book entry and
no cash was actually paid. The charge recorded was determined as the difference
between the fair value of the loans provided to the BEE partners and the fair
value of the equity instruments granted to the BEE partners.
The fair value of the loans
provided to the BEE partners was determined to be their face value. The fair
value of the equity instruments was calculated utilizing an adjusted Monte Carlo
simulation discounted cash flow model which was developed for the purpose of the
valuation of these BEE transactions. Cash flows were calculated for each
simulated share price path, taking into account the bespoke features of the BEE
transactions, as well as the expected interest and capital repayments (funded
through the expected sales of BEE shares). The adjustment to the Monte Carlo
simulation model incorporates a jump diffusion process to the standard
Geometric Brownian Motion simulation, in order to capture the discontinuous
share price jumps observed in the Companys share price movements on stock
exchanges on which it is listed. Therefore, the simulated share price paths
capture the idiosyncrasies of the observed Company share price movements. For
each simulation, the resulting expected cash flows were discounted to the
valuation date.
The Company used an expected
volatility of 21.04%, an expected life of five years, a risk free rate of 7.90%
and no future dividends in its calculation of the fair value of the equity
instrument. The estimated expected volatility was calculated based on the
Companys 30 day VWAP share price using the exponentially weighted moving
average of returns.
18.
|
STOCK-BASED COMPENSATION
|
Amended and Restated
Stock Incentive Plan
The Companys Amended and
Restated 2015 Stock Incentive Plan (the Plan) was most recently amended and
restated on November 11, 2015, after approval by shareholders. No evergreen
provisions are included in the Plan. This means that the maximum number of
shares issuable under the Plan is fixed and cannot be increased without
shareholder approval, the plan expires by its terms upon a specified date, and
no new stock options are awarded automatically upon exercise of an outstanding
stock option. Shareholder approval is required for the repricing of awards or
the implementation of any award exchange program.
The Plan permits Net1 to grant to
its employees, directors and consultants incentive stock options, nonqualified
stock options, stock appreciation rights, restricted stock, performance-based
awards and other awards based on its common stock. The Remuneration Committee of
the Companys Board of Directors (Remuneration Committee) administers the
Plan.
The total number of shares of
common stock issuable under the Plan is 11,052,580. The maximum number of shares
for which awards, other than performance-based awards, may be granted in any
combination during a calendar year to any participant is 569,120. The maximum
limits on performance-based awards that any participant may be granted during a
calendar year are 569,120 shares subject to stock option awards and $20 million
with respect to awards other than stock options. Shares that are subject to
awards which terminate or lapse without the payment of consideration may be
granted again under the Plan. Shares delivered to the Company as part or full
payment for the exercise of an option or to satisfy withholding obligations upon
the exercise of an option may be granted again under the Plan in the
Remuneration Committees discretion. No awards may be granted under the Plan
after August 19, 2025, but awards granted on or before such date may extend to
later dates.
F-40
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2016, 2015 and 2014
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
18.
|
STOCK-BASED COMPENSATION
(continued)
|
Options
General
Terms of Awards
Option awards are generally
granted with an exercise price equal to the market price of the Company's stock
at the date of grant, with vesting conditioned upon the recipients continuous
service through the applicable vesting date and expire 10 years after the date
of grant. The options generally become exercisable in accordance with a vesting
schedule ratably over a period of three years from the date of grant. The
Company issues new shares to satisfy stock option award exercises but may also
use treasury shares.
Valuation
Assumptions
No stock options were awarded
during the year ended June 30, 2016. The fair value of each option is estimated
on the date of grant using the Cox Ross Rubinstein binomial model that uses the
assumptions noted in the following table. The estimated expected volatility is
calculated based on the Companys 250 day volatility. The estimated expected
life of the option was determined based historical behavior of employees who
were granted options with similar terms. The Company has estimated no
forfeitures for options awarded in 2015 and 2014. The table below presents the
range of assumptions used to value options granted during the years ended June
30, 2015 and 2014:
|
|
|
2015
|
|
|
2014
|
|
|
Expected volatility
|
|
60%
|
|
|
50%
|
|
|
Expected dividends
|
|
0%
|
|
|
0%
|
|
|
Expected life (in years)
|
|
3
|
|
|
3
|
|
|
Risk-free rate
|
|
1.0%
|
|
|
0.9%
|
|
Restricted Stock
General
Terms of Awards
Shares of restricted stock are
considered to be participating non-vested equity shares (specifically
contingently returnable shares) for the purposes of calculating earnings per
share (refer to Note 21) because, as discussed in more detail below, the
recipient is obligated to transfer any unvested restricted stock back to the
Company for no consideration and these shares of restricted stock are eligible
to receive non-forfeitable dividend equivalents at the same rate as common
stock. Restricted stock generally vests ratably over a three year period, with
vesting conditioned upon the recipients continuous service through the
applicable vesting date and under certain circumstances, the achievement of
certain performance targets, as described below.
Restricted stock awarded to
non-employee directors and employees of the Company vests ratably over a
three-year period. Recipients are entitled to all rights of a shareholder of the
Company except as otherwise provided in the restricted stock agreements.
General
Terms of Awards (continued)
These rights include the right to
vote and receive dividends and/or other distributions. However, the restricted
stock agreements generally prohibit transfer of any nonvested and forfeitable
restricted stock. If a recipient ceases to be a member of the Board of Directors
or an employee for any reason, all shares of his restricted stock that are not
then vested and nonforfeitable will be immediately forfeited and transferred to
the Company for no consideration.
The Company issues new shares to satisfy restricted stock
awards.
Valuation
Assumptions
The fair value of restricted
stock is based on the closing price of the Companys stock quoted on The Nasdaq
Global Select Market on the date of grant.
F-41
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2016, 2015 and 2014
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
18.
|
STOCK-BASED COMPENSATION
(continued)
|
Amended and Restated
Stock Incentive Plan (continued)
Restricted
Stock (continued)
Market
Conditions - Restricted Stock Granted in August and November 2014
In August and November 2014,
respectively, the Remuneration Committee approved an award of 127,626 and 71,530
shares of restricted stock to employees. These shares of restricted stock will
vest in full only on the date, if any, the following conditions are satisfied:
(1) the closing price of the Companys common stock equals or exceeds $19.41
(subject to appropriate adjustment for any stock split or stock dividend) for a
period of 30 consecutive trading days during a measurement period commencing on
the date that the Company files its Annual Report on Form 10-K for the fiscal
year ended 2017 and ending on December 31, 2017 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 $19.41 price target
represents a 20% increase, compounded annually, in the price of the Companys
common stock on Nasdaq over the $11.23 closing price on August 27, 2014.
The 127,626 and 71,530 shares of
restricted stock are effectively forward starting knock-in barrier options with
a strike price of zero. The fair value of these shares of restricted stock was
calculated utilizing an adjusted Monte Carlo simulation discounted cash flow
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. The
adjustment to the Monte Carlo simulation model incorporates a jump diffusion
process to the standard Geometric Brownian Motion simulation, in order to
capture the discontinuous share price jumps observed in the Companys share
price movements on stock exchanges on which it is listed. 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 76.01%, an expected life of approximately
three years, a risk-free rate of 1.27% and no future dividends in its
calculation of the fair value of the 127,626 shares of restricted stock. The
Company used an expected volatility of 63.73%, an expected life of approximately
three years, a risk-free rate of 1.21% and no future dividends in its
calculation of the fair value of the 71,530 shares of restricted stock.
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 2015
In August 2015, the Remuneration
Committee approved an award of 301,537 shares of restricted stock to employees.
The shares of restricted stock awarded to employees in August 2015 are subject
to time-based and performance-based vesting conditions. In order for any of the
shares to vest, the recipient must remain employed by the Company on a full-time
basis on the date that it files its Annual Report on Form 10-K for the fiscal
year ended June 30, 2018. If that condition is satisfied, then the shares will
vest based on the level of Fundamental EPS the Company achieves for the fiscal
year ended June 30, 2018 (2018 Fundamental EPS), as follows:
|
|
One-third of the shares will vest if the
Company achieves 2018 Fundamental EPS of $2.88;
|
|
|
Two-thirds of the shares will vest if the
Company achieves 2018 Fundamental EPS of $3.30; and
|
|
|
All of the shares will vest if the Company
achieves 2018 Fundamental EPS of $3.76.
|
At levels of 2018 Fundamental EPS
greater than $2.88 and less than $3.76, the number of shares that will vest will
be determined by linear interpolation relative to 2018 Fundamental EPS of $3.30.
Any shares that do not vest in accordance with the above-described conditions
will be forfeited. All shares of restricted stock have been valued utilizing the
closing price of shares of the Companys common stock quoted on The Nasdaq
Global Select Market on the date of grant.
F-42
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2016, 2015 and 2014
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
18.
|
STOCK-BASED COMPENSATION
(continued)
|
Amended and Restated
Stock Incentive Plan (continued)
Stock
Appreciation Rights
The Remuneration Committee also
may grant stock appreciation rights, either singly or in tandem with underlying
stock options. Stock appreciation rights entitle the holder upon exercise to
receive an amount in any combination of cash or shares of common stock (as
determined by the Remuneration Committee) equal in value to the excess of the
fair market value of the shares covered by the right over the grant price. No
stock appreciation rights have been granted.
Stock
option and restricted stock activity
Options
The following table summarizes
stock option activity for the years ended June 30, 2016, 2015 and 2014:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
Average
|
|
|
|
|
|
|
|
average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
Grant
|
|
|
|
|
Number of
|
|
|
exercise
|
|
|
Term
|
|
|
Value
|
|
|
Date Fair
|
|
|
|
|
shares
|
|
|
price ($)
|
|
|
(in years)
|
|
|
($000)
|
|
|
Value ($)
|
|
|
Outstanding
July 1, 2013
|
|
2,648,583
|
|
|
15.15
|
|
|
5.98
|
|
|
313
|
|
|
|
|
|
Granted under Plan: August 2013
|
|
224,896
|
|
|
7.35
|
|
|
10.00
|
|
|
568
|
|
|
2.53
|
|
|
Exercised
|
|
(26,667
|
)
|
|
7.00
|
|
|
|
|
|
91
|
|
|
|
|
|
Forfeited
|
|
(136,420
|
)
|
|
23.51
|
|
|
|
|
|
-
|
|
|
|
|
|
Outstanding
June 30, 2014
|
|
2,710,392
|
|
|
14.16
|
|
|
5.38
|
|
|
3,909
|
|
|
|
|
|
Granted under Plan: August 2014
|
|
464,410
|
|
|
11.23
|
|
|
10.00
|
|
|
2,113
|
|
|
4.55
|
|
|
Exercised
|
|
(773,633
|
)
|
|
8.35
|
|
|
|
|
|
3,845
|
|
|
|
|
|
Outstanding June 30, 2015
|
|
2,401,169
|
|
|
15.34
|
|
|
4.74
|
|
|
11,516
|
|
|
|
|
|
Exercised
|
|
(323,645
|
)
|
|
11.62
|
|
|
|
|
|
2,669
|
|
|
|
|
|
Outstanding June 30, 2016
|
|
2,077,524
|
|
|
15.92
|
|
|
3.65
|
|
|
926
|
|
|
|
|
The following table presents
stock options vesting and expecting to vest as of June 30, 2016:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
|
exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
|
Number of
|
|
|
price
|
|
|
Term
|
|
|
Value
|
|
|
|
|
shares
|
|
|
($)
|
|
|
(in years)
|
|
|
($000)
|
|
|
Vested and expecting to vest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
2,077,524
|
|
|
15.92
|
|
|
3.65
|
|
|
926
|
|
These options have an exercise
price range of $7.35 to $24.46.
F-43
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2016, 2015 and 2014
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
18.
|
STOCK-BASED COMPENSATION
(continued)
|
Stock option and
restricted stock activity (continued)
Options
(continued)
The following table presents
stock options that are exercisable as of June 30, 2016:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
|
average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
|
Number of
|
|
|
exercise
|
|
|
Term
|
|
|
Value
|
|
|
|
|
shares
|
|
|
price ($)
|
|
|
(in years)
|
|
|
($000)
|
|
|
Exercisable June 30, 2016
|
|
1,692,952
|
|
|
17.17
|
|
|
2.66
|
|
|
728
|
|
During the years ended June 30,
2016, 2015 and 2014, approximately 373,435, 330,967, and 462,333 stock options
became exercisable, respectively. During the year ended June 30, 2016, the
Company received approximately $3.8 million from the exercise of 323,645 stock
options. During the year ended June 30, 2015, the Company received approximately
$2.0 million from 201,395 stock options exercised. The remaining 572,238 stock
options were exercised through recipients delivering 336,584 shares of the
Companys common stock to the Company on September 9, 2014, to settle the
exercise price due. During the year ended June 30, 2014, the Company received
$0.2 million from 26,667 stock options exercised by employees. During the year
ended June 30, 2014, employees forfeited 136,420 stock options. There were no
forfeitures during the years ended June 30, 2016 and 2015, respectively. The
Company issues new shares to satisfy stock option exercises.
Restricted stock
The following table summarizes
restricted stock activity for the years ended June 30, 2016, 2015 and 2014:
|
|
|
Number of
|
|
|
Weighted
|
|
|
|
|
Shares of
|
|
|
Average Grant
|
|
|
|
|
Restricted
|
|
|
Date Fair Value
|
|
|
|
|
Stock
|
|
|
($000)
|
|
|
Non-vested July 1, 2013
|
|
405,226
|
|
|
4,393
|
|
|
Granted August 2013
|
|
187,963
|
|
|
1,382
|
|
|
Vested August 2013
|
|
(16,907)
|
|
|
161
|
|
|
Vested February
2014
|
|
(183,333)
|
|
|
1,742
|
|
|
Total vested
|
|
(200,240)
|
|
|
|
|
|
Forfeitures
|
|
(7,171)
|
|
|
84
|
|
|
Non-vested June 30, 2014
|
|
385,778
|
|
|
3,534
|
|
|
Granted August
2014
|
|
141,707
|
|
|
581
|
|
|
Granted November 2014
|
|
71,530
|
|
|
229
|
|
|
Total granted
|
|
213,237
|
|
|
|
|
|
Vested August 2014
|
|
(74,152)
|
|
|
828
|
|
|
Vested February
2015
|
|
(183,334)
|
|
|
2,400
|
|
|
Total vested
|
|
(257,486)
|
|
|
|
|
|
Non-vested June 30, 2015
|
|
341,529
|
|
|
1,759
|
|
|
Granted August
2015
|
|
319,492
|
|
|
6,406
|
|
|
Vested August 2015
|
|
(71,574)
|
|
|
1,435
|
|
|
Non-vested June 30, 2016
|
|
589,447
|
|
|
7,622
|
|
The fair value of restricted
stock vested during the years ended June 30, 2016, 2015 and 2014, was $1.4
million, $3.2 million and $1.9 million, respectively. A non-employee director
resigning during the year ended June 30, 2014, forfeited 7,171 shares of
restricted stock that had not vested. Forfeited shares of restricted stock are
returned to the Company and, in accordance with the Plan, are available for
future issuances by the Remuneration Committee.
F-44
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2016, 2015 and 2014
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
18.
|
STOCK-BASED COMPENSATION
(continued)
|
Stock-based compensation charge and unrecognized
compensation cost
The Company has recorded a net
stock compensation charge of $3.6 million, $3.2 million and $3.7 million for the
years ended June 30, 2016, 2015 and 2014, respectively, which comprised:
|
|
|
|
|
|
Allocated to
|
|
|
|
|
|
|
|
|
|
|
cost of goods
|
|
|
|
|
|
|
|
|
|
|
sold, IT
|
|
|
Allocated to
|
|
|
|
|
Total
|
|
|
processing,
|
|
|
selling,
|
|
|
|
|
charge
|
|
|
servicing
|
|
|
general and
|
|
|
|
|
(reversal)
|
|
|
and support
|
|
|
administration
|
|
|
Year ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation charge
|
$
|
3,598
|
|
$
|
-
|
|
$
|
3,598
|
|
|
Total year ended June 30, 2016
|
$
|
3,598
|
|
$
|
-
|
|
$
|
3,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, 2015
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation charge
|
$
|
3,195
|
|
$
|
-
|
|
$
|
3,195
|
|
|
Total year ended June 30, 2015
|
$
|
3,195
|
|
$
|
-
|
|
$
|
3,195
|
|
|
Year ended June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation charge
|
$
|
3,724
|
|
$
|
-
|
|
$
|
3,724
|
|
|
Reversal of stock
compensation charge related to restricted stock forfeited
|
|
(6
|
)
|
|
-
|
|
|
(6
|
)
|
|
Total year ended June 30, 2014
|
$
|
3,718
|
|
$
|
-
|
|
$
|
3,718
|
|
The stock compensation charge and
reversals have been allocated to cost of goods sold, IT processing, servicing
and support and selling, general and administration based on the allocation of
the cash compensation paid to the employees.
As of June 30, 2016, the total
unrecognized compensation cost related to stock options was approximately $0.8
million, which the Company expects to recognize over approximately two years. As
of June 30, 2016, the total unrecognized compensation cost related to restricted
stock awards was approximately $2.4 million, which the Company expects to
recognize over approximately three years.
Tax consequences
The Company has recorded a
deferred tax asset of approximately $1.8 million and $1.4 million, respectively,
for the years ended June 30, 2016 and 2015, related to the stock-based
compensation charge recognized related to employees of Net1 as it is able to
deduct 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.
19.
|
DECONSOLIDATION OF BUSINESSES SOLD OR LIQUIDATED AND
DISPOSAL OF BUSINESS
|
The profit (loss) on
deconsolidation of businesses sold or liquidated and disposal of business during
the years ended June 30, 2016, 2015 and 2014, are summarized in the table below:
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Profit on sale of MediKredit
Integrated Healthcare Solutions Proprietary Limited (MediKredit)
|
$
|
-
|
|
$
|
-
|
|
$
|
4,125
|
|
|
Profit on disposal of assets related to the
business of Net 1 Universal Electronic
|
|
|
|
|
|
|
|
|
|
|
Technological Solutions (Pty)
Ltd (NUETS business)
|
|
-
|
|
|
-
|
|
|
2,081
|
|
|
Loss on liquidation of Net1 UTA
|
|
-
|
|
|
-
|
|
|
(6,261
|
)
|
|
Net profit
(loss) for the year ended June 30,
|
$
|
-
|
|
$
|
-
|
|
$
|
(55
|
)
|
F-45
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2016, 2015 and 2014
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
19.
|
DECONSOLIDATION OF BUSINESSES SOLD OR LIQUIDATED AND
DISPOSAL OF BUSINESS (continued)
|
2014 transactions
Sale
of MediKredit
On June 17, 2014, the Company
sold its MediKredit subsidiary to an unrelated third party. The Company has
recorded a profit of approximately $4.1 million related to the sale in selling,
general and administration expense on its consolidated statement of operations
for the year ended June 30, 2014. The profit has been allocated to
corporate/eliminations. The sales price will be paid in three tranches,
approximately 57% on June 17, 2014, approximately 14% on June 1, 2015, and the
remainder on June 1, 2016. In addition, the parties agreed that MediKredit would
continue to operate at the Companys premises at no cost to the purchaser until
September 30, 2014. Furthermore, the parties agreed that MediKredit provide
certain development, support and maintenance services (collectively Services)
related to technology used in the United States at no cost to the Company up to
an amount of $0.3 million, translated at the foreign exchange rates applicable
as of June 30, 2014. The Company determined that the Services comprise part of
the sales price of MediKredit and have increased the profit on sale accordingly.
In addition, the Company determined that the provision of an operating area
within the Companys premises represents an obligation on it, and has reduced
the profit on sale accordingly. The fair value of the Services and free rental
of premises has been determined using prices that would have been charged
between unrelated third parties. Finally, the Company was required to release a
gain of approximately $2.0 million from its foreign currency transaction reserve
which has been included in the profit on sale. During the year ended June 30,
2014, the Company incurred transaction-related expenditure of $0.01 million
related to the sale of MediKredit.
The purchaser is contingently
obligated to pay the Company additional amounts based on future expansion of the
MediKredit business in certain circumstances. The Company has not recorded any
of these amounts during the year ended June 30, 2015 and 2014, respectively, as
none of the contingent events occurred during these years.
Disposal
of assets related to NUETS business
On June 30, 2014, the Company
sold the NUETS business, which consisted primarily of customer contracts, other
than contracts for UEPS systems in Botswana and Namibia, and equipment for
approximately $2.2 million in cash. The Company received $0.2 million of these
cash proceeds in June 2014, and the remaining $1.9 million was received in July
2014, and was included in accounts receivable, net, as of June 30, 2014. The
Company recorded a profit of approximately $2.1 million on the sale in selling,
general and administration expense on its consolidated statement of operations
for the year ended June 30, 2014. The profit has been allocated to
corporate/eliminations. The shareholders of the purchaser comprise a former
employee of the Company, a U.S.-based economic development equity fund and other
unrelated individuals and private companies. The Company has provided the
purchaser with a non-exclusive, perpetual, worldwide license to use the
Companys UEPS technology. The purchaser may not use this technology in South
Africa to provide payment services and specifically may not use the technology
in any manner to service the Ministry of Social Development in South Africa
and/or SASSA. The parties agreed that the Company provide certain administrative
and technical support services related to the NUETS business until March 2015.
During the year ended June 30, 2014, the Company incurred transaction-related
expenditure of $0.06 million related to the sale of NUETS business.
Liquidation
of Net1 UTA
The Company had substantially
liquidated its Net1 UTA business during the year ended June 30, 2014, due to an
inability to implement and expand its technology into new markets on a
profitable basis. Net1 UTAs operations were streamlined a number of years ago
and the Company did not incur significant cash costs to liquidate Net1 UTA.
However, the Company was required to release approximately $6.3 million from its
foreign currency transaction reserve which has resulted in a loss on liquidation
of Net1 UTA. This non-cash loss on liquidation of Net1 UTA has been recorded in
selling, general and administration expense on its consolidated statement of
operations for the year ended June 30, 2014. The loss has been allocated to
corporate/eliminations.
F-46
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2016, 2015 and 2014
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
Income tax provision
The table below presents the
components of income before income taxes for the years ended June 30, 2016, 2015
and 2014:
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South Africa
|
$
|
119,097
|
|
$
|
137,138
|
|
$
|
121,338
|
|
|
United States
|
|
(5,915
|
)
|
|
(7,286
|
)
|
|
(9,923
|
)
|
|
Other
|
|
13,055
|
|
|
10,566
|
|
|
(2,273
|
)
|
|
Income before income taxes
|
$
|
126,237
|
|
$
|
140,418
|
|
$
|
109,142
|
|
Presented below is the provision
for income taxes by location of the taxing jurisdiction for the years ended June
30, 2016, 2015 and 2014:
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current income tax
|
$
|
88,807
|
|
$
|
48,795
|
|
$
|
61,902
|
|
|
South Africa
|
|
31,815
|
|
|
39,901
|
|
|
41,326
|
|
|
United States
|
|
50,750
|
|
|
3,109
|
|
|
14,838
|
|
|
Other
|
|
6,242
|
|
|
5,785
|
|
|
5,738
|
|
|
Deferred taxation (benefit)
charge
|
|
(161)
|
|
|
(2,292)
|
|
|
(7,887)
|
|
|
South Africa
|
|
3,044
|
|
|
398
|
|
|
(3,345)
|
|
|
United States
|
|
(274)
|
|
|
485
|
|
|
(107)
|
|
|
Other
|
|
(2,931)
|
|
|
(3,175)
|
|
|
(4,435)
|
|
|
Capital gains tax
|
|
-
|
|
|
-
|
|
|
202
|
|
|
Foreign tax credits generated United States
|
|
(46,566)
|
|
|
(2,367)
|
|
|
(14,838)
|
|
|
Income tax
provision
|
$
|
42,080
|
|
$
|
44,136
|
|
$
|
39,379
|
|
There were no significant capital
gains taxes paid during the years ended June 30, 2016, 2015 and 2014.
There were no changes to the
enacted tax rate in the years ended June 30, 2016, 2015 and 2014.
The movement in the valuation
allowance for the year ended June 30, 2016, relates primarily to an increase in
the valuation allowance resulting from the generation of unused foreign tax
credits during the year. The movement in the valuation allowance for the year
ended June 30, 2015, relates primarily to the release of the valuation allowance
resulting from the utilization of foreign tax credits during the year. The
movement in the valuation allowance for the year ended June 30, 2014, relates to
releases of the valuation allowance resulting from the utilization of foreign
tax credits during the year and deconsolidation of net operating loss
carryforwards for MediKredit.
Net1 included actual and deemed
dividends received from one of its South African subsidiaries in its years ended
June 30, 2016, 2015 and 2014, taxation computation. Net1 applied net operating
losses against this income. Net1 generated foreign tax credits as a result of
the inclusion of the dividends in its taxable income. Net1 has applied certain
of these foreign tax credits against its current income tax provision for the
year ended June 30, 2016, 2015 and 2014.
F-47
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2016, 2015 and 2014
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
20.
|
INCOME TAXES (continued)
|
A reconciliation of income taxes,
calculated at the fully-distributed South African income tax rate to the
Companys effective tax rate, for the years ended June 30, 2016, 2015 and 2014,
is as follows:
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Income tax rate
reconciliation:
|
|
|
|
|
|
|
|
|
|
|
Income taxes at fully-distributed South
African tax rates
|
|
28.00%
|
|
|
28.00%
|
|
|
28.00%
|
|
|
Non-deductible
items
|
|
0.38%
|
|
|
2.36%
|
|
|
4.71%
|
|
|
Foreign tax rate differential
|
|
7.42%
|
|
|
0.06%
|
|
|
1.89%
|
|
|
Foreign tax
credits
|
|
(36.88%
|
)
|
|
(1.68%
|
)
|
|
(13.59%
|
)
|
|
Taxation on deemed dividends in
the United States
|
|
34.60%
|
|
|
3.46%
|
|
|
13.46%
|
|
|
Capital gains
tax paid
|
|
0.00%
|
|
|
0.00%
|
|
|
0.19%
|
|
|
Movement in valuation allowance
|
|
(0.09%
|
)
|
|
(0.08%
|
)
|
|
1.23%
|
|
|
Prior year
adjustments
|
|
(0.09%
|
)
|
|
(0.69%
|
)
|
|
0.19%
|
|
|
Income tax
provision
|
|
33.34%
|
|
|
31.43%
|
|
|
36.08%
|
|
Net1 received substantial
dividends from one of its South African subsidiaries during the year ended June
30, 2016, which resulted in an increase in the amount of foreign tax credits
generated and an increase in taxation on dividends received. A portion of these
foreign tax credits generated were not used during the year and a valuation
allowance has been created for unused foreign tax credits. The non-deductible
items during the year ended June 30, 2015, include primarily legal and
consulting fees incurred that are not deductible for tax purposes. The
non-deductible items during the year ended June 30, 2014, relates principally to
expenses that are not deductible for tax purposes, including the charge related
to the equity awards issued pursuant to the Companys BEE transactions,
stock-based compensation charges, costs incurred to support foreign related
entities and interest expense. The foreign tax rate differential represents the
difference between statutory tax rates in South Africa and foreign
jurisdictions, primarily the United States.
Deferred tax assets and
liabilities
Deferred income taxes reflect the
temporary differences between the financial reporting and tax bases of assets
and liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. The primary components of the temporary
differences that gave rise to the Companys deferred tax assets and liabilities
as of June 30, and their classification, were as follows:
|
|
|
2016
|
|
|
2015
|
|
|
Total deferred tax
assets
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
$
|
1,982
|
|
$
|
1,216
|
|
|
Provisions and
accruals
|
|
4,245
|
|
|
5,653
|
|
|
FTS patent
|
|
496
|
|
|
691
|
|
|
Intangible
assets
|
|
733
|
|
|
616
|
|
|
Foreign tax credits
|
|
36,750
|
|
|
20,212
|
|
|
Other
|
|
7,448
|
|
|
7,330
|
|
|
Total deferred
tax assets before valuation allowance
|
|
51,654
|
|
|
35,718
|
|
|
Valuation allowances
|
|
(38,834
|
)
|
|
(22,550
|
)
|
|
Total deferred tax assets, net of valuation allowance
|
|
12,820
|
|
|
13,168
|
|
|
Total deferred tax
liabilities:
|
|
|
|
|
|
|
|
Intangible assets
|
|
11,799
|
|
|
11,510
|
|
|
Other
|
|
6,624
|
|
|
4,924
|
|
|
Total deferred
tax liabilities
|
|
18,423
|
|
|
16,434
|
|
|
Reported as
|
|
|
|
|
|
|
|
Current deferred tax assets
|
|
6,956
|
|
|
7,298
|
|
|
Long term
deferred tax liabilities
|
|
12,559
|
|
|
10,564
|
|
|
Net deferred
income tax liabilities
|
$
|
5,603
|
|
$
|
3,266
|
|
F-48
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2016, 2015 and 2014
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
20.
|
INCOME TAXES (continued)
|
Deferred tax assets and
liabilities (continued)
Increase
in total deferred tax liabilities
Intangible
assets
Deferred tax liabilities
intangible assets have moderately increased during the year ended June 30, 2016,
primarily as a result of the purchase of intangible assets identified in the
Transact24 and Masterpayment acquisitions, partially offset by the amortization
of the KSNET intangible assets during the year.
Foreign
tax credits and valuation allowances
The increase in foreign tax
credits as of June 30, 2016, resulted from the generation of foreign tax credits
associated with the dividends received by Net1 during the year ended June 30,
2016. A portion of these foreign tax credits generated were not fully utilized
during the year ended June 30, 2016. Accordingly, a valuation allowance has been
created for all of these unused foreign tax credits.
Increase
in valuation allowance
At June 30, 2016, the Company had
deferred tax assets of $12.8 million (2015: $13.2 million), net of the valuation
allowance. Management believes, based on the weight of available positive and
negative evidence it is more likely than not that the Company will realize the
benefits of these deductible differences, net of the valuation allowance.
However, the amount of the deferred tax asset considered realizable could be
adjusted in the future if estimates of taxable income are revised.
At June 30, 2016, the Company had
a valuation allowance of $38.9 million (2015: $22.6 million) to reduce its
deferred tax assets to estimated realizable value. The movement in the valuation
allowance for the years ended June 30, 2016 and 2015, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
Tax
|
|
|
operating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
tax
|
|
|
deductible
|
|
|
loss carry-
|
|
|
FTS
|
|
|
|
|
|
|
|
Total
|
|
|
credits
|
|
|
goodwill
|
|
|
forwards
|
|
|
patent
|
|
|
Other
|
|
|
July 1, 2014
|
$
|
25,153
|
|
$
|
23,337
|
|
$
|
-
|
|
$
|
1,244
|
|
$
|
369
|
|
$
|
203
|
|
|
Reversed to statement of operations
|
|
(3,126
|
)
|
|
(3,126
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Charged to statement of
operations
|
|
794
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
794
|
|
|
Utilized
|
|
(128
|
)
|
|
-
|
|
|
-
|
|
|
(128
|
)
|
|
-
|
|
|
-
|
|
|
Foreign currency adjustment
|
|
(143
|
)
|
|
-
|
|
|
-
|
|
|
(28
|
)
|
|
(115
|
)
|
|
-
|
|
|
June 30, 2015
|
|
22,550
|
|
|
20,211
|
|
|
-
|
|
|
1,088
|
|
|
254
|
|
|
997
|
|
|
Charged to statement of
operations
|
|
16,537
|
|
|
16,537
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Utilized
|
|
(128
|
)
|
|
-
|
|
|
-
|
|
|
(128
|
)
|
|
-
|
|
|
-
|
|
|
Foreign currency adjustment
|
|
(125
|
)
|
|
-
|
|
|
-
|
|
|
(29
|
)
|
|
(96
|
)
|
|
-
|
|
|
June 30, 2016
|
$
|
38,834
|
|
$
|
36,748
|
|
$
|
-
|
|
$
|
931
|
|
$
|
158
|
|
$
|
997
|
|
Net operating loss
carryforwards and foreign tax credits
United States
As of June 30, 2016, Net1 had net
operating loss carryforwards that will expire, if unused, as follows:
|
Year of expiration
|
|
U.S. net operating
|
|
|
|
|
loss carry
|
|
|
|
|
forwards
|
|
|
2025
|
$
|
2,608
|
|
F-49
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2016, 2015 and 2014
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
20.
|
INCOME TAXES (continued)
|
Net
operating loss carryforwards and foreign tax credits (continued)
United
States (continued)
During the year ended June 30,
2016 and 2015, Net1 generated additional foreign tax credits related to the cash
dividends received. Net1 had no net unused foreign tax credits that are more
likely than not to be realized as of June 30, 2016 and 2015, respectively. The
unused foreign tax credits generated expire after ten years in 2026, 2024, 2023,
2022, 2021 and 2020.
Uncertain tax positions
As of June 30, 2016 and 2015, the
Company has unrecognized tax benefits of $1.9 million and $2.3 million,
respectively, all of which would impact the Companys effective tax rate. The
Company files income tax returns mainly in South Africa, South Korea, Hong Kong,
Botswana, Germany and in the U.S. federal jurisdiction. As of June 30, 2016, the
Companys South African subsidiaries are no longer subject to income tax
examination by the South African Revenue Service for periods before June 30,
2011. 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. The Company does not expect
the change related to unrecognized tax benefits will have a significant impact
on its results of operations or financial position in the next 12 months.
The following is a reconciliation
of the total amounts of unrecognized tax benefits for the year ended June 30,
2016, 2015 and 2014:
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Unrecognized tax benefits -
opening balance
|
$
|
2,322
|
|
$
|
1,160
|
|
$
|
1,150
|
|
|
Gross decreases - tax positions
in prior periods
|
|
(609
|
)
|
|
-
|
|
|
-
|
|
|
Gross increases
- tax positions in current period
|
|
641
|
|
|
1,311
|
|
|
38
|
|
|
Lapse of statute limitations
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Foreign currency
adjustment
|
|
(424
|
)
|
|
(149
|
)
|
|
(28
|
)
|
|
Unrecognized
tax benefits - closing balance
|
$
|
1,930
|
|
$
|
2,322
|
|
$
|
1,160
|
|
As of June 30, 2016 and 2015, the
Company had accrued interest related to uncertain tax positions of approximately
$0.1 million and $0.3 million, respectively, on its balance sheet.
The Company has issued redeemable
common stock (refer to Note 14) 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 years ended June 30, 2016, 2015 or 2014.
Accordingly the two-class method presented below does not include the impact of
any redemption.
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 years
ended June 30, 2016, 2015 and 2014, 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.
F-50
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2016, 2015 and 2014
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
21.
|
EARNINGS PER SHARE
(continued)
|
Diluted earnings per share has
been calculated to give effect to the number of shares of additional common
stock that would have been outstanding if the potential dilutive instruments had
been issued in each period. Stock options are included in the calculation of
diluted earnings per share utilizing the treasury stock method and are not
considered to be participating securities as the stock options do not contain
non-forfeitable dividend rights. The calculation of diluted earnings per share
includes the dilutive effect of a portion of the restricted stock granted to
employees in October 2010, November 2010, February 2012, August 2014 and
November 2014 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 are discussed in Note 18.
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 for the years ended June 30, 2016, 2015 and 2014:
Options to purchase 1,597,751
shares of the Companys common stock at prices ranging from $11.23 to $24.46 per
share were outstanding during the year ended June 30, 2015, but were not
included in the computation of diluted earnings per share because the options
exercise price were greater than the average market price of the Companys
common shares. The options, which expire at various dates through on August 27,
2024, were still outstanding as of June 30, 2015.
Treasury shares, at cost included
in the Companys 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 consolidated balance sheet as of June 30,
2016.
As discussed in Note 3, on
January 20, 2016, the Company issued 391,645 shares of its common stock with an
aggregate issue date fair value of approximately $4.0 million as part
consideration for the Companys 56% interest in Transact24.
As discussed in Note 18, during
the year ended June 30, 2015, employees exercised stock options through the
delivery 336,584 shares of the Companys common stock at the closing price on
September 9, 2014 or $13.93 under the terms of their option agreements. These
shares are included in the Companys total share count and amount reflected as
treasury shares on the consolidated balance sheet as of June 30, 2015 and
consolidated statement of changes in equity for the year ended June 30, 2015.
The cash flows associated with
the December 2013 BEE transactions and buy back of shares from the BEE partners
as described in Note 14 were all denominated in South African rand and net
settled and there were no actual cash flow transactions between the parties. The
Company would have recorded the following movements in its investing and
financing activities in its consolidated statement of cash flows for the year
ended June 30, 2014, if cash had actually flowed between the parties as
follows:
In addition, the equity
instrument charges discussed in Note 17 and expensed during the year ended June
30, 2014 are book entries and were not paid in cash.
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.
The Company currently has three
reportable segments: South African transaction processing, International
transaction processing and Financial inclusion and applied technologies. The
South African transaction processing and Financial inclusion and applied
technologies segments operate mainly within South Africa and the International
transaction processing segment operates mainly within South Korea, Hong Kong and
the European Union. The Companys reportable segments offer different products
and services and require different resources and marketing strategies and share
the Companys assets.
The South African transaction
processing segment currently consists mainly of a welfare benefit distribution
service provided to the South African government and transaction processing for
retailers, utilities, medical-related claim service customers and banks. Fee
income is earned based on the number of recipient cardholders paid. Utility
providers and banks are charged a fee for transaction processing services
performed on their behalf at retailers. This segment has individually
significant customers that each provides more than 10% of the total revenue of
the Company. For the year ended June 30, 2016, there was one such customer,
providing 21% of total revenue (2015: one such customer, providing 24% of total
revenue; 2014: one such customer, providing 27% of total revenue).
The International transaction
processing segment consists mainly of activities in South Korea from which the
Company generates revenue from the provision of payment processing services to
merchants and card issuers through its VAN. This segment generates fee revenue
from the provision of payment processing services and to a lesser extent from
the sale of goods, primarily point of sale terminals, to customers in South
Korea. Fees generated from payment services processing and other processing
activities by Transact24 and Masterpayment are included in this segment.
Finally, the segment includes start up costs related to ZAZOO in the United
Kingdom and India and generates transaction fee revenue from transaction
processing of UEPS-enabled smartcards in Botswana.
The Financial inclusion and
applied technologies segment derives revenue from the provision of short-term
loans as a principal and the provision of smart card accounts, as a fixed
monthly fee per card is charged for the maintenance of these accounts. This
segment also includes fee income and associated expenses from merchants and card
holders using the Companys merchant acquiring system, the sale of prepaid
products (electricity and airtime) as well as the sale of hardware and software.
Finally, the Company earns premium income from the sale of life insurance
products and investment income through its insurance business.
Corporate/eliminations includes
the Companys head office cost center and the amortization of
acquisition-related intangible assets. The $1.9 million fair value gain
resulting from the acquisition of Transact24 (refer to Note 3) and the $2.2
million gain resulting from the change in accounting for Finbond (refer to Note
15) that were recognized during the year ended June 30, 2016, have been
allocated to corporate/ elimination. The charges related to the BEE equity
instrument issued during the year ended June 30, 2014 (refer to Note 17), and
the profit related to the deconsolidation of subsidiaries and disposal of
business (refer to Note 19), during the year ended June 30, 2014, has been
allocated to corporate/eliminations.
The reconciliation of the
reportable segments revenue to revenue from external customers for the years
ended June 30, 2016, 2015 and 2014, respectively, is as follows:
The Company does not allocate
interest income, interest expense or income tax expense to its reportable
segments. The Company evaluates segment performance based on segment operating
income before acquisition-related intangible asset amortization which represents
operating income before acquisition-related intangible asset amortization and
allocation of expenses allocated to Corporate/Eliminations, all under GAAP. The
reconciliation of the reportable segments measure of profit or loss to income
before income taxes for the years ended June 30, 2016, 2015 and 2014,
respectively, is as follows:
The following tables summarize
segment information which is prepared in accordance with GAAP for the years
ended June 30, 2016, 2015 and 2014:
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.
(1) As described in Note 1, during the year ended June 30,
2016, the Company identified a balance sheet misclassification between current
assets and long-term assets. Long-lived assets for fiscal 2015 and 2014, have
been restated, and have increased by $27.4 million and $23.3 million,
respectively.
Operating lease payments related
to the premises and equipment were $8.0 million, $6.8 million and $7.5 million,
respectively, for the years ended June 2016, 2015 and 2014, respectively.
As of June 30, 2016 and 2015, the
Company had outstanding capital commitments of approximately $0.1 million and
$3.4 million, respectively.
As of June 30, 2016 and 2015, the
Company had purchase obligations totaling $3.1 million and $5.0 million,
respectively. The purchase obligations as of June 30, 2016, primarily include
inventory that will be delivered to the Company and sold to customers in the
next twelve months.
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 127.4 million ($8.6 million, translated at
exchange rates applicable as of June 30, 2016) and thereby utilizing part of the
Companys short-term facility. The Company in turn has provided nonrecourse,
unsecured counter-guarantees to Nedbank for ZAR 127.4 million ($8.6 million,
translated at exchange rates applicable as of June 30, 2016). The Company pays
commission of between 0.4% per annum to 2.0% per annum of the face value of
these guarantees and does not recover any of the commission from third
parties.
The Company has not recognized
any obligation related to these counter-guarantees in its consolidated balance
sheet as of June 30, 2016. The maximum potential amount that the Company could
pay under these guarantees is ZAR 127.4 million ($8.6 million, translated at
exchange rates applicable as of June 30, 2016). The guarantees have reduced the
amount available for borrowings under the Companys short-term credit facility
described in Note 12.
The Company is subject to a
variety of insignificant claims and suits that arise from time to time in the
ordinary course of business.
Management currently believes
that the resolution of these matters, individually or in the aggregate, will not
have a material adverse impact on the Companys financial position, results of
operations and cash flows.
As described in Note 3, the
Company has acquired all of the outstanding and issued ordinary shares in
Transact24 that it did not own in January 2016 and commenced consolidating
Transact24 from that date. Transact24 had an existing relationship in place
between itself and a company controlled by the spouse of Transact24s Managing
Director at the time of the Transact24 acquisition. This arrangement therefore
was also in place before the Managing Director became an executive officer of
the Company. This relationship was disclosed to the Company during the due
diligence process and has been considered by the Companys management to be
critical to the ongoing operations of Transact24. The company controlled by the
spouse of the managing director performs transaction processing and Transact24
provides technical and administration services to the company. The Company has
recorded revenue of approximately $1.9 million related to this relationship
during the six months ended June 30, 2015. Transact24s Managing Director has an
indirect interest in these transactions as a result of his relationship with his
spouse, with an approximate value of $0.1 million during the six months ended
June 30, 2016. As of June 30, 2016, $0.4 million is due to the Company related
to the service provided by Transact24 and this amount is included in accounts
receivables, net as of June 30, 2016.