Item 1. Financial Statements
NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed
Consolidated Balance Sheets
|
|
Unaudited
|
|
|
(A)
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2016
|
|
|
|
(In thousands,
except share data)
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
Cash and
cash equivalents
|
$
|
205,329
|
|
$
|
223,644
|
|
Pre-funded social welfare
grants receivable (Note 2)
|
|
1,738
|
|
|
1,580
|
|
Accounts
receivable, net of allowances of September: $1,453; June: $1,669
|
|
108,088
|
|
|
107,805
|
|
Finance loans receivable,
net of allowances of September: $3,919; June: $4,494
|
|
38,941
|
|
|
37,009
|
|
Inventory
(Note 3)
|
|
10,694
|
|
|
10,004
|
|
Deferred income taxes
|
|
7,484
|
|
|
6,956
|
|
Total current assets before settlement assets
|
|
372,274
|
|
|
386,998
|
|
Settlement assets (Note 4)
|
|
593,503
|
|
|
536,725
|
|
Total current assets
|
|
965,777
|
|
|
923,723
|
|
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation of
September: $112,336; June: $99,969
|
|
53,338
|
|
|
54,977
|
|
EQUITY-ACCOUNTED INVESTMENTS
|
|
25,560
|
|
|
25,645
|
|
GOODWILL (Note 6)
|
|
187,875
|
|
|
179,478
|
|
INTANGIBLE ASSETS, net (Note
6)
|
|
47,611
|
|
|
48,556
|
|
OTHER LONG-TERM ASSETS, including reinsurance
assets (Note 5 and Note 7)
|
|
45,089
|
|
|
31,121
|
|
TOTAL
ASSETS
|
|
1,325,250
|
|
|
1,263,500
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
Short-term credit facilities (Note 8)
|
|
-
|
|
|
-
|
|
Accounts payable
|
|
13,956
|
|
|
14,097
|
|
Other
payables
|
|
42,535
|
|
|
37,479
|
|
Current portion of
long-term borrowings (Note 9)
|
|
9,078
|
|
|
8,675
|
|
Income
taxes payable
|
|
16,572
|
|
|
5,235
|
|
Total current liabilities before settlement obligations
|
|
82,141
|
|
|
65,486
|
|
Settlement obligations
(Note 4)
|
|
593,503
|
|
|
536,725
|
|
Total current liabilities
|
|
675,644
|
|
|
602,211
|
|
DEFERRED INCOME TAXES
|
|
11,397
|
|
|
12,559
|
|
LONG-TERM BORROWINGS (Note 9)
|
|
18,156
|
|
|
43,134
|
|
OTHER LONG-TERM LIABILITIES,
including insurance policy liabilities (Note 7)
|
|
2,793
|
|
|
2,376
|
|
TOTAL LIABILITIES
|
|
707,990
|
|
|
660,280
|
|
COMMITMENTS AND CONTINGENCIES
(Note 17)
|
|
|
|
|
|
|
EQUITY
|
|
|
|
|
|
|
COMMON STOCK (Note
10)
Authorized: 200,000,000 with $0.001 par value;
Issued and outstanding shares, net of treasury - September: 52,521,345;
June: 55,271,954
|
|
74
|
|
|
74
|
|
PREFERRED
STOCK
Authorized shares: 50,000,000 with $0.001 par value;
Issued and outstanding shares, net of treasury: September: -; June: -
|
|
-
|
|
|
-
|
|
ADDITIONAL PAID-IN-CAPITAL
|
|
222,637
|
|
|
223,978
|
|
TREASURY SHARES, AT COST:
September: 23,621,541; June: 20,483,932
|
|
(273,238
|
)
|
|
(241,627
|
)
|
ACCUMULATED OTHER COMPREHENSIVE LOSS (Note 11)
|
|
(167,842
|
)
|
|
(189,700
|
)
|
RETAINED EARNINGS
|
|
724,954
|
|
|
700,322
|
|
TOTAL NET1 EQUITY
|
|
506,585
|
|
|
493,047
|
|
REDEEMABLE COMMON STOCK
|
|
107,672
|
|
|
107,672
|
|
NON-CONTROLLING INTEREST
|
|
3,003
|
|
|
2,501
|
|
TOTAL EQUITY
|
|
617,260
|
|
|
603,220
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS EQUITY
|
$
|
1,325,250
|
|
$
|
1,263,500
|
|
(A) Derived from audited financial statements
See Notes to Unaudited Condensed Consolidated Financial
Statements
2
NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed
Consolidated Statements of Operations
|
|
Three months
ended
|
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
REVENUE
|
$
|
155,633
|
|
$
|
154,473
|
|
|
|
|
|
|
|
|
EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold, IT processing, servicing and support
|
|
74,780
|
|
|
77,382
|
|
|
|
|
|
|
|
|
Selling, general and administration
|
|
38,468
|
|
|
35,761
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
10,204
|
|
|
10,115
|
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
32,181
|
|
|
31,215
|
|
|
|
|
|
|
|
|
INTEREST INCOME
|
|
4,304
|
|
|
4,275
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE
|
|
796
|
|
|
974
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAX
EXPENSE
|
|
35,689
|
|
|
34,516
|
|
|
|
|
|
|
|
|
INCOME TAX EXPENSE (Note 16)
|
|
11,103
|
|
|
10,897
|
|
|
|
|
|
|
|
|
NET INCOME BEFORE EARNINGS
FROM EQUITY-ACCOUNTED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTMENTS
|
|
24,586
|
|
|
23,619
|
|
|
|
|
|
|
|
|
EARNINGS FROM
EQUITY-ACCOUNTED INVESTMENTS
|
|
659
|
|
|
188
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
25,245
|
|
|
23,807
|
|
|
|
|
|
|
|
|
LESS NET INCOME ATTRIBUTABLE
TO NON-CONTROLLING INTEREST
|
|
613
|
|
|
787
|
|
|
|
|
|
|
|
|
NET INCOME ATTRIBUTABLE TO
NET1
|
$
|
24,632
|
|
$
|
23,020
|
|
|
|
|
|
|
|
|
Net income per share, in
U.S. dollars
(Note 13)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings attributable to Net1 shareholders
|
$
|
0.46
|
|
$
|
0.49
|
|
Diluted earnings attributable to Net1 shareholders
|
$
|
0.46
|
|
$
|
0.49
|
|
See Notes to Unaudited Condensed Consolidated Financial
Statements
3
NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed
Consolidated Statements of Comprehensive Income
|
|
Three months ended
|
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Net income
|
$
|
25,245
|
|
$
|
23,807
|
|
|
|
|
|
|
|
|
Other comprehensive income
(loss)
|
|
|
|
|
|
|
Net unrealized
income on asset available for sale, net of tax
|
|
-
|
|
|
50
|
|
Movement in foreign currency translation reserve
|
|
22,302
|
|
|
(43,696
|
)
|
Total other comprehensive income (loss), net of taxes
|
|
22,302
|
|
|
(43,646
|
)
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
47,547
|
|
|
(19,839
|
)
|
Less comprehensive income attributable
to non-controlling interest
|
|
(1,057
|
)
|
|
(505
|
)
|
Comprehensive income (loss)
attributable to Net1
|
$
|
46,490
|
|
$
|
(20,344
|
)
|
See Notes to Unaudited Condensed Consolidated Financial
Statements
4
NET 1 UEPS
TECHNOLOGIES,
INC.
Unaudited
Condensed
Consolidated
Statement
of
Changes
in
Equity for the three
months
ended
September
30, 2016
(dollar
amounts
in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Net 1 UEPS Technologies, Inc.
Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
of
|
|
|
|
|
|
Number of
|
|
|
Additional
|
|
|
|
|
|
other
|
|
|
Total
|
|
|
Redeemable
|
|
|
Non-
|
|
|
|
|
|
|
of
|
|
|
|
|
|
Treasury
|
|
|
Treasury
|
|
|
shares, net of
|
|
|
Paid-In
|
|
|
Retained
|
|
|
comprehensive
|
|
|
Net1
|
|
|
common
|
|
|
controlling
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Shares
|
|
|
treasury
|
|
|
Capital
|
|
|
Earnings
|
|
|
(loss) income
|
|
|
Equity
|
|
|
stock
|
|
|
Interest
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance July 1, 2016
|
|
75,755,886
|
|
$
|
74
|
|
|
(20,483,932
|
)
|
$
|
(241,627
|
)
|
|
55,271,954
|
|
$
|
223,978
|
|
$
|
700,322
|
|
$
|
(189,700
|
)
|
$
|
493,047
|
|
$
|
107,672
|
|
$
|
2,501
|
|
$
|
603,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of common stock
(Note 10)
|
|
|
|
|
|
|
|
(3,137,609
|
)
|
|
(31,611
|
)
|
|
(3,137,609
|
)
|
|
|
|
|
|
|
|
|
|
|
(31,611
|
)
|
|
|
|
|
|
|
|
(31,611
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock
granted (Note 12)
|
|
387,000
|
|
|
|
|
|
|
|
|
|
|
|
387,000
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
charge (Note 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
503
|
|
|
|
|
|
|
|
|
503
|
|
|
|
|
|
|
|
|
503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal of stock comp
charge (Note 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,827
|
)
|
|
|
|
|
|
|
|
(1,827
|
)
|
|
|
|
|
|
|
|
(1,827
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit from
vested
stock awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid to
non-controlling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
(555
|
)
|
|
(555
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,632
|
|
|
|
|
|
24,632
|
|
|
|
|
|
613
|
|
|
25,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
(Note 11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,858
|
|
|
21,858
|
|
|
|
|
|
444
|
|
|
22,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance September 30, 2016
|
|
76,142,886
|
|
$
|
74
|
|
|
(23,621,541
|
)
|
$
|
(273,238
|
)
|
|
52,521,345
|
|
$
|
222,637
|
|
$
|
724,954
|
|
$
|
(167,842
|
)
|
$
|
506,585
|
|
$
|
107,672
|
|
$
|
3,003
|
|
$
|
617,260
|
|
See Notes to Unaudited Condensed
Consolidated Financial Statements
5
NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed
Consolidated Statements of Cash Flows
|
|
Three months ended
|
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net income
|
$
|
25,245
|
|
$
|
23,807
|
|
Depreciation and amortization
|
|
10,204
|
|
|
10,115
|
|
Earnings from
equity-accounted investments
|
|
(659
|
)
|
|
(188
|
)
|
Fair value adjustments
|
|
(83
|
)
|
|
1,433
|
|
Interest payable
|
|
32
|
|
|
709
|
|
Loss (Profit) on disposal of property, plant
and equipment
|
|
66
|
|
|
(95
|
)
|
Stock-based compensation
(reversal) charge, net (Note 12)
|
|
(1,324
|
)
|
|
726
|
|
Facility fee amortized
|
|
36
|
|
|
34
|
|
Decrease (Increase) in
accounts receivable, pre-funded social welfare grants receivable
and
finance loans receivable
|
|
7,766
|
|
|
(17,278
|
)
|
Increase in inventory
|
|
(104
|
)
|
|
(931
|
)
|
Increase in accounts payable
and other payables
|
|
3,040
|
|
|
2,972
|
|
Increase in taxes payable
|
|
10,956
|
|
|
7,824
|
|
Decrease in deferred taxes
|
|
(1,632
|
)
|
|
(1,026
|
)
|
Net cash provided by
operating activities
|
|
53,543
|
|
|
28,102
|
|
Cash flows from investing
activities
|
|
|
|
|
|
|
Capital expenditures
|
|
(3,423
|
)
|
|
(10,698
|
)
|
Proceeds from disposal of
property, plant and equipment
|
|
69
|
|
|
348
|
|
Investment in MobiKwik
|
|
(15,347
|
)
|
|
-
|
|
Dividends received from
equity accounted investments
|
|
370
|
|
|
-
|
|
Net change in settlement assets (Note 4)
|
|
(37,394
|
)
|
|
(23,496
|
)
|
Net cash used in by
investing activities
|
|
(55,725
|
)
|
|
(33,846
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
Acquisition of treasury stock
(Note 10)
|
|
(32,081
|
)
|
|
-
|
|
Repayment of long-term borrowings (Note 9)
|
|
(26,669
|
)
|
|
-
|
|
Dividends paid to
non-controlling interest
|
|
(555
|
)
|
|
-
|
|
Long-term borrowings utilized (Note 9)
|
|
247
|
|
|
720
|
|
Proceeds from issue of common
stock
|
|
-
|
|
|
3,762
|
|
Net change in settlement obligations (Note 4)
|
|
37,394
|
|
|
23,496
|
|
Net cash (used in)
provided by financing activities
|
|
(21,664
|
)
|
|
27,978
|
|
Effect of exchange rate changes on cash
|
|
5,531
|
|
|
(14,207
|
)
|
Net (decrease) increase in
cash and cash equivalents
|
|
(18,315
|
)
|
|
8,027
|
|
Cash and cash equivalents beginning of
period
|
|
223,644
|
|
|
117,583
|
|
Cash and cash equivalents
end of period
|
$
|
205,329
|
|
$
|
125,610
|
|
See Notes to Unaudited Condensed Consolidated Financial
Statements
6
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the
Unaudited Condensed Consolidated Financial Statements
for the three months
ended September 30, 2016 and 2015
(All amounts in tables stated in
thousands or thousands of U.S. Dollars, unless otherwise stated)
1.
|
Basis of Presentation and Summary of Significant
Accounting Policies
|
Unaudited Interim Financial
Information
The accompanying unaudited
condensed consolidated financial statements include all majority-owned
subsidiaries over which the Company exercises control and have been prepared in
accordance with U.S. generally accepted accounting principles (GAAP) and the
rules and regulations of the United States Securities and Exchange Commission
for quarterly reports on Form 10-Q and include all of the information and
disclosures required for interim financial reporting. The results of operations
for the three months ended September 30, 2016 and 2015, are not necessarily
indicative of the results for the full year. The Company believes that the
disclosures are adequate to make the information presented not misleading.
These financial statements should
be read in conjunction with the financial statements, accounting policies and
financial notes thereto included in the Companys Annual Report on Form 10-K for
the fiscal year ended June 30, 2016. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements reflect all
adjustments (consisting only of normal recurring adjustments), which are
necessary for a fair representation of financial results for the interim periods
presented.
References to the Company refer
to Net1 and its consolidated subsidiaries, unless the context otherwise
requires. References to Net1 are references solely to Net 1 UEPS Technologies,
Inc.
Recent accounting pronouncements
adopted
In February 2015, the FASB issued
guidance regarding
Amendments to the Consolidation Analysis
. This
guidance amends both the variable interest entity and voting interest entity
consolidation models. The requirement to assess an entity under a different
consolidation model may change previous consolidation conclusions. The guidance
is effective for the Company beginning July 1, 2016. The adoption of this
guidance did not have a material impact on the Companys financial statements.
Recent accounting pronouncements not
yet adopted as of September 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 to be effective for the Company beginning July 1, 2017, however in
August 2015, the FASB issued guidance regarding
Revenue from Contracts with
Customers, Deferral of the Effective Date
. This guidance defers the required
implementation date specified in
Revenue from Contracts with Customers
to
December 2017. Public companies may elect to adopt the standard along the
original timeline. The 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.
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.
7
1.
|
Basis of Presentation and Summary of Significant
Accounting Policies (continued)
|
Recent accounting pronouncements not
yet adopted as of September 30, 2016 (continued)
In November 2015, the FASB issued
guidance regarding
Balance Sheet Classification of Deferred Taxes
. This
guidance requires that deferred tax liabilities and assets are to be classified
as non-current in a classified statement of financial position. The current
requirement that deferred tax liabilities and assets of a tax-paying component
of an entity be offset and presented as a single amount is not affected by the
amendments in this update. This guidance is effective for the Company beginning
July 1, 2017, with early adoption permitted on a prospective or retrospective
basis. The Company is currently assessing the impact of this guidance on its
financial statements disclosures.
In January 2016, the FASB issued
guidance regarding
Recognition and Measurement of Financial Assets and
Financial Liabilities
. The guidance primarily affects the accounting for
equity investments, financial liabilities under the fair value option and the
presentation and disclosure requirements for financial instruments. In addition,
the guidance clarifies the valuation allowance assessment when recognizing
deferred tax assets resulting from unrealized losses on available-for-sale debt
securities. This guidance is effective for the Company beginning July 1, 2018,
and early adoption is not permitted, with certain exceptions. The amendments are
required to be applied by means of a cumulative-effect adjustment on the balance
sheet as of the beginning of the fiscal year of adoption. The Company is
currently assessing the impact of this guidance on its financial statements
disclosure.
In February 2016, the FASB issued
guidance regarding
Leases
. The guidance increases transparency and
comparability among organizations by requiring the recognition of lease assets
and lease liabilities on the balance sheet. The amendments to current lease
guidance includes the recognition of assets and liabilities by lessees for those
leases currently classified as operating leases. The guidance also requires
disclosures to meet the objective of enabling users of financial statements to
assess the amount, timing, and uncertainty of cash flows arising from leases.
This guidance is effective for the Company beginning July 1, 2019. Early
adoption is permitted. The Company expects that this guidance may have a
material impact on its financial statements and is currently evaluating the
impact of this guidance on its financial statements on adoption.
In March 2016, the FASB issued
guidance regarding
Improvements to Employee Share-Based Payment
Accounting
. The guidance simplifies several aspects of the accounting for
employee share-based payment transactions for both public and nonpublic
entities, including the accounting for income taxes, forfeitures, and statutory
tax withholding requirements, as well as classification in the statement of cash
flows. This guidance is effective for the Company beginning July 1, 2017. Early
adoption is permitted. The Company is currently assessing the impact of this
guidance on its financial statements disclosure.
In June 2016, the FASB issued
guidance regarding
Measurement of Credit Losses on Financial Instruments
.
The guidance replaces the incurred loss impairment methodology in current GAAP
with a methodology that reflects expected credit losses and requires
consideration of a broader range of reasonable and supportable information to
inform credit loss estimates. For trade and other receivables, loans, and other
financial instruments, an entity is required to use a forward-looking expected
loss model rather than the incurred loss model for recognizing credit losses
which reflects losses that are probable. Credit losses relating to
available-for-sale debt securities will also be recorded through an allowance
for credit losses rather than as a reduction in the amortized cost basis of the
securities. This guidance is effective for the Company beginning July 1, 2020.
Early adoption is permitted beginning July 1, 2019. The Company is currently
assessing the impact of this guidance on its financial statements disclosure.
In June 2016, the FASB issued
guidance regarding
Classification of Certain Cash Receipts and Cash
Payments
. The guidance is intended to reduce diversity in practice and
explains how certain cash receipts and payments are presented and classified in
the statement of cash flows, including beneficial interests in securitization,
which would impact the presentation of the deferred purchase price from sales of
receivables. This guidance is effective for the Company beginning July 1, 2018,
and must be applied retrospectively. Early adoption is permitted. The Company is
currently assessing the impact of this guidance on its financial statements
disclosure.
2.
|
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 October 2016 payment service commenced on October 1, 2016,
but the Company pre-funded certain merchants participating in the merchant
acquiring system on the last two days of September 2016.
8
The Companys inventory comprised the
following category as of September 30, 2016 and June 30, 2016.
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
|
2016
|
|
|
2016
|
|
|
Finished goods
|
$
|
10,694
|
|
$
|
10,004
|
|
|
|
$
|
10,694
|
|
$
|
10,004
|
|
4.
|
Settlement assets and settlement
obligations
|
Settlement assets comprise (1)
cash received from the South African government that the Company holds pending
disbursement to recipient beneficiaries of social welfare grants and (2) cash
received from customers on whose behalf the Company processes payroll payments
that the Company will disburse to customer employees, payroll-related payees and
other payees designated by the customer.
Settlement obligations comprise
(1) amounts that the Company is obligated to disburse to recipient cardholders
of social welfare grants, and (2) amounts that the Company is obligated to pay
to customer employees, payroll-related payees and other payees designated by the
customer.
The balances at each reporting
date may vary widely depending on the timing of the receipts and payments of
these assets and obligations.
Net change in settlement assets
and net change in settlement assets included in the unaudited condensed
consolidated statement of cash flows for the three months ended September 30,
2015, have been increased by $1.9 million as a result of the restatement
described in Note 2(Significant accounting policiesSettlement assets and
settlement obligations) to the Companys audited consolidated financial
statements included in its Annual Report on Form 10-K for the year ended June
30, 2016.
5.
|
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.
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.
9
5.
|
Fair value of financial instruments
(continued)
|
Risk management (continued)
Credit risk
Credit risk relates to the risk
of loss that the Company would incur as a result of non-performance by
counterparties. The Company maintains credit risk policies with regard to its
counterparties to minimize overall credit risk. These policies include an
evaluation of a potential counterpartys financial condition, credit rating, and
other credit criteria and risk mitigation tools as the Companys management
deems appropriate.
With respect to credit risk on
financial instruments, the Company maintains a policy of entering into such
transactions only with South African and European financial institutions that
have a credit rating of BBB- or better, as determined by credit rating agencies
such as Standard & Poors, Moodys and Fitch Ratings.
UEPS-based microlending credit
risk
The Company is exposed to credit
risk in its UEPS-based microlending activities, which provides unsecured
short-term loans to qualifying customers. The Company manages this risk by
performing an affordability test for each prospective customer and assigns a
creditworthiness score, which takes into account a variety of factors such as
other debts and total expenditures on normal household and lifestyle expenses.
Equity price and liquidity risk
Equity price risk relates to the
risk of loss that the Company would incur as a result of the volatility in the
exchange-traded price of equity securities that it holds and the risk that it
may not be able to liquidate these securities. The market price of these
securities may fluctuate for a variety of reasons, consequently, the amount the
Company may obtain in a subsequent sale of these securities may significantly
differ from the reported market value.
Liquidity risk relates to the
risk of loss that the Company would incur as a result of the lack of liquidity
on the exchange on which these securities are listed. The Company may not be
able to sell some or all of these securities at one time, or over an extended
period of time without influencing the exchange traded price, or at all.
Financial instruments
The following section describes
the valuation methodologies the Company uses to measure its significant
financial assets and liabilities at fair value.
In general, and where applicable,
the Company uses quoted prices in active markets for identical assets or
liabilities to determine fair value. This pricing methodology applies to Level 1
investments. If quoted prices in active markets for identical assets or
liabilities are not available to determine fair value, then the Company uses
quoted prices for similar assets and liabilities or inputs other than the quoted
prices that are observable either directly or indirectly. These investments are
included in Level 2 investments. In circumstances in which inputs are generally
unobservable, values typically reflect managements estimates of assumptions
that market participants would use in pricing the asset or liability. The fair
values are therefore determined using model-based techniques that include option
pricing models, discounted cash flow models, and similar techniques. Investments
valued using such techniques are included in Level 3 investments.
Derivative transactions -
Foreign exchange contracts
As part of the Companys risk
management strategy, the Company enters into derivative transactions to mitigate
exposures to foreign currencies using foreign exchange contracts. These foreign
exchange contracts are over-the-counter derivative transactions. Substantially
all of the Companys derivative exposures are with counterparties that have
long-term credit ratings of BBB- or better. The Company uses quoted prices in
active markets for similar assets and liabilities to determine fair value (Level
2). The Company has no derivatives that require fair value measurement under
Level 1 or 3 of the fair value hierarchy.
The Companys outstanding foreign
exchange contracts are as follows:
As of September 30, 2016
|
|
|
|
|
|
Fair market
|
|
|
|
|
|
Notional amount
|
|
Strike price
|
|
|
value price
|
|
|
Maturity
|
|
|
EUR 393,675.00
|
|
ZAR 16.2911
|
|
|
ZAR 15.5206
|
|
|
October 20, 2016
|
|
|
EUR 302,368.50
|
|
ZAR 16.4085
|
|
|
ZAR 15.6389
|
|
|
November 21, 2016
|
|
10
5.
|
Fair value of financial instruments
(continued)
|
Financial instruments (continued)
As of June 30, 2016
|
|
|
|
|
|
Fair market
|
|
|
|
|
|
Notional amount
|
|
Strike price
|
|
|
value price
|
|
|
Maturity
|
|
|
EUR 573,765.00
|
|
ZAR 15.9587
|
|
|
ZAR 16.3393
|
|
|
July 20, 2016
|
|
|
EUR 554,494.50
|
|
ZAR 16.0643
|
|
|
ZAR 16.4564
|
|
|
August 19, 2016
|
|
|
EUR 465,711.00
|
|
ZAR 16.1798
|
|
|
ZAR 16.582
|
|
|
September 20, 2016
|
|
|
EUR 393,675.00
|
|
ZAR 16.2911
|
|
|
ZAR 16.7017
|
|
|
October 20, 2016
|
|
|
EUR 302,368.50
|
|
ZAR 16.4085
|
|
|
ZAR 16.8301
|
|
|
November 21, 2016
|
|
The following table presents the
Companys assets and liabilities measured at fair value on a recurring basis as
of September 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
|
$
|
562
|
|
$
|
-
|
|
$
|
-
|
|
$
|
562
|
|
|
Other
|
|
-
|
|
|
38
|
|
|
-
|
|
|
38
|
|
|
Total assets at
fair value
|
$
|
562
|
|
$
|
38
|
|
$
|
-
|
|
$
|
600
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
$
|
-
|
|
$
|
39
|
|
$
|
-
|
|
$
|
39
|
|
|
Total liabilities at fair value
|
$
|
-
|
|
$
|
39
|
|
$
|
-
|
|
$
|
39
|
|
The following table presents the
Companys assets measured at fair value on a recurring basis as of June 30,
2016, according to the fair value hierarchy:
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
price in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
markets for
|
|
|
other
|
|
|
Significant
|
|
|
|
|
|
|
|
identical
|
|
|
observable
|
|
|
unobservable
|
|
|
|
|
|
|
|
assets
|
|
|
inputs
|
|
|
inputs
|
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related to insurance business
(included in other long-term assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
$
|
533
|
|
$
|
-
|
|
$
|
-
|
|
$
|
533
|
|
|
Foreign exchange contracts
|
|
-
|
|
|
62
|
|
|
-
|
|
|
62
|
|
|
Other
|
|
-
|
|
|
37
|
|
|
-
|
|
|
37
|
|
|
Total assets at fair value
|
$
|
533
|
|
$
|
99
|
|
$
|
-
|
|
$
|
632
|
|
Changes in the Companys
investment in Finbond Group Limited, or Finbond, (Level 3 that are measured at
fair value on a recurring basis) were insignificant during the three months
ended September 30, 2015, respectively. There have been no transfers in or out
of Level 3 during the three months ended September 30, 2016 and 2015,
respectively.
11
5.
|
Fair value of financial instruments
(continued)
|
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.
6.
|
Goodwill and intangible assets,
net
|
Goodwill
Summarized below is the movement in the
carrying value of goodwill for the three months ended September 30, 2016:
|
|
|
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
|
Gross value
|
|
|
impairment
|
|
|
value
|
|
|
Balance as of June 30, 2016
|
$
|
179,478
|
|
$
|
-
|
|
$
|
179,478
|
|
|
Foreign currency
adjustment
(1)
|
|
8,397
|
|
|
-
|
|
|
8,397
|
|
|
Balance as of September 30, 2016
|
$
|
187,875
|
|
$
|
-
|
|
$
|
187,875
|
|
(1)
Represents the effects of
the fluctuations between the South African rand, Euro and the Korean won, and
the U.S. dollar on the carrying value.
Goodwill has been allocated to the
Companys reportable segments as follows:
|
|
|
South
|
|
|
|
|
|
Financial
|
|
|
|
|
|
|
|
African
|
|
|
International
|
|
|
inclusion and
|
|
|
|
|
|
|
|
transaction
|
|
|
transaction
|
|
|
applied
|
|
|
Carrying
|
|
|
|
|
processing
|
|
|
processing
|
|
|
technologies
|
|
|
value
|
|
|
Balance as of June 30, 2016
|
$
|
20,425
|
|
$
|
136,185
|
|
$
|
22,868
|
|
$
|
179,478
|
|
|
Foreign currency
adjustment
(1)
|
|
1,357
|
|
|
5,907
|
|
|
1,133
|
|
|
8,397
|
|
|
Balance as of September 30, 2016
|
$
|
21,782
|
|
$
|
142,092
|
|
$
|
24,001
|
|
$
|
187,875
|
|
(1)
Represents the effects of
the fluctuations between the South African rand, Euro and the Korean won, and
the U.S. dollar on the carrying value.
Intangible assets, net
Carrying value and amortization
of intangible assets
Summarized below is the carrying
value and accumulated amortization of the intangible assets as of September 30,
2016 and June 30, 2016:
|
|
|
As of September 30, 2016
|
|
|
As of June 30, 2016
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
|
carrying
|
|
|
Accumulated
|
|
|
carrying
|
|
|
carrying
|
|
|
Accumulated
|
|
|
carrying
|
|
|
|
|
value
|
|
|
amortization
|
|
|
value
|
|
|
value
|
|
|
amortization
|
|
|
value
|
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
$
|
97,992
|
|
$
|
(55,956
|
)
|
$
|
42,036
|
|
$
|
94,529
|
|
$
|
(51,557
|
)
|
$
|
42,972
|
|
|
Software and unpatented
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
technology
|
|
32,502
|
|
|
(30,009
|
)
|
|
2,493
|
|
|
31,452
|
|
|
(28,791
|
)
|
|
2,661
|
|
|
FTS patent
|
|
2,764
|
|
|
(2,764
|
)
|
|
-
|
|
|
2,592
|
|
|
(2,592
|
)
|
|
-
|
|
|
Exclusive licenses
|
|
4,506
|
|
|
(4,506
|
)
|
|
-
|
|
|
4,506
|
|
|
(4,506
|
)
|
|
-
|
|
|
Trademarks
|
|
6,986
|
|
|
(3,904
|
)
|
|
3,082
|
|
|
6,685
|
|
|
(3,762
|
)
|
|
2,923
|
|
|
Total finite-lived
intangible assets
|
$
|
144,750
|
|
$
|
(97,139
|
)
|
$
|
47,611
|
|
$
|
139,764
|
|
$
|
(91,208
|
)
|
$
|
48,556
|
|
Aggregate amortization expense on
the finite-lived intangible assets for the three months ended September 30, 2016
and 2015, was approximately $2.9 million and $3.3 million, respectively.
12
Intangible assets, net (continued)
Future estimated annual
amortization expense for the next five fiscal years and thereafter, assuming
exchange rates that prevailed on September 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
|
$
|
12,607
|
|
|
2018
|
|
11,692
|
|
|
2019
|
|
11,061
|
|
|
2020
|
|
10,352
|
|
|
2021
|
|
4,453
|
|
|
Thereafter
|
$
|
368
|
|
7.
|
Reinsurance assets and policy holder liabilities under
insurance and investment contracts
|
Reinsurance assets and policy holder
liabilities under insurance contracts
Summarized below is the movement
in reinsurance assets and policy holder liabilities under insurance contracts
during the three months ended September 30, 2016:
|
|
|
Reinsurance
|
|
|
Insurance
|
|
|
|
|
assets
(1)
|
|
|
contracts
(2)
|
|
|
Balance as of June 30, 2016
|
$
|
171
|
|
$
|
(1,078
|
)
|
|
Increase in policy holder benefits
under insurance contracts
|
|
231
|
|
|
(754
|
)
|
|
Claims and
policyholders benefits under insurance contracts
|
|
(229
|
)
|
|
682
|
|
|
Foreign currency
adjustment
(3)
|
|
12
|
|
|
(71
|
)
|
|
Balance
as of September 30, 2016
|
$
|
185
|
|
$
|
(1,221
|
)
|
|
(1)
|
Included in other long-term assets.
|
|
(2)
|
Included in other long-term liabilities.
|
|
(3)
|
Represents the effects of the fluctuations between the
ZAR against the U.S. dollar.
|
The Company has agreements with
reinsurance companies in order to limit its losses from large insurance
contracts, however, if the reinsurer is unable to meet its obligations, the
Company retains the liability.
The Company determines its
reserves for future policy benefits under its life insurance products using a
model which estimates claims incurred that have not been reported at the balance
sheet date. This model includes best estimate assumptions of experience plus
prescribed margins, as required in the markets in which these products are
offered, namely South Africa. The best estimate assumptions include those
assumptions related to mortality, morbidity and claim reporting delays, and the
main assumptions used to calculate the reserve for future policy benefits
include (i) mortality and morbidity assumptions reflecting the Companys most
recent experience and (ii) claim reporting delays reflecting Company specific
and industry experience.
Assets and policy holder liabilities
under investment contracts
Summarized below is the movement
in assets and policy holder liabilities under investment contracts during the
three months ended September 30, 2016:
|
|
|
|
|
|
Investment
|
|
|
|
|
Assets
(1)
|
|
|
contracts
(2)
|
|
|
Balance as of June 30, 2016
|
$
|
528
|
|
$
|
(528
|
)
|
|
Foreign currency
adjustment
(3)
|
|
35
|
|
|
(35
|
)
|
|
Balance
as of September 30, 2016
|
$
|
563
|
|
$
|
(563
|
)
|
|
(1)
|
Included in other long-term assets.
|
|
(2)
|
Included in other long-term liabilities.
|
|
(3)
|
Represents the effects of the fluctuations between the
ZAR against the U.S. dollar.
|
The Company does not offer any
investment products with guarantees related to capital or returns.
13
8.
|
Short-term credit
facilities
|
The Companys short-term credit
facilities are described in Note 12 to the Companys audited consolidated
financial statements included in its Annual Report on Form 10-K for the year
ended June 30, 2016.
South Africa
The aggregate amount of the
Companys short-term South African credit facility with Nedbank Limited is up to
ZAR 400 million ($28.8 million) and consists of (i) a primary amount of up to
ZAR 200 million ($14.4 million), which is immediately available, and (ii) a
secondary amount of up to ZAR 200 million ($14.4 million), which is not
immediately available (all amounts denominated in ZAR and translated at exchange
rates applicable as of September 30, 2016). The primary amount comprises an
overdraft facility of up to ZAR 50 million ($3.6 million) and indirect and
derivative facilities of up to ZAR 150 million ($10.8 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
September 30, 2016). As of September 30, 2016, the interest rate on the
overdraft facility was 9.35% . The Company has ceded its investment in Cash
Paymaster Services Proprietary Limited as security for its repayment obligations
under the facility.
A commitment fee of 0.35% per
annum is payable on the monthly unutilized amount of the overdraft portion of
the primary amount. The Company is required to comply with customary
non-financial covenants, including, without limitation, covenants that restrict
its ability to dispose of or encumber its assets, incur additional indebtedness
or engage in certain business combinations.
As of September 30, 2016 and June
30, 2016, respectively, the Company had not utilized any of its overdraft
facility. As of September 30, 2016, the Company had utilized approximately ZAR
131.1 million ($9.5 million, translated at exchange rates applicable as of
September 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
17). 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.
Korea
The Company had not utilized any
of its KRW 10 billion ($9.1 million, translated at exchange rates applicable as
of September 30, 2016) overdraft facility as of September 30, 2016 or June 30,
2016. As of September 30, 2016, the interest rate on the overdraft facility was
3.31% . The facility expires in January 2017.
The Companys Korean senior
secured loan facility is described in Note 13 to the Companys audited
consolidated financial statements included in its Annual Report on Form 10-K for
the year ended June 30, 2016. The current carrying value as of September 30,
2016, is $27.2 million. As of September 30, 2016, the carrying amount of the
long-term borrowings approximated fair value. The interest rate in effect on
September 30, 2016, was 4.46% .
On July 29, 2016, the Company
utilized approximately KRW 0.3 billion ($0.2 million) of its Facility C
revolving credit facility to pay interest due. On the same day, the Company made
unscheduled payments of KRW 20 billion ($17.8 million) towards its Facility A
loan and KRW 10 billion ($8.9 million) towards its Facility C revolving credit
facility. The next scheduled principal payment of $9.1 million (translated at
exchange rates applicable as of September 30, 2016) will be made on April 29,
2017.
Interest expense incurred during
the three months ended September 30, 2016 and 2015, was $0.5 million and $0.7
million, respectively. Prepaid facility fees amortized during each of the three
months ended September 30, 2016, and 2015, was $0.04 and $0.03 million,
respectively.
14
The following table presents
reconciliation between the number of shares, net of treasury, presented in the
unaudited condensed consolidated statement of changes in equity during the three
months ended September 30, 2016 and 2015, respectively, and the number of
shares, net of treasury, excluding non-vested equity shares that have not vested
during the three months ended September 30, 2016 and 2015, respectively:
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Number of shares, net of
treasury:
|
|
|
|
|
|
|
|
Statement of changes in
equity
|
|
52,521,345
|
|
|
47,322,702
|
|
|
Less:
Non-vested equity shares that have not vested (Note 12)
|
|
(904,356
|
)
|
|
(589,447
|
)
|
|
Number
of shares, net of treasury excluding non-vested equity shares that have
not vested
|
|
51,616,989
|
|
|
46,733,255
|
|
Common stock repurchases
Executed
under share repurchase authorizations
In February 2016, the Companys
Board of Directors approved the replenishment of its share repurchase
authorization to repurchase up to an aggregate of $100 million of common stock.
The authorization has no expiration date. On June 29, 2016, the Company adopted
a Rule 10b5-1 trading plan for the purpose of repurchasing approximately $50
million of its common stock, which was included within the original share
repurchase authorization. During the three months ended September 30, 2016, the
Company repurchased 3,137,609 shares for approximately $31.6 million under its
share repurchase authorization. The Company did not repurchase any of its shares
during the three months ended September 30, 2015.
11.
|
Accumulated other comprehensive
loss
|
The table below presents the
change in accumulated other comprehensive (loss) income per component during the
three months ended September 30, 2016:
|
|
|
|
|
|
Three months
ended
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
net
|
|
|
|
|
|
|
|
|
|
|
unrealized
|
|
|
|
|
|
|
|
Accumulated
|
|
|
income on
|
|
|
|
|
|
|
|
foreign
|
|
|
asset
|
|
|
|
|
|
|
|
currency
|
|
|
available for
|
|
|
|
|
|
|
|
translation
|
|
|
sale, net of
|
|
|
|
|
|
|
|
reserve
|
|
|
tax
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2016
|
$
|
(189,700
|
)
|
$
|
-
|
|
$
|
(189,700
|
)
|
|
Movement in foreign
currency translation reserve
|
|
21,858
|
|
|
-
|
|
|
21,858
|
|
|
Balance as of September 30, 2016
|
$
|
(167,842
|
)
|
$
|
-
|
|
$
|
(167,842
|
)
|
There were no reclassifications
from accumulated other comprehensive loss to comprehensive (loss) income during
the three months ended September 30, 2016 or 2015, respectively.
15
12.
|
Stock-based compensation
|
Stock option and
restricted stock activity
Options
The following table summarizes
stock option activity for the three months ended September 30, 2016 and 2015:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
average
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
average
|
|
|
remaining
|
|
|
Aggregate
|
|
|
average
|
|
|
|
|
|
|
|
exercise
|
|
|
contractual
|
|
|
intrinsic
|
|
|
grant date
|
|
|
|
|
Number of
|
|
|
price
|
|
|
term
|
|
|
value
|
|
|
fair value
|
|
|
|
|
shares
|
|
|
($)
|
|
|
(in years)
|
|
|
($000)
|
|
|
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding June 30, 2016
|
|
2,077,524
|
|
|
15.92
|
|
|
3.65
|
|
|
926
|
|
|
|
|
|
Expired unexercised
|
|
(474,443
|
)
|
|
22.51
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding September 30,
2016
|
|
1,603,081
|
|
|
13.98
|
|
|
4.50
|
|
|
452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding June 30, 2015
|
|
2,401,169
|
|
|
15.34
|
|
|
4.74
|
|
|
11,516
|
|
|
|
|
|
Exercised
|
|
(323,645
|
)
|
|
11.62
|
|
|
|
|
|
2,669
|
|
|
|
|
|
Outstanding September 30,
2015
|
|
2,077,524
|
|
|
15.92
|
|
|
4.33
|
|
|
7,509
|
|
|
|
|
No stock options were awarded
during the three months ended September 30, 2016 or 2015. There were no
forfeitures during the three months ended September 30, 2016 or 2015; however,
during the three months ended September 30, 2016, 474,443 stock options awarded
in August 2006, expired unexercised.
The following table presents
stock options vested and expecting to vest as of September 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
September 30, 2016
|
|
1,603,081
|
|
|
13.98
|
|
|
4.50
|
|
|
452
|
|
These options have an exercise
price range of $7.35 to $24.46.
The following table presents
stock options that are exercisable as of September 30, 2016:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
average
|
|
|
|
|
|
|
|
|
|
|
average
|
|
|
remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
|
exercise
|
|
|
contractual
|
|
|
intrinsic
|
|
|
|
|
Number of
|
|
|
price
|
|
|
term
|
|
|
value
|
|
|
|
|
shares
|
|
|
($)
|
|
|
(in years)
|
|
|
($000)
|
|
|
Exercisable September 30,
2016
|
|
1,448,278
|
|
|
14.28
|
|
|
4.11
|
|
|
452
|
|
During the three months ended
September 30, 2016 and 2015, respectively, 154,803 and 330,967 stock options
became exercisable. No stock options were exercised during the three months
ended September 30, 2016. The Company received approximately $3.8 million from
the exercise of 323,645 stock options, during the three months ended September
30, 2015. The Company issues new shares to satisfy stock option exercises.
16
12.
|
Stock-based compensation
(continued)
|
Stock option and
restricted stock activity (continued)
Restricted
stock
The following table summarizes
restricted stock activity for the three months ended September 30, 2016 and
2015:
|
|
|
Number of
|
|
|
Weighted
|
|
|
|
|
shares of
|
|
|
average grant
|
|
|
|
|
restricted
|
|
|
date fair value
|
|
|
|
|
stock
|
|
|
($000)
|
|
|
Non-vested June 30, 2016
|
|
589,447
|
|
|
7,622
|
|
|
Granted August 2016
|
|
387,000
|
|
|
4,145
|
|
|
Vested August 2016
|
|
(72,091
|
)
|
|
735
|
|
|
Non-vested September
30, 2016
|
|
904,356
|
|
|
11,142
|
|
|
|
|
|
|
|
|
|
|
Non-vested June 30, 2015
|
|
341,529
|
|
|
1,759
|
|
|
Granted August 2015
|
|
319,492
|
|
|
581
|
|
|
Vested August 2015
|
|
(71,574
|
)
|
|
1,435
|
|
|
Non-vested September 30, 2015
|
|
589,447
|
|
|
7,622
|
|
The August 2016 grants comprise
350,000 and 37,000 shares of restricted stock awarded to executive officers and
non-employee directors, respectively. The shares of restricted stock awarded to
executive officers in August 2016 are subject to time-based and
performance-based vesting conditions. In order for any of the shares to vest,
the recipient must remain employed by the Company on a full-time basis on the
date that it files its Annual Report on Form 10-K for the fiscal year ended June
30, 2019. If that condition is satisfied, then the shares will vest based on the
level of Fundamental EPS the Company achieves for the fiscal year ended June 30,
2019 (2019 Fundamental EPS), as follows:
|
|
One-third of the shares will vest if the
Company achieves 2019 Fundamental EPS of $2.60;
|
|
|
Two-thirds of the shares will vest if the
Company achieves 2019 Fundamental EPS of $2.80; and
|
|
|
All of the shares will vest if the Company
achieves 2019 Fundamental EPS of $3.00.
|
At levels of 2019 Fundamental EPS
greater than $2.60 and less than $3.00, the number of shares that will vest will
be determined by linear interpolation relative to 2019 Fundamental EPS of $2.80.
Any shares that do not vest in accordance with the above-described conditions
will be forfeited. All shares of restricted stock have been valued utilizing the
closing price of shares of the Companys common stock quoted on The Nasdaq
Global Select Market on the date of grant.
The August 2015 grants comprise
301,537 and 17,955 shares of restricted stock awarded to employees and
non-employee directors, respectively. The shares of restricted stock awarded to
employees in August 2015 are subject to time-based and performance-based vesting
conditions. In order for any of the shares to vest, the recipient must remain
employed by the Company on a full-time basis on the date that it files its
Annual Report on Form 10-K for the fiscal year ended June 30, 2018. If that
condition is satisfied, then the shares will vest based on the level of
Fundamental EPS the Company achieves for the fiscal year ended June 30, 2018
(2018 Fundamental EPS), as follows:
|
|
One-third of the shares will vest if the
Company achieves 2018 Fundamental EPS of $2.88;
|
|
|
Two-thirds of the shares will vest if the
Company achieves 2018 Fundamental EPS of $3.30; and
|
|
|
All of the shares will vest if the Company
achieves 2018 Fundamental EPS of $3.76.
|
At levels of 2018 Fundamental EPS
greater than $2.88 and less than $3.76, the number of shares that will vest will
be determined by linear interpolation relative to 2018 Fundamental EPS of $3.30.
Any shares that do not vest in accordance with the above-described conditions
will be forfeited. All shares of restricted stock have been valued utilizing the
closing price of shares of the Companys common stock quoted on The Nasdaq
Global Select Market on the date of grant. The Company has reversed the
stock-based compensation charge recognized to date related to the 301,537 shares
of restricted stock because it believes that it is unlikely that the 2018
Fundamental EPS target will be achieved due to the dilutive impact on the
fundamental EPS calculation as a result of issuance of the approximate 10
million shares to the IFC in May 2016.
17
12.
|
Stock-based compensation
(continued)
|
Stock option and
restricted stock activity (continued)
Restricted
stock (continued)
The fair value of restricted
stock vesting during the three months ended September 30, 2016 and 2015,
respectively, was $0.7 million and $1.4 million.
Stock-based compensation
charge and unrecognized compensation cost
The Company has recorded a
stock-based compensation (reversal) charge, net of ($1.3 million) and $0.7
million, respectively, during the three months ended September 30, 2016 and
2015, which comprised:
|
|
|
|
|
|
Allocated to cost
|
|
|
|
|
|
|
|
|
|
|
of goods sold, IT
|
|
|
Allocated to
|
|
|
|
|
|
|
|
processing,
|
|
|
selling, general
|
|
|
|
|
Total
|
|
|
servicing and
|
|
|
and
|
|
|
|
|
charge
|
|
|
support
|
|
|
administration
|
|
|
Three months ended September
30, 2016
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation charge
|
$
|
503
|
|
$
|
-
|
|
$
|
503
|
|
|
Reversal of stock
compensation charge related to restricted stock
|
|
(1,827
|
)
|
|
-
|
|
|
(1,827
|
)
|
|
Total three months ended September 30, 2016
|
$
|
(1,324
|
)
|
$
|
-
|
|
$
|
(1,324
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2015
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation charge
|
$
|
726
|
|
$
|
-
|
|
$
|
726
|
|
|
Total three months ended September 30, 2015
|
$
|
726
|
|
$
|
-
|
|
$
|
726
|
|
The stock-based compensation
charges have been allocated to selling, general and administration based on the
allocation of the cash compensation paid to the employees.
As of September 30, 2016, the
total unrecognized compensation cost related to stock options was approximately
$0.6 million, which the Company expects to recognize over approximately one
year. As of September 30, 2016, the total unrecognized compensation cost related
to restricted stock awards was approximately $4.5 million, which the Company
expects to recognize over approximately two years. This amount excludes the
total unrecognized compensation cost as of September 30, 2016, related to
restricted stock awards that the Company expects will not vest due to it not
achieving the 2018 Fundamental EPS of approximately $6.0 million. As of
September 30, 2016, the cumulative unrecorded stock-based compensation charge
related to these awards of restricted stock that the Company has determined are
expected not to vest and has not expensed in its consolidated statement of
operations is approximately $2.5 million (which amount includes the $1.8 million
reversed).
As of September 30, 2016 and June
30, 2016, respectively, the Company has recorded a deferred tax asset of
approximately $1.5 million and 1.8 million related to the stock-based
compensation charge recognized related to employees and directors of Net1 as it
is able to deduct the grant date fair value for taxation purposes.
The Company has issued redeemable
common stock which is redeemable at an amount other than fair value. Redemption
of a class of common stock at other than fair value increases or decreases the
carrying amount of the redeemable common stock and is reflected in basic
earnings per share using the two-class method. There were no redemptions of
common stock, or adjustments to the carrying value of the redeemable common
stock during the three months ended September 30, 2016 or 2015. Accordingly the
two-class method presented below does not include the impact of any redemption.
The Companys redeemable common stock is described in Note 14 to the Companys
audited consolidated financial statements included in its Annual Report on Form
10-K for the year ended June 30, 2016.
Basic earnings per share include
shares of restricted stock that meet the definition of a participating security
because these shares are eligible to receive non-forfeitable dividend
equivalents at the same rate as common stock. Basic earnings per share have been
calculated using the two-class method and basic earnings per share for the three
months ended September 30, 2016 and 2015, reflects only undistributed earnings.
The computation below of basic earnings per share excludes the net income
attributable to shares of unvested restricted stock (participating non-vested
restricted stock) from the numerator and excludes the dilutive impact of these
unvested shares of restricted stock from the denominator.
18
13.
|
Earnings per share
(continued)
|
Diluted earnings per share have
been calculated to give effect to the number of shares of additional common
stock that would have been outstanding if the potential dilutive instruments had
been issued in each period. Stock options are included in the calculation of
diluted earnings per share utilizing the treasury stock method and are not
considered to be participating securities as the stock options do not contain
non-forfeitable dividend rights. The calculation of diluted earnings per share
includes the dilutive effect of a portion of the restricted stock granted to
employees in August 2013, August 2014, November 2014, August 2015 and August
2016, as these shares of restricted stock are considered contingently returnable
shares for the purposes of the diluted earnings per share calculation and the
vesting conditions in respect of a portion of the restricted stock had been
satisfied. The vesting conditions for awards made in August 2016 and August 2015
are discussed in Note 12 and the vesting conditions for all other awards are
discussed in Note 18 to the Companys audited consolidated financial statements
included in its Annual Report on Form 10-K for the year ended June 30, 2016.
The following table presents net
income attributable to Net1 (income from continuing operations) and the share
data used in the basic and diluted earnings per share computations using the
two-class method:
|
|
|
Three
months ended
|
|
|
|
|
September,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
(in thousands
except percent
|
|
|
|
|
and
|
|
|
|
|
per share
data)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Net income attributable
to Net1
|
$
|
24,632
|
|
$
|
23,020
|
|
|
Undistributed earnings
|
|
24,632
|
|
|
23,020
|
|
|
Percent allocated to
common shareholders (Calculation 1)
|
|
99%
|
|
|
99%
|
|
|
Numerator
for earnings per share: basic and diluted
|
$
|
24,276
|
|
$
|
22,817
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Denominator for
basic earnings per share: weighted-average common shares outstanding
|
|
53,053
|
|
|
46,209
|
|
|
Effect of
dilutive securities:
|
|
|
|
|
|
|
|
Stock options
|
|
91
|
|
|
460
|
|
|
Denominator
for diluted earnings per share: adjusted
weighted
average
common shares outstanding and assumed conversion
|
|
53,144
|
|
|
46,669
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.46
|
|
$
|
0.49
|
|
|
Diluted
|
$
|
0.46
|
|
$
|
0.49
|
|
|
|
|
|
|
|
|
|
|
(Calculation 1)
|
|
|
|
|
|
|
|
Basic weighted-average
common shares outstanding (A)
|
|
53,053
|
|
|
46,209
|
|
|
Basic weighted-average
common shares outstanding and unvested restricted shares expected to vest
(B)
|
|
53,832
|
|
|
46,620
|
|
|
Percent allocated to
common shareholders (A) / (B)
|
|
99%
|
|
|
99%
|
|
Options to purchase 812,919
shares of the Companys common stock at prices ranging from $10.59 to $24.46 per
share were outstanding during the three months ended September 30, 2016, but
were not included in the computation of diluted earnings per share because the
options exercise price were greater than the average market price of the
Companys common stock. The options, which expire at various dates through
August 27, 2024, were still outstanding as of September 30, 2016.
14.
|
Supplemental cash flow
information
|
The following table presents
supplemental cash flow disclosures for the three months ended September 30, 2016
and 2015:
|
|
|
Three
months ended
|
|
|
|
|
September 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Cash received from interest
|
$
|
4,285
|
|
$
|
4,265
|
|
|
Cash paid for interest
|
$
|
1,076
|
|
$
|
939
|
|
|
Cash paid for income taxes
|
$
|
1,503
|
|
$
|
4,066
|
|
19
14.
|
Supplemental cash flow information
(continued)
|
Treasury shares, at cost included
in the Companys condensed consolidated balance sheet as of June 30, 2016,
includes 47,056 shares of the Companys common stock acquired for approximately
$0.5 million which were paid for on July 1, 2016. The liability for this payment
was included in accounts payable on the Companys condensed consolidated balance
sheet as of June 30, 2016. The payment of approximately $0.5 million is included
in acquisition of treasury stock in the Companys condensed consolidated
statement of cash flows for the three months ended September 30, 2016.
The Company discloses segment
information as reflected in the management information systems reports that its
chief operating decision maker uses in making decisions and to report certain
entity-wide disclosures about products and services, major customers, and the
countries in which the entity holds material assets or reports material
revenues. A description of the Companys operating segments is contained in Note
23 to the Companys audited consolidated financial statements included in its
Annual Report on Form 10-K for the year ended June 30, 2016.
The reconciliation of the
reportable segments revenue to revenue from external customers for the three
months ended September 30, 2016 and 2015, respectively, is as follows:
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
From
|
|
|
|
|
Reportable
|
|
|
Inter-
|
|
|
external
|
|
|
|
|
Segment
|
|
|
segment
|
|
|
customers
|
|
|
South African transaction
processing
|
$
|
57,568
|
|
$
|
5,401
|
|
$
|
52,167
|
|
|
International transaction processing
|
|
46,190
|
|
|
-
|
|
|
46,190
|
|
|
Financial inclusion and
applied technologies
|
|
63,542
|
|
|
6,266
|
|
|
57,276
|
|
|
Total for the three months ended
September 30, 2016
|
$
|
167,300
|
|
$
|
11,667
|
|
$
|
155,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction processing
|
$
|
55,639
|
|
$
|
3,627
|
|
$
|
52,012
|
|
|
International transaction
processing
|
|
41,229
|
|
|
-
|
|
|
41,229
|
|
|
Financial inclusion and applied technologies
|
|
67,360
|
|
|
6,128
|
|
|
61,232
|
|
|
Total for the three
months ended September 30, 2015
|
$
|
164,228
|
|
$
|
9,755
|
|
$
|
154,473
|
|
The Company does not allocate
interest income, interest expense or income tax expense to its reportable
segments. The Company evaluates segment performance based on segment operating
income before acquisition-related intangible asset amortization which represents
operating income before acquisition-related intangible asset amortization and
allocation of expenses allocated to Corporate/Eliminations, all under GAAP. The
reconciliation of the reportable segments measure of profit or loss to income
before income taxes for the three months ended September 30, 2016 and 2015,
respectively, is as follows:
|
|
|
Three
months ended
|
|
|
|
|
September 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Reportable segments measure
of profit or loss
|
$
|
34,548
|
|
$
|
36,608
|
|
|
Operating income:
Corporate/Eliminations
|
|
(2,367
|
)
|
|
(5,393
|
)
|
|
Interest income
|
|
4,304
|
|
|
4,275
|
|
|
Interest expense
|
|
(796
|
)
|
|
(974
|
)
|
|
Income
before income taxes
|
$
|
35,689
|
|
$
|
34,516
|
|
20
15.
|
Operating segments
(continued)
|
The following tables summarize
segment information which is prepared in accordance with GAAP for the three
months ended September 30, 2016 and 2015:
|
|
|
Three
months ended
|
|
|
|
|
September,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Revenues
|
|
|
|
|
|
|
|
South African transaction
processing
|
$
|
57,568
|
|
$
|
55,639
|
|
|
International transaction processing
|
|
46,190
|
|
|
41,229
|
|
|
Financial inclusion and
applied technologies
|
|
63,542
|
|
|
67,360
|
|
|
Total
|
|
167,300
|
|
|
164,228
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
South
African transaction processing
|
|
13,548
|
|
|
13,511
|
|
|
International transaction
processing
|
|
5,817
|
|
|
6,543
|
|
|
Financial
inclusion and applied technologies
|
|
15,183
|
|
|
16,554
|
|
|
Subtotal:
Operating segments
|
|
34,548
|
|
|
36,608
|
|
|
Corporate/Eliminations
|
|
(2,367
|
)
|
|
(5,393
|
)
|
|
Total
|
|
32,181
|
|
|
31,215
|
|
|
Depreciation and
amortization
|
|
|
|
|
|
|
|
South African transaction
processing
|
|
1,157
|
|
|
1,795
|
|
|
International transaction processing
|
|
5,836
|
|
|
4,696
|
|
|
Financial inclusion and
applied technologies
|
|
337
|
|
|
240
|
|
|
Subtotal: Operating segments
|
|
7,330
|
|
|
6,731
|
|
|
Corporate/Eliminations
|
|
2,874
|
|
|
3,384
|
|
|
Total
|
|
10,204
|
|
|
10,115
|
|
|
Expenditures for long-lived assets
|
|
|
|
|
|
|
|
South
African transaction processing
|
|
407
|
|
|
1,447
|
|
|
International transaction
processing
|
|
2,799
|
|
|
8,038
|
|
|
Financial
inclusion and applied technologies
|
|
217
|
|
|
1,213
|
|
|
Subtotal:
Operating segments
|
|
3,423
|
|
|
10,698
|
|
|
Corporate/Eliminations
|
|
-
|
|
|
-
|
|
|
Total
|
$
|
3,423
|
|
$
|
10,698
|
|
The segment information as
reviewed by the chief operating decision maker does not include a measure of
segment assets per segment as all of the significant assets are used in the
operations of all, rather than any one, of the segments. The Company does not
have dedicated assets assigned to a particular operating segment. Accordingly,
it is not meaningful to attempt an arbitrary allocation and segment asset
allocation is therefore not presented.
It is impractical to disclose
revenues from external customers for each product and service or each group of
similar products and services.
Income tax in interim
periods
For the purposes of interim
financial reporting, the Company determines the appropriate income tax provision
by first applying the effective tax rate expected to be applicable for the full
fiscal year to ordinary income. This amount is then adjusted for the tax effect
of significant unusual or extraordinary items, for instance, changes in tax law,
valuation allowances and non-deductible transaction-related expenses that are
reported separately, and have an impact on the tax charge. The cumulative effect
of any change in the enacted tax rate, if and when applicable, on the opening
balance of deferred tax assets and liabilities is also included in the tax
charge as a discrete event in the interim period in which the enactment date
occurs.
For the three months ended
September 30, 2016, the tax charge was calculated using the expected effective
tax rate for the year. The Companys effective tax rate for the three months
ended September 30, 2016, was 31.1% and was higher than the South African
statutory rate as a result of additional taxes payable resulting from the
finalization of a tax review in South Korea, non-deductible expenses and the tax
impact attributable to distributions from our South African subsidiary.
21
16.
|
Income tax (continued)
|
Income tax in interim
periods (continued)
For the three months ended
September 30, 2015, the tax charge was calculated using the expected effective
tax rate for the year. The Companys effective tax rate for the three months
ended September 30, 2015, was 31.6% and was higher than the South African
statutory rate as a result of a valuation allowance for foreign tax credits and
non-deductible expenses (including consulting and legal fees).
Uncertain tax positions
The Company utilized
approximately $0.3 million of its unrecognized tax benefits during the three
months ended September 30, 2016 as a result of the finalization of a tax review
in South Korea. As of September 30, 2016, the Company had accrued interest
related to uncertain tax positions of approximately $0.1 million on its balance
sheet.
The Company does not expect
changes related to its unrecognized tax benefits will have a significant impact
on its results of operations or financial position in the next 12 months.
As of September 30, 2016 and June
30, 2016, the Company has unrecognized tax benefits of $1.7 million and $1.9
million, respectively, all of which would impact the Companys effective tax
rate. The Company files income tax returns mainly in South Africa, South Korea,
India, the United Kingdom, Botswana and in the U.S. federal jurisdiction. As of
September 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, 2012. The Company is subject to income tax in other
jurisdictions outside South Africa, none of which are individually material to
its financial position, results of operations or cash flows.
17.
|
Commitments and
contingencies
|
Guarantees
The South African Revenue Service
and certain of the Companys customers, suppliers and other business partners
have asked the Company to provide them with guarantees, including standby
letters of credit, issued by a South African bank. The Company is required to
procure these guarantees for these third parties to operate its business.
Nedbank has issued guarantees to
these third parties amounting to ZAR 127.4 million ($9.2 million, translated at
exchange rates applicable as of September 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 ($9.2
million, translated at exchange rates applicable as of September 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 September 30, 2016 and June 30, 2016. The maximum potential amount
that the Company could pay under these guarantees is ZAR 127.4 million ($9.2
million, translated at exchange rates applicable as of September 30, 2016). The
guarantees have reduced the amount available for borrowings under the Companys
short-term credit facility described in Note 8.
Contingencies
The Company is subject to a
variety of insignificant claims and suits that arise from time to time in the
ordinary course of business.
Management currently believes
that the resolution of these matters, individually or in the aggregate, will not
have a material adverse impact on the Companys financial position, results of
operations or cash flows.
Sale of common stock
On October 6, 2016, the Company
entered into stock purchase agreements with two investors under which the
Company agreed to sell each of the investors 2.5 million shares of the its
common stock at a price of $9.00 per share, for aggregate gross proceeds to the
Company of $45.0 million. Closing of the transactions is scheduled to occur on
or about November 9, 2016.
22
18.
|
Subsequent events
(continued)
|
Strategic investments
Blue
Label Telecoms
On October 4, 2016, the Company
entered into a Share Subscription Agreement (the Blue Label Subscription
Agreement) with Blue Label Telecoms Limited (Blue Label), a JSE-listed
company which is a leading provider of prepaid electricity and airtime in South
Africa. Pursuant to the Blue Label Subscription Agreement, the Company will
purchase approximately 117.9 million ordinary shares of Blue Label at a price of
ZAR 16.96 per share, for an aggregate purchase price of ZAR 2.0 billion ($144.3
million, translated at exchange rates applicable as of September 30, 2016) in
cash. The Company expects that the proceeds from its investment in Blue Label
will be used to partially fund Blue Labels acquisition of a 45% shareholding in
Cell C (Proprietary) Limited, a leading mobile provider in South Africa. Closing
of the Companys investment in Blue Label is subject to closing conditions and
is expected to occur simultaneously with the closing of Blue Labels Cell C
investment.
The Company expects to fund the
transaction through a combination of cash on hand, a portion of a ZAR 1.4
billion loan facility to be provided to Net1 Applied Technologies South Africa
(Pty) Ltd (Net1 SA) from FirstRand Bank Limited (acting through its Rand
Merchant Bank division) (RMB) as described below and the sale of common stock
referred to above.
Finbond
On October 7, 2016, the Company
provided a loan of ZAR 139.2 million to Finbond in order for Finbond to
partially finance its expansion strategy in the United States. Finbond expects
to conclude a rights offering during the first quarter of calendar 2017 and the
Company has provided an irrevocable undertaking to participate in the rights
offering and convert the ZAR 139.2 million loan to Finbond shares as part of
this process.
RMB Loan Facilities
On October 20, 2016, Net1 SA
entered into a Common Terms Agreement, a Senior Facility A Agreement, Senior
Facility B Agreement, Senior Facility C Agreement, Subordination Agreement,
Security Cession & Pledge and certain ancillary loan documents
(collectively, the Loan Documents) with RMB, pursuant to which, among other
things, Net1 SA may borrow up to an aggregate of ZAR 1.4 billion ($101.0
million, translated at exchange rates applicable as of September 30, 2016) to
finance a portion of its working capital requirements and a portion of its
investment in Blue Label. The amounts available under these loans and an escrow
deposit of ZAR 600 million ($43.3 million, translated at exchange rates
applicable as of September 30, 2016) made by Net1 SA serve as security for a
guarantee issued by RMB in favor or Blue Label (the Guarantee). Net1 and
certain of the Companys other subsidiaries have agreed to guarantee the
obligations of Net1 SA to RMB and subordinate any claims they may have against
Net1 SA and certain of its subsidiaries to RMBs claims against such persons.
The Loan Documents provide for a Facility A term loan of up to ZAR 500 million
($36.1 million), a Facility B term loan of up to ZAR 900 million ($64.9
million), amounts translated at exchange rates applicable as of September 30,
2016, and a Facility C term loan in an amount equal to the aggregate amount of
voluntary prepayments of the outstanding principal amount of the Facility A
loan.
Interest on the loans is payable
monthly based on the Johannesburg Interbank Agreed Rate (JIBAR) in effect from
time to time plus a margin of 1.35% for the Facility A and Facility C loans and
2.75% for the Facility B loan. The JIBAR rate was 7.1% on October 20, 2016.
Principal repayments on the
Facility A and Facility B loans are due in eight equal quarterly installments,
beginning on January 31, 2017, and all of the loans mature on October 20, 2018.
Principal repayment on the Facility C loan is due in quarterly installments to
be determined by RMB subject to the date of borrowing thereunder. Voluntary
prepayments are permitted without early repayment fees or penalties.
The loans are secured by a pledge
by Net1 SA of its entire equity interest in Blue Label. The Loan Documents
contain customary covenants that require Net1 SA to maintain a specified total
net leverage ratio and restrict the ability of Net1 SA, and certain of its
subsidiaries to make certain distributions with respect to their capital stock,
prepay other debt, encumber their assets, incur additional indebtedness, make
investment above specified levels, engage in certain business combinations and
engage in other corporate activities.
23
18.
|
Subsequent events
(continued)
|
Acquisitions
C4U
Malta
In November 2016, the Company
acquired a 100% interest in C4U Malta (C4U), a licensed Maltese Financial
Services Authority-supervised electronic money institution, for approximately
$3.9 million. C4Us license has been passported across all member states of the
European Union. The Company intends to apply for a principal membership with the
major card associations as soon as possible and to integrate a robust and
reliable issuing and acquiring processing platform in C4U to enable the issuance
of electronic money instruments, such as electronic money accounts, prepaid
cards and virtual cards, after a transitional period of integration and
technology adaption. The Company plans to build and reinforce C4U such that it
operates as its principal regulated electronic money institution with the
ability to cover all of the Companys financial services activities and business
in the European Union.
The purchase price allocation has
not been finalized, as management has not yet analyzed in detail the assets
acquired and liabilities assumed. The Company expects to finalize the purchase
price allocation on or before June 30, 2017.
Pros
Software (Pty) Ltd
In October 2016, the Company
acquired a 100% interest in Pros Software (Pty) Ltd (Pros Software), a
software development and consulting services based near Johannesburg, South
Africa, for ZAR 25.0 million ($1.8 million, translated at exchange rates
applicable as of September 30, 2016). Pros Software performs software
development and consulting services for a number of clients, including for the
Company.
The purchase price allocation has
not been finalized, as management has not yet analyzed in detail the assets
acquired and liabilities assumed. The Company expects to finalize the purchase
price allocation on or before June 30, 2017.
Pro forma results of operations
have not been presented because the effect of the C4U and Pros Software
acquisitions, individually and in the aggregate, were not material to the
Company. During the three months ended September 30, 2016, the Company incurred
acquisition-related expenditure of $0.1 million related to these
acquisitions.
24
Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion should
be read in conjunction with our Annual Report on Form 10-K for the year ended
June 30, 2016, and the unaudited condensed consolidated financial statements and
the accompanying notes included in this Form 10-Q.
Forward-looking statements
Some of the statements in this
Form 10-Q constitute forward-looking statements. These statements relate to
future events or our future financial performance and involve known and unknown
risks, uncertainties and other factors that may cause our or our industrys
actual results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed, implied or inferred by these forward-looking statements.
Such factors include, among other things, those listed under Item 1A.Risk
Factors and elsewhere in our Annual Report on Form 10-K for the year ended June
30, 2016 and in this Quarterly Report on Form 10-Q. In some cases, you can
identify forward-looking statements by terminology such as may, will,
should, could, would, expects, plans, intends, anticipates,
believes, estimates, predicts, potential or continue or the negative
of such terms and other comparable terminology.
Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we do
not know whether we can achieve positive future results, levels of activity,
performance, or goals. Actual events or results may differ materially. We
undertake no obligation to update any of the forward-looking statements after
the date of this Form 10-Q to conform those statements to reflect the occurrence
of unanticipated events, except as required by applicable law.
You should read this Form 10-Q
and the documents that we reference herein and the documents we have filed as
exhibits hereto and thereto and which we have filed with the Securities and
Exchange Commission completely and with the understanding that our actual future
results, levels of activity, performance and achievements may be materially
different from what we expect. We qualify all of our forward-looking statements
by these cautionary statements.
Recent Developments
Progress of financial
inclusion initiatives in South Africa
At October 26, 2016, we had more
than 1.6 million active EPE accounts, compared to 1.4 million at August 18,
2016. EPE is a fully transactional account created to serve the needs of South
Africas unbanked and under-banked population, and is available to all consumers
regardless of their financial or social status or whether they are SASSA
recipients. The EPE account offers customers a comprehensive suite of financial
and various financial inclusion services, such as prepaid products, in an
economical, convenient and secure solution. EPE provides account holders with a
UEPS-EMV debit MasterCard, mobile and internet banking services, ATM and POS
services, as well as loans, insurance and other financial products and
value-added services. However, SASSA is challenging the ability of beneficiaries
to freely transact with the grants that they receive. See Part II, Item
1.Legal Proceedings Litigation Regarding Legality of Debit Orders under
Social Assistance Act Regulations for additional details.
In order for us to address the
sizeable opportunity for EPE and related financial inclusion services in South
Africa, we have had to expand our brick-and-mortar financial services branch
infrastructure and supplement our nationwide distribution with a
UEPS/EMV-enabled ATM network, as well as a dedicated sales force. At September
30, 2016, we had 142 branches, 909 ATMs, and 2,096 dedicated employees.
In September 2015, we resumed
marketing and business development activities in selected areas for the
distribution of our simple, low-cost life insurance products and have sold
approximately 215,500 new policies through October 30, 2016, in addition to the
basic life insurance policy provided with every EPE account opened. We continue
to recruit additional and often-times specialized staff to expand our insurance
activities during fiscal 2017.
We experienced higher
year-over-year growth in the demand for our loans. Tougher economic conditions
in South Africa, aggravated by rising food prices as a result of widespread
drought conditions and a weakening currency, has had an impact on the number of
clients who qualify for our loan products.
25
The graph below presents the growth of the number of EPE cards
and Smart Life policies:
Strategic investment
We have signed a subscription
agreement with One MobiKwik Systems Private Limited, or MobiKwik, in India.
MobiKwik is India's largest independent mobile payments network, with over 35
million users and 100,000 retailers. MobiKwiks current shareholders include
Sequoia Capital, Tree Line Asia, American Express, Cisco Investments, GMO
Payment Gateway and MediaTek, as well as Bipin Preet Singh and Upasana Taku, the
founders and executive officers. Pursuant to the subscription agreement, we have
agreed to make an equity investment of up to $40.0 million in MobiKwik over the
next 24 months. We made an agreed initial $15.0 million investment under this
subscription agreement in August 2016. In addition, through a technology
agreement, our Virtual Card technology will be integrated across all MobiKwik
wallets in order to provide ubiquity across all merchants in India.
Acquisition of a
strategic stake in Blue Label Telecoms
On October 5, 2016 we entered
into a share subscription agreement with Blue Label Telecoms Limited, or Blue
Label, to subscribe for approximately 117.9 million shares in Blue Label, at a
subscription price of ZAR 16.96 per share, representing a 10% discount to ZAR
18.84, being the 30-day volume weighted average price of a Blue Label share
traded on the Johannesburg Stock Exchange to September 29, 2016. The aggregate
subscription consideration payable is ZAR 2.0 billion ($144.3 million,
translated at exchange rates applicable as of September 30, 2016). Following
implementation of the subscription, we will own approximately 15% of the issued
ordinary shares in Blue Label. We will settle the subscription consideration
through a combination of cash resources, debt instruments and an equity issuance
of five million shares of common stock, at an issue price of $9.00 per share.
Following implementation of the subscription, which is subject to the approval
of Blue Label shareholders, we will be entitled to nominate a director to Blue
Labels board.
Blue Label, which operates in
South Africa, Mexico and India, is listed in the Telcoms Mobile Telcoms sector
of the Main Board of the JSE, and is a market leading virtual and physical
distributor of secure electronic tokens of value as well as a provider of
transactional and value added services. Blue Label is in the process of
acquiring a 45% interest in Cell C, one of South Africas three major licensed
mobile network operators. For the fiscal year ended May 31, 2016, Blue Label
reported revenue of ZAR 26.2 billion ($1.9 billion), EBITDA of ZAR 1.24 billion
($90.0 million) and earnings per share of ZAR 1.04 ($0.08), all amounts
translated at exchange rates applicable as of September 30, 2016.
We expect that this strategic
investment will assist us, Blue Label and Cell C to accelerate the growth of our
combined customer bases, and facilitate cross selling opportunities between
ourselves. The combination of our and Blue Labels infrastructures is expected
to envelop all areas of South Africa through our combined physical and mobile
branches, associations with merchant stores and virtual distribution services
via USSD, voice, internet and social media linked with traditional payment
systems including EFTs, debit and credit cards and our Virtual Card
solution.
26
In India, we are a shareholder in
MobiKwik and Blue Label is a shareholder in Oxigen, and we believe that there
are compelling opportunities for us to extend our collaboration through the
provision of innovative payment solutions, enabling universal acceptance and
value to customers of two of Indias leading digital wallet providers who also
have highly developed online and offline infrastructure and capabilities. Our
alliance with Blue Label is expected to further enhance the marketing of our
international remittances, virtual cards and merchant financing strategies. In
addition, the POS infrastructure that Blue Label has deployed in Mexico opens up
new and real potential to participate in, acquiring, bill payments and
remittances when combined with our technology and relationships in North
America.
User access security enhancements
to prepaid products
User security remains of paramount
importance to us and, as we continue to evaluate and introduce non-PIN based
security enhancements to our product offerings, this can, in certain cases,
result in an initial drop off while the technology is rolled out, understood and
adopted. We introduced our new biometric-linking feature during the first
quarter of fiscal 2017, which has reduced the number of transacting users as the
adoption rate scales. This in turn therefore impacted volume in prepaid sales
vouchers on Umoja Manje during the quarter.
We believe that the adverse impact of
the new security on sales volumes will rectify itself over time as we further
entrench ourselves as the most secure, convenient and cost effective service
provider in the market. Our biometric security enhancements provide the
leadership in solving an industry-wide endemic of unauthorized transactions by
providing non-repudiatable transaction authorizations. Our mobile vending
channel now incorporates biometry - which makes it the first of its kind, and
will facilitate the launch of further digital services that incorporate dual
authorization-and-identification factors.
Critical Accounting Policies
Our unaudited condensed
consolidated financial statements have been prepared in accordance with U.S.
GAAP, which requires management to make estimates and assumptions about future
events that affect the reported amount of assets and liabilities and disclosure
of contingent assets and liabilities. As future events and their effects cannot
be determined with absolute certainty, the determination of estimates requires
managements judgment based on a variety of assumptions and other determinants
such as historical experience, current and expected market conditions and
certain scientific evaluation techniques.
Critical accounting policies are
those that reflect significant judgments or uncertainties, and potentially may
result in materially different results under different assumptions and
conditions. Management has identified the following critical accounting policies
that are described in more detail in our Annual Report on Form 10-K for the year
ended June 30, 2016:
|
|
Business combinations and the recoverability of
goodwill;
|
|
|
Intangible assets acquired through
acquisitions;
|
|
|
Deferred taxation;
|
|
|
Stock-based compensation and equity instrument
issued pursuant to BEE transaction;
|
|
|
Accounts receivable and allowance for doubtful
accounts receivable; and
|
|
|
Research and development.
|
Recent accounting
pronouncements adopted
Refer to Note 1 to our unaudited
condensed consolidated financial statements for a full description of recent
accounting pronouncements adopted, including the dates of adoption and the
effects on our condensed consolidated financial statements.
Recent accounting
pronouncements not yet adopted as of September 30, 2016
Refer to Note 1 to our unaudited
condensed consolidated financial statements for a full description of recent
accounting pronouncements not yet adopted as of September 30, 2016, including
the expected dates of adoption and effects on our financial condition, results
of operations and cash flows.
27
Currency Exchange Rate Information
Actual exchange rates
The actual exchange rates for and
at the end of the periods presented were as follows:
Table 1
|
|
Three
months ended
|
|
|
Year ended
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
ZAR : $ average exchange rate
|
|
14.0890
|
|
|
12.9702
|
|
|
14.5062
|
|
Highest ZAR : $ rate during period
|
|
14.8114
|
|
|
14.0282
|
|
|
16.8231
|
|
Lowest ZAR : $ rate during
period
|
|
13.3000
|
|
|
12.1965
|
|
|
12.1965
|
|
Rate at end of period
|
|
13.8630
|
|
|
14.0282
|
|
|
14.7838
|
|
|
|
|
|
|
|
|
|
|
|
KRW : $ average exchange rate
|
|
1,121
|
|
|
1,169
|
|
|
1,173
|
|
Highest KRW : $ rate during
period
|
|
1,163
|
|
|
1,203
|
|
|
1,245
|
|
Lowest KRW : $ rate during period
|
|
1,092
|
|
|
1,118
|
|
|
1,122
|
|
Rate at end of period
|
|
1,102
|
|
|
1,196
|
|
|
1,153
|
|
ZAR: US $ Exchange Rates
28
KRW: US $ Exchange Rates
Translation exchange
rates for financial reporting purposes
We are required to translate our
results of operations from ZAR and KRW to U.S. dollars on a monthly basis. Thus,
the average rates used to translate this data for the three months ended
September 30, 2016 and 2015, vary slightly from the averages shown in the table
above. The translation rates we use in presenting our results of operations are
the rates shown in the following table:
Table 2
|
|
Three
months ended
|
|
|
Year ended
|
|
|
|
September 30
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
Income and expense items: $1
= ZAR .
|
|
14.1048
|
|
|
12.9583
|
|
|
14.3842
|
|
Income and expense items: $1 = KRW
|
|
1,127
|
|
|
1,167
|
|
|
1,172
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet items: $1 = ZAR
|
|
13.8630
|
|
|
14.0282
|
|
|
14.7838
|
|
Balance sheet items: $1 = KRW
|
|
1,102
|
|
|
1,196
|
|
|
1,153
|
|
Results of operations
The discussion of our
consolidated overall results of operations is based on amounts as reflected in
our unaudited condensed consolidated financial statements which are prepared in
accordance with U.S. GAAP. We analyze our results of operations both in U.S.
dollars, as presented in the consolidated financial statements, and
supplementally in ZAR, because ZAR is the functional currency of the entities
which contribute the majority of our profits and is the currency in which the
majority of our transactions are initially incurred and measured. Due to the
significant impact of currency fluctuations between the U.S. dollar and ZAR on
our reported results and because we use the U.S. dollar as our reporting
currency, we believe that the supplemental presentation of our results of
operations in ZAR is useful to investors to understand the changes in the
underlying trends of our business.
The first quarter of fiscal 2017
includes the results of Masterpayment and T24 for the entire quarter. The first
quarter of fiscal 2016 does not include Masterpayment or T24.
Our operating segment revenue
presented in Results of operations by operating segment represents total
revenue per operating segment before inter-segment eliminations. Reconciliation
between total operating segment revenue and revenue presented in our unaudited
condensed consolidated financial statements is included in Note 15 to those
statements.
29
We analyze our business and
operations in terms of three inter-related but independent operating segments:
(1) South African transaction processing, (2) International transaction
processing and (3) Financial inclusion and applied technologies. In addition,
corporate and corporate office activities that are impracticable to ascribe
directly to any of the other operating segments, as well as any inter-segment
eliminations, are included in corporate/eliminations.
First quarter of fiscal
2017 compared to first quarter of fiscal 2016
The following factors had a
significant influence on our results of operations during the first quarter of
fiscal 2017 as compared with the same period in the prior year:
|
|
Unfavorable impact from the strengthening of the
U.S. dollar against ZAR:
The U.S. dollar appreciated by 9% against
the ZAR during the first quarter of fiscal 2017, which negatively impacted
our reported results;
|
|
|
Growth in lending and insurance businesses:
We continued to experience volume growth and operating
efficiencies in our lending and insurance businesses during the first
quarter of fiscal 2017, which has resulted in an improved contribution to
our financial inclusion revenue and operating income;
|
|
|
Impact of changes in specific regulations in South
Korea governing fees charged on card transactions:
Recently
introduced regulations governing the fees that may be charged on card
transactions have adversely impacted our revenues and operating income in
South Korea;
|
|
|
Reversal of stock-based compensation charge of $1.8
million:
We have determined that awards of restricted stock
subject to performance conditions granted in fiscal 2016 are not likely to
vest due to an increase in the weighted average number of shares
outstanding resulting from the issuance of approximately 10 million shares
of our common stock to the IFC Investors;
|
|
|
Lower prepaid sales resulting from improved
security features to our Manje products:
The introduction of our
new biometric-linking feature was implemented this quarter and adversely
impacted the number of transacting users purchasing prepaid products
through our mobile channel; and
|
|
|
Ongoing contributions from EPE offering:
Our EPE offering contributed to an increase in revenue and
operating income as we further expanded our customer base utilizing our
ATM infrastructure.
|
30
Consolidated overall
results of operations
This discussion is based on the
amounts which were prepared in accordance with U.S. GAAP.
The following tables show the
changes in the items comprising our statements of operations, both in U.S.
dollars and in ZAR:
|
|
In U.S.
Dollars
|
|
Table 3
|
|
(U.S. GAAP)
|
|
|
|
Three months ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
$ %
|
|
|
|
$ 000
|
|
|
$ 000
|
|
|
change
|
|
Revenue
|
|
155,633
|
|
|
154,473
|
|
|
1%
|
|
Cost of goods sold, IT processing, servicing
and support
|
|
74,780
|
|
|
77,382
|
|
|
(3%
|
)
|
Selling, general and
administration
|
|
38,468
|
|
|
35,761
|
|
|
8%
|
|
Depreciation and amortization
|
|
10,204
|
|
|
10,115
|
|
|
1%
|
|
Operating income
|
|
32,181
|
|
|
31,215
|
|
|
3%
|
|
Interest income
|
|
4,304
|
|
|
4,275
|
|
|
1%
|
|
Interest expense
|
|
796
|
|
|
974
|
|
|
(18%
|
)
|
Income before income tax expense
|
|
35,689
|
|
|
34,516
|
|
|
3%
|
|
Income tax expense
|
|
11,103
|
|
|
10,897
|
|
|
2%
|
|
Net income before earnings from
equity-accounted investments
|
|
24,586
|
|
|
23,619
|
|
|
4%
|
|
Earnings from
equity-accounted investments
|
|
659
|
|
|
188
|
|
|
251%
|
|
Net income
|
|
25,245
|
|
|
23,807
|
|
|
6%
|
|
Less net income attributable
to non-controlling interest
|
|
613
|
|
|
787
|
|
|
(22%
|
)
|
Net income attributable to us
|
|
24,632
|
|
|
23,020
|
|
|
7%
|
|
|
|
In South
African Rand
|
|
Table 4
|
|
(U.S. GAAP)
|
|
|
|
Three months ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
ZAR
|
|
|
ZAR
|
|
|
ZAR %
|
|
|
|
000
|
|
|
000
|
|
|
change
|
|
Revenue
|
|
2,195,171
|
|
|
2,001,708
|
|
|
10%
|
|
Cost of goods sold, IT processing, servicing
and support
|
|
1,054,755
|
|
|
1,002,739
|
|
|
5%
|
|
Selling, general and
administration
|
|
542,583
|
|
|
463,402
|
|
|
17%
|
|
Depreciation and amortization
|
|
143,926
|
|
|
131,073
|
|
|
10%
|
|
Operating income
|
|
453,907
|
|
|
404,494
|
|
|
12%
|
|
Interest income
|
|
60,707
|
|
|
55,397
|
|
|
10%
|
|
Interest expense
|
|
11,227
|
|
|
12,621
|
|
|
(11%
|
)
|
Income before income tax expense
|
|
503,387
|
|
|
447,270
|
|
|
13%
|
|
Income tax expense
|
|
156,606
|
|
|
141,207
|
|
|
11%
|
|
Net income before earnings from
equity-accounted investments
|
|
346,781
|
|
|
306,063
|
|
|
13%
|
|
Earnings from
equity-accounted investments
|
|
9,295
|
|
|
2,436
|
|
|
282%
|
|
Net income
|
|
356,076
|
|
|
308,499
|
|
|
15%
|
|
Less net income attributable
to non-controlling interest
|
|
8,646
|
|
|
10,198
|
|
|
(15%
|
)
|
Net income attributable to us
|
|
347,430
|
|
|
298,301
|
|
|
16%
|
|
In ZAR, the increase in revenue
was primarily due to more fees generated from our EPE and ATM offerings,
improved lending and insurance activities, higher ad hoc terminal sales, the
inclusion of T24 and Masterpayments businesses, more low-margin transaction
fees generated from cardholders using the South African National Payment System,
and an increase in the number of SASSA UEPS/EMV beneficiaries paid, which was
partially offset by lower prepaid airtime sales and a lower contribution from
KSNET due to regulatory changes in South Korea.
In ZAR, the increase in cost of
goods sold, IT processing, servicing and support was primarily due to higher
expenses incurred from increased usage of the South African National Payment
System by beneficiaries, expenses incurred to operate our EPE and ATM offerings
and expanding our branch network, and the inclusion of T24 and Masterpayments
businesses, which was partially offset by fewer prepaid airtime sales.
31
In ZAR, our selling, general and
administration expense increased primarily due to a higher staff complement
resulting from our EPE roll-out in fiscal 2016, the impact of October 2015
annual salary increases for our South African and UK-based employees, as well as
increases in goods and services purchased from third parties, which was
partially offset by the reversal of stock-based compensation charges related to
awards of restricted stock with performance conditions which we believe will not
be achieved.
Our operating income margin for
first quarter of fiscal 2017 and 2016 was 21% and 20% respectively. We discuss
the components of operating income margin under Results of operations by
operating segment. The increase was primarily attributable the reversal of
stock-based compensation charges, which was partially offset by the higher cost
of goods sold, IT processing, servicing and support referred to above and an
increase in depreciation expense.
Depreciation and amortization
increased primarily due to an increase in depreciation related to more ATMs in
South Africa and terminals used to provide transaction processing in Korea as
well as an increase in acquisition-related intangible asset amortization
resulting from the T24 and Masterpayment transactions. These increases were
partially offset by lower overall amortization of intangible assets that are
fully amortized and tangible assets that are fully depreciated.
In ZAR, interest on surplus cash
increased to $4.3 million (ZAR 60.7 million) from $4.3 million (ZAR 55.4
million), due primarily to higher average daily ZAR cash balances and ZAR
interest rates, partially offset by the lower interest earned on the U.S. dollar
cash reserves that we converted from ZAR through distributions from our South
African subsidiary.
Interest expense decreased to
$0.8 million (ZAR 11.2 million) from $1.0 million (ZAR 12.6 million) due to a
lower average long-term debt balance on our South Korean debt and a lower
interest rate.
Fiscal 2017 tax expense was $11.1
million (ZAR 156.6 million) compared to $10.9 million (ZAR 141.2 million) in
fiscal 2016. Our effective tax rate for fiscal 2017, was 31.1% and was higher
than the South African statutory rate as a result of non-deductible expenses and
the tax impact attributable to distributions from our South African subsidiary.
Our effective tax rate for fiscal 2016, was 31.6% and was higher than the South
African statutory rate as a result of a valuation allowance for foreign tax
credits and non-deductible expenses (including consulting and legal fees).
Earnings from equity-accounted
investments for the first quarter of fiscal 2017, has increased primarily due to
the inclusion of our portion of Finbonds net income. Finbond is listed on the
Johannesburg Stock Exchange and reports its six month results during our first
quarter and its annual results during our fourth quarter. We have included our
portion of its interim net income in our first quarter 2017 results and expect
to record the last six months of its fiscal year ended February 2017 net income
in our third quarter of fiscal 2017 results.
Results of operations by
operating segment
The composition of revenue and
the contributions of our business activities to operating income are illustrated
below:
Table 5
|
|
In U.S. Dollars (U.S.
GAAP)
|
|
|
|
Three months ended September
30,
|
|
|
|
2016
|
|
|
% of
|
|
|
2015
|
|
|
% of
|
|
|
%
|
|
Operating
Segment
|
|
$ 000
|
|
|
total
|
|
|
$ 000
|
|
|
total
|
|
|
change
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction
processing
|
|
57,568
|
|
|
37%
|
|
|
55,639
|
|
|
36%
|
|
|
3%
|
|
International transaction processing
|
|
46,190
|
|
|
30%
|
|
|
41,229
|
|
|
27%
|
|
|
12%
|
|
Financial inclusion and
applied technologies
|
|
63,542
|
|
|
41%
|
|
|
67,360
|
|
|
44%
|
|
|
(6%
|
)
|
Subtotal:
Operating segments
|
|
167,300
|
|
|
108%
|
|
|
164,228
|
|
|
107%
|
|
|
2%
|
|
Intersegment eliminations
|
|
(11,667
|
)
|
|
(8%
|
)
|
|
(9,755
|
)
|
|
(7%
|
)
|
|
20%
|
|
Consolidated
revenue
|
|
155,633
|
|
|
100%
|
|
|
154,473
|
|
|
100%
|
|
|
1%
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction processing
|
|
13,548
|
|
|
42%
|
|
|
13,511
|
|
|
43%
|
|
|
-
|
|
International transaction
processing
|
|
5,817
|
|
|
18%
|
|
|
6,543
|
|
|
21%
|
|
|
(11%
|
)
|
Financial inclusion and applied technologies
|
|
15,183
|
|
|
47%
|
|
|
16,554
|
|
|
53%
|
|
|
(8%
|
)
|
Subtotal: Operating segments
|
|
34,548
|
|
|
107%
|
|
|
36,608
|
|
|
117%
|
|
|
(6%
|
)
|
Corporate/Eliminations
|
|
(2,367
|
)
|
|
(7%
|
)
|
|
(5,393
|
)
|
|
(17%
|
)
|
|
(56%
|
)
|
Consolidated operating income
|
|
32,181
|
|
|
100%
|
|
|
31,215
|
|
|
100%
|
|
|
3%
|
|
32
Table 6
|
|
In South African Rand (U.S.
GAAP)
|
|
|
|
Three months ended September 30,
|
|
|
|
2016
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
ZAR
|
|
|
% of
|
|
|
ZAR
|
|
|
% of
|
|
|
%
|
|
Operating Segment
|
|
000
|
|
|
total
|
|
|
000
|
|
|
total
|
|
|
change
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction
processing
|
|
811,985
|
|
|
37%
|
|
|
720,987
|
|
|
36%
|
|
|
13%
|
|
International transaction processing
|
|
651,501
|
|
|
30%
|
|
|
534,258
|
|
|
27%
|
|
|
22%
|
|
Financial inclusion and
applied technologies
|
|
896,247
|
|
|
41%
|
|
|
872,871
|
|
|
44%
|
|
|
3%
|
|
Subtotal:
Operating segments
|
|
2,359,733
|
|
|
108%
|
|
|
2,128,116
|
|
|
107%
|
|
|
11%
|
|
Intersegment eliminations
|
|
(164,562
|
)
|
|
(8%
|
)
|
|
(126,408
|
)
|
|
(7%
|
)
|
|
30%
|
|
Consolidated
revenue
|
|
2,195,171
|
|
|
100%
|
|
|
2,001,708
|
|
|
100%
|
|
|
10%
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction processing
|
|
191,092
|
|
|
42%
|
|
|
175,080
|
|
|
43%
|
|
|
9%
|
|
International transaction
processing
|
|
82,048
|
|
|
18%
|
|
|
84,786
|
|
|
21%
|
|
|
(3%
|
)
|
Financial inclusion and applied technologies
|
|
214,153
|
|
|
47%
|
|
|
214,512
|
|
|
53%
|
|
|
-
|
|
Subtotal: Operating segments
|
|
487,293
|
|
|
107%
|
|
|
474,378
|
|
|
117%
|
|
|
3%
|
|
Corporate/Eliminations
|
|
(33,386
|
)
|
|
(7%
|
)
|
|
(69,884
|
)
|
|
(17%
|
)
|
|
(52%
|
)
|
Consolidated operating income
|
|
453,907
|
|
|
100%
|
|
|
404,494
|
|
|
100%
|
|
|
12%
|
|
South African transaction
processing
In ZAR, the increase in segment
revenue and operating income was primarily due to higher EPE transaction revenue
as a result of increased usage of our ATMs, more low-margin transaction fees
generated from card holders using the South African National Payment System,
increased inter-segment transaction processing activities, and a modest increase
in the number of social welfare grants distributed.
Our operating income margin for
each of the first quarter of fiscal 2017 and 2016 was 24%. Our fiscal 2017
margin includes higher EPE revenue as a result of increased ATM transactions, an
increase in inter-segment transaction processing activities, an increase in the
number of beneficiaries paid in the first quarter of fiscal 2017 and a modest
increase in the margin of transaction fees generated from cardholders using the
South African National Payment System, which was partially offset by annual
salary increases granted to our South African employees.
International
transaction-based activities
South Korean regulators have
recently introduced specific regulations governing the fees that may be charged
on card transactions, as is the case in most other developed economies. These
regulations have a direct impact on card issuers in South Korea and consistent
with global practices, card issuers have renegotiated their fees with South
Korean VAN companies, including KSNET, which has had an adverse impact on
KSNETs financial performance.
Segment revenue increased during
the first quarter of fiscal 2017, primarily due to the inclusion of T24 and
Masterpayment; however, this growth was partially offset by a lower contribution
from KSNET due to the regulatory changes described above. Operating income
during the first quarter of fiscal 2017 was lower due a decrease in revenue and
an increase in depreciation expenses at KSNET and ongoing ZAZOO start-up costs
in the UK and India, which was partially offset by a positive contribution by
T24 and XeoHealth.
Operating income margin for the
first quarter of fiscal 2017 and 2016 was 13% and 16%, respectively.
Masterpayment has commenced
implementing its expansion plan and we expect to incur additional expenses in
the second quarter of fiscal 2017 as it enters new markets.
Financial inclusion and
applied technologies
In ZAR, Financial inclusion and
applied technologies revenue and operating income increased primarily due to
from increased volumes and improved operating efficiencies in our lending and
insurance businesses, and, in ZAR, an increase in inter-segment revenues, more
ad hoc terminal and card sales, which was offset by fewer prepaid airtime and
other value-added services sales. These sales were specifically impacted this
quarter by the introduction of our new biometric-linking feature which adversely
impacted the number of transacting users purchasing prepaid products through our
mobile channel.
Operating income margin for the
Financial inclusion and applied technologies segment was 24% and 25% during the
first quarter of fiscal 2017 and 2016, respectively, and has decreased primarily
due to the increase in branch infrastructure and staff compliment, which was
partially offset by improved revenues from our lending and insurance businesses
and an increase in inter-segment revenues.
33
Corporate/Eliminations
Our corporate expenses generally
include acquisition-related intangible asset amortization; expenditure related
to compliance with the Sarbanes-Oxley Act of 2002; non-employee directors fees;
employee and executive bonuses; stock-based compensation; legal fees; audit
fees; directors and officers insurance premiums; telecommunications expenses;
property-related expenditures including utilities, rental, security and
maintenance; and elimination entries.
Our corporate expenses have
decreased primarily due to reversal of stock-based compensation charges, the
impact of the stronger U.S. dollar on goods and services procured in other
currencies, primarily the ZAR, and lower amortization costs, partially offset by
modest increases in U.S. dollar denominated goods and services purchased from
third parties and directors fees.
Liquidity and Capital Resources
At September 30, 2016, our cash
balances were $205.3 million, which comprised mainly ZAR-denominated balances of
ZAR 1.2 billion ($87.1 million), U.S. dollar-denominated balances of $73.2
million, KRW-denominated balances of KRW 35.8 billion ($32.5 million) and other
currency deposits, primarily euros, of $12.5 million. The decrease in our cash
balances from June 30, 2016, was primarily due to repurchase of shares of our
common stock, unscheduled repayments of our Korean debt, the investment in
MobiKwik and capital expenditures, which was partially offset by the expansion
of most of our core businesses, and the weakening of the U.S. dollar against our
primary functional currencies.
We currently believe that our
cash and credit facilities are sufficient to fund our future operations for at
least the next four quarters.
We generally invest the surplus
cash held by our South African operations in overnight call accounts that we
maintain at South African banking institutions, and surplus cash held by our
non-South African companies in the U.S. dollar denominated money market
accounts. We have invested surplus cash in Korea in short-term investment
accounts at Korean banking institutions.
Historically, we have financed
most of our operations, research and development, working capital, capital
expenditures and acquisitions through our internally generated cash. When
considering whether to borrow under our financing facilities, we consider the
cost of capital, cost of financing, opportunity cost of utilizing surplus cash
and availability of tax efficient structures to moderate financing costs. For
instance, in October 2016, we obtained loan facilities from RMB to fund a
portion of our working capital requirements and a portion of the Blue Label
investment. Refer to Note 18 to our unaudited condensed consolidated financial
statements for the three months ended September 30, 2016 for additional
information related to these loan facilities.
We have a short-term South
African credit facility with Nedbank Limited of ZAR 400 million ($28.8 million),
which consists of (i) a primary amount of up to ZAR 200 million, which is
immediately available, and (ii) a secondary amount of up to ZAR 200 million,
which is not immediately available. The primary amounts comprise an overdraft
facility of up to ZAR 50 million and indirect and derivative facilities of up to
ZAR 150 million, which includes letters of guarantee, letters of credit and
forward exchange contracts. As of September 30, 2016, we have used none of the
overdraft and ZAR 131.1 million ($9.5 million) of the indirect and derivative
facilities to obtain foreign exchange contracts and to support guarantees issued
by Nedbank to various third parties on our behalf. Refer to Note 12 to our
audited consolidated financial statements included in our Annual Report on Form
10-K for the year ended June 30, 2016, for additional information related to our
short-term facilities.
As of September 30, 2016, we had
outstanding long-term debt of KRW 30.0 billion (approximately $27.2 million
translated at exchange rates applicable as of September 30, 2016) under credit
facilities with a group of South Korean banks. The loans bear interest at the
South Korean CD rate in effect from time to time (1.36% as of September 30,
2016) plus a margin of 3.10% for one of the term loan facilities and the
revolver. Scheduled remaining repayments of the term loans and loan under the
revolving credit facility are as follows: April 2017 and 2018 (KRW 10 billion
each) and October 2018 (KRW 10 billion plus all outstanding loans under our
revolving credit facility). Refer to Note 13 to our audited consolidated
financial statements included in our Annual Report on Form 10-K for the year
ended June 30, 2016 and Note 9 to our unaudited condensed consolidated financial
statements for the three months ended September 30, 2016, for additional
information related to our long-term borrowings.
34
Cash flows from operating activities
First
quarter
Net cash provided by operating
activities for the first quarter of fiscal 2017 was $53.5 million (ZAR 755.2
million) compared to $28.1 million (ZAR 364.2 million) for the first quarter of
fiscal 2016. Excluding the impact of interest received, interest paid under our
Korean debt and taxes presented in the table below, in ZAR, the increase in cash
from operating activities resulted from improved trading activity during fiscal
2017.
During the first quarter of
fiscal 2017, we made an additional tax payment of $1.2 million (ZAR 16.7
million) related to our 2016 tax year in South Africa and received a refund of
approximately $1.2 million (ZAR 16.6 million) related to taxes overpaid in
previous tax years in South Africa. We paid dividend withholding taxes of $1.5
million (ZAR 21.3 million) during the first quarter of fiscal 2017. During the
first quarter of fiscal 2016, we made an additional tax payment of $3.4 million
(ZAR 46.8 million) related to our 2015 tax year in South Africa. We paid
dividend withholding taxes of $0.8million (ZAR 10 million) during the first
quarter of fiscal 2016.
Taxes paid during the first
quarter of fiscal 2017 and 2016 were as follows:
Table 7
|
|
Three months ended September
30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
$
|
|
|
ZAR
|
|
|
ZAR
|
|
|
|
000
|
|
|
000
|
|
|
000
|
|
|
000
|
|
Taxation paid related to
prior years
|
|
1,186
|
|
|
3,436
|
|
|
16,708
|
|
|
46,840
|
|
Taxation refunds received
|
|
(1,203
|
)
|
|
(176
|
)
|
|
(16,563
|
)
|
|
(2,402
|
)
|
Dividend withholding taxation
|
|
1,471
|
|
|
789
|
|
|
21,300
|
|
|
10,000
|
|
Total South
African taxes paid
|
|
1,454
|
|
|
4,049
|
|
|
21,445
|
|
|
54,438
|
|
Foreign taxes paid
|
|
49
|
|
|
17
|
|
|
691
|
|
|
232
|
|
Total
tax paid
|
|
1,503
|
|
|
4,066
|
|
|
22,136
|
|
|
54,670
|
|
Cash flows from investing
activities
First
quarter
Cash used in investing activities
for the first quarter of fiscal 2017 includes capital expenditure of $3.4
million (ZAR 48.3 million), primarily for the acquisition of payment processing
terminals in Korea. Our Korean capital expenditures have declined due to
regulatory changes in South Korea which now prohibit the provision of payment
equipment to the majority of merchants. We also paid approximately $15.3 million
for a 7.5% interest in MobiKwik.
Cash used in investing activities
for the first quarter of fiscal 2016 includes capital expenditure of $10.7
million (ZAR 138.8 million), primarily for the acquisition of payment processing
terminals in Korea and the rollout of ATMs in South Africa.
Cash flows from financing
activities
First
quarter
During the first quarter of
fiscal 2017, we paid approximately $31.6 million to repurchase 3,137,609 shares
of our common stock and also paid $0.5 million, on July 1, 2016, related to
settlement of amounts outstanding related to the repurchases at the end of June
2016. We also made a $26.7 million unscheduled repayment of our Korean debt and
utilized approximately $0.5 million of our Korean facility to pay a portion of
our quarterly interest due. In addition, we paid a dividend of approximately
$0.6 million to certain of our non-controlling interests.
During the first quarter of
fiscal 2016, we received approximately $3.8 million from the exercise of stock
options and utilized approximately $0.7 million of our Korean borrowings to pay
quarterly interest due.
Off-Balance Sheet Arrangements
We have no off-balance sheet
arrangements.
35
Capital Expenditures
We expect capital spending for
the second quarter of fiscal 2017 to primarily include the acquisition of
payment terminals for the expansion of our operations in Korea and expansion of
our ATM infrastructure and branch network in South Africa.
Our historical capital
expenditures for the first quarter of fiscal 2017 and 2016 are discussed under
Liquidity and Capital ResourcesCash flows from investing activities. All of
our capital expenditures for the past three fiscal years were funded through
internally-generated funds. We had outstanding capital commitments as of
September 30, 2016, of $0.9 million related mainly to the procurement of ATMs.
We expect to fund these expenditures through internally-generated funds.